Interactive Investor

10 UK oil stocks affected by the Budget

20th March 2015 15:43

Harriet Mann from interactive investor

As George Osborne stood up to deliver his final Budget before May's General Election, the oil and gas sector was on the edge of its seat waiting to see how the Tory Chancellor planned to stimulate growth in a market forced to slash spending on new projects. In the end, Osborne delivered a package of measures worth £1.3 billion for the sector. That's welcome news, but does it go far enough?

The new rules will reduce the total effective tax rate for oilfields set up in the last 22 years by 10% to 50%, and shrink the tax rate for older ones from 80% to 65%. The government will also invest in seismic surveys in the under-explored areas of the UK Continental Shelf (UKCS). But some argue these measures don’t go far enough to encourage further investment in the North Sea at current low oil prices.

"A bit of a token gesture given that the majority of UKCS producers do not pay tax due their accumulated tax losses/credits/capital allowances," said Dr Dougie Youngson, research director at small-cap broker finnCap.

An improved fiscal regime would have been better, Youngson argues; with a resource rent tax based upon the profitability a company achieves incentivising investment. The tax would only be applied once a threshold has been passed. This system was successful in Australia where various LNG projects were established on the west coast.

"Things have to change if we are serious about prolonging the life of the life of the North Sea and encouraging investment in what is still a very important part of our economy," says Youngson.

But North Sea producers will still do well out of these cuts, especially those with older assets.

Deutsche Bank analyst Tom Robinson reckons BP and BG net asset values (NAV) will benefit by 1% or more, as well as overseas oil majors Total and OMV. Eni, Shell, Statoil and Repsol will see a more modest benefit, says Robinson.

He adds: "For European E&P, the companies with UK asset exposure are Premier Oil (c.45% of NAV), Cairn (c.25%), Tullow (<1%). Impact is more muted here as most are not in corporate tax-paying positions and have substantial tax losses to offset future profits. For Premier Oil, a 10% cut to SCT equates to a ~1% uplift to NAV. On earnings/cash flow, Premier Oil does stand to gain directly from a cut to PRT on its Wytch Farm asset (~7.5% of 2015 production)."

Although the changes affect companies differently, the investment case for the stocks under Westhouse Securities' coverage looks a little sweeter. EnQuest comes out on top here, benefiting from the reduced PRT, while Ithaca Energy should benefit from government investment in seismic.

Running these tax cuts through their models, the analysts found the risked valuation of EnQuest's production and development (P&D) assets rose by 20%, with Ithaca second at 15%. Faroe Petroleum's P&D assets were valued 10% higher after the recalculations.

Although battered by the oil price rout, EnQuest released some decent results this week, signalling production of nearly 28,000 barrels a day, up 15% on the year. Management seems confident in achieving 24% production growth this year, its development projects seem on track and its reserves were given a nice boost to 220 million barrels of oil.

Of the results industry expert Malcolm Graham-Wood said: "EnQuest has suffered more than most lately as concerns over its debt has worried the market but today’s numbers, along with an impressive hedging position may have allayed some negative vibes."

An impairment charge of $335.3 million was recognised and net debt reached $932.8 million, but Westhouse reckons the firm is now worth 75p per share, up from 65p. EnQuest finished the week 15% higher at 39p, despite a sell off as the week drew to a close.

Although Faroe's core net asset value is up to 85p per share, its target price has been kept at 135p per share due to the upside being driven by its Norwegian exploration, say the analysts. The target price of Ithaca has also been maintained despite an increase in its core NAV from 81p to 102p, blamed on operational delays.

"Parkmead's risked development value has increased by 14%; however, the recent workover failure at the producing Athena field and lower oil price environment, means that we have decreased the Core NAV to 136p/share (from 150p/share) and we keep our target price unchanged at 250p/share."

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.