Oil stocks split as investors sort tax break winners from windfall losers

Britain’s new oil and gas tax regime unveiled by Rishi Sunak today divides London-listed oil companies into two camps – those who invest and those who don’t.

The winners are companies with capital and asset investment plans that will see a bonus from nearly doubling tax relief on new spending.

Some 91p of tax relief will now be available for every pound of new investment in Britain’s oil and gas sector under the new scheme which at the same time included a one-off £5billion-a-year tax on oil profits and gas.

“The government has made clear that it wants to see the oil and gas sector reinvest its profits to support the UK economy, jobs and energy security,” it said in a statement.

“That’s why, as part of the tax, a new ‘super deduction’ style relief is being introduced to encourage companies to invest in oil and gas extraction in the UK.”

Significantly, Sunak’s new investment allowance, which is tied to energy profit tax (i.e. windfall tax) provides immediate benefit with tax savings available from the point of investment rather than the previous regime where tax relief potentially applied years later once income is generated from new fields.

AIM-listed Deltic Energy PLC (AIM:DELT) saw its share price rise more than 6% on Thursday afternoon as investors speculated about its prospects under the tax regime – perhaps telling , Deltic is partnering with Shell PLC (LSE:SHEL, NYSE:SHEL) in a high-potential exploration venture in the North Sea.

Speculative investors will be betting that Shell will be more willing to spend in the Deltic acreage where the Pensacola well is due to be drilled in the third quarter of this year.

Deltic could also benefit from investments by its other exploration partner Capricorn Energy PLC (LSE:CNE, OTC:CRNZF) (formerly Cairn) in a company focused on gas prospects.

Shares of oil majors Shell PLC (LSE:SHEL, NYSE:SHEL) and BP PLC (LSE:BP.) rallied after Sunak’s announcement, rising 1.26% and 1.55% respectively.

Harbor Energy (LSE:HBR), the UK’s largest independent oil producer, meanwhile saw its shares rise 0.51%.

Elsewhere in the market, there have also been casualties.

Among them were UK-focused oil and gas companies like Hurricane Energy PLC (LSE:HUR), down 1.11%, which barely escaped the Covid-19 crude price crash intact. 19 and has since sought to maximize cash flow and pay down debt. Hurricane currently has no active investment plans.

Other oil companies without major reinvestment opportunities in place will be stuck with an unprotected tax increase, at a combined rate of 65% instead of 40%.

Serica Energy Plc (AIM:SQZ), which last year produced 22,000 barrels per day and gross profit of £386m, fell 14% in Thursday afternoon trading to change hands at 269.75 pence.

Enquest Plc (AIM:ENQ), a North Sea producer of over 40,000 barrels per day, fell 8.5% to 32.25p.

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Felix J. Dixon