Shares in Premier Oil (LSE: PMO) rose by more than 15% on Tuesday, as investors piled into the stock in the expectation that Wednesday’s Budget will include a package of North Sea tax cuts that could help turnaround the firm’s fortunes.
The government has already indicated that the Budget will contain measures aimed at supporting activity in the North Sea, so in this article I’ll take a look at what these could be, and whether they might help Premier, and two of its North Sea peers, Ithaca Energy (LSE: IAE) and Enquest (LSE: ENQ).
What’s on the cards?
Two changes are expected in today’s Budget.
The first is a cut to the supplementary charge. This is an additional tax rate that oil firms pay in addition to corporation tax. In 2011, when oil prices were high, the supplementary charge was increased from 20% to 32%, in order to boost tax revenues from the North Sea.
The industry argues that this increase should now be reversed to reflect lower oil prices and discourage operators from decommissioning unprofitable fields early.
However, a cut here will do little to help operators who are reluctant to spend money on exploration and developing new projects.
To address this, the government is expected to simplify and update the investment allowance, which allows operators to claim tax relief on exploration and development spending.
Will this be enough?
I don’t think investors should expect a sudden transformation in the 2015 outlook for North Sea oil firms.
Any change to the investment allowance is expected to apply to new expenditure only. This means that committed spending, such as the $600m Enquest plans to spend in 2015, is unlikely to benefit.
However, a change to the investment allowance should encourage longer-term activity, when the price of oil starts to recover.
A cut to the supplementary charge ought to improve cash flow slightly for each firm, by reducing the tax liability associated with their current North Sea production. As all three firms approach peak debt levels this year, this should be helpful.
Overall, I see this as a small benefit, relative to the size of each firm’s debt and spending commitments.
Sell the North Sea?
I’m not rushing to invest in North Sea oil stocks. In my view, the oil rout may have another few months to run, and there are likely to be other attractive buying opportunities further down the line.