Serica Energy reassures on impact of UK windfall tax

Serica Energy has sought to reassure investors that it can use incentives built into the UK’s new windfall levy on North Sea oil and gas producers to reduce its tax bill, following a steep drop in its share price in recent weeks.

The Aim-listed group is responsible for producing about 5 per cent of the UK’s gas and has been a particular beneficiary of high prices.

But its shares have suffered over the past month after UK chancellor Rishi Sunak confirmed at the end of May a 25 per cent windfall levy on the profits of oil and gas producers, which immediately raised their total tax rate to 65 per cent from 40 per cent.

Although the opposition Labour party had long been pushing for a North Sea windfall tax to help households with soaring domestic energy bills, the structure of the levy took companies, including the oil majors BP and Shell, by surprise.

They had been expecting only a one-off hit but instead the chancellor said the “energy profits levy” would remain in place until the end of 2025 unless oil and gas prices returned to “historically more normal levels”, which are yet to be defined by the government.

However, Serica, which had so far stayed silent on the tax, reassured its shareholders on Monday that it should be able to use new investment allowances to lower its tax bill this year.

The chancellor included a new “super deduction”-style relief in the levy that would mean companies willing to reinvest profits in maximising North Sea oil and gas production would be rewarded with an overall 91p tax saving for every £1 they invest.

Serica already had a £60mn investment campaign planned for 2022, which included drilling an exploration well at the North Eigg gas prospect in the North Sea.

“This will offset a large element of the energy profits levy that would otherwise be payable on Serica’s profits this year,” the group said in a trading update on Monday. It said it was now also considering “additional candidate projects” for investment this year.

Serica’s shares jumped 8 per cent on Monday, cutting their drop to 13 per cent since the windfall tax was announced on May 26.

Nevertheless, chief executive Mitch Flegg fired a warning shot to the government over the consequences of unpredictable tax regimes in the long term.

“Our industry operates within unusually long investment horizons against a backdrop of often highly volatile commodity markets and business cycles,” Flegg said.

“We therefore encourage policymakers to consider the importance of fiscal stability in enabling government and industry to meet the mutually set objectives of sustaining investment in the UKCS [UK Continental Shelf] at a level capable of ensuring security of oil and gas supply in volatile markets and delivering energy transition targets,” he added.

Although UK gas price dipped at the start of May, they still remain at historically high levels, averaging 186p per therm. As a result, Serica’s cash and deposits totalled £396mn at the end of May, up from £218.4mn at the end of 2021.

Serica has been a significant beneficiary of high prices given it generally only sells forward at fixed prices a small proportion of its output.