Serica Energy ramps up investment plans to offset windfall tax
One of the UK’s biggest gas producers is planning to spend its way out of a tax bill, after the government imposed a hefty new levy on North Sea oil and gas operators.
Serica Energy has announced it will be able to offset a “large element” of the latest tariff by investing £60m on two domestic projects this year.
The company currently produces around five per cent of the UK’s natural gas, and is listed on the FTSE AIM UK 50 Index.
Last month, Chancellor Rishi Sunak unveiled the Energy Profits Levy, a 25 per cent additional tariff on the profits of UK energy firms trading in fossil fuels.
This is on top of the 40 per cent special corporation tax North Sea oil and gas firms already pay.
The Treasury is looking to harness the record profits North Sea oil and gas operators have made amid commodity prices to combat spiralling energy bills.
The latest levy is expected to bring in an additional £5bn for The Treasury this year, which will help fund its £15bn support package for households.
It has also hit stock market performance of North Sea operators, with Serica’s value dropping by more than a fifth in the week following the announcement.
Levy offers investment incentive for North Sea operators
Ministers have left the door open for companies like Serica to invest domestically to ease their tax burden.
The levy includes 80 per cent investment relief – which means businesses will get a 91p tax saving for every £1 they invest.
Serica expects its £60m spending plans “to be eligible towards this tax saving.”
Chief executive Mitch Flegg said: “Our established strategy of investing in our portfolio to enhance production and create greater value means that Serica is well placed to take advantage of the investment incentives included in the levy.”
“This will offset a large element of the Energy Profits Levy that would otherwise be payable on Serica’s profits this year.
The news will also be a relief to investors, as Investec highlighted Serica as being particularly vulnerable to the tax in its latest report on the levy.
It said: “Given the terms of the levy, the impact is most significant on companies that have low capex spend relative to their EBITDA, as well as companies that are largely unhedged and exposed to gas. So within our coverage, Serica is most impacted, with those investing, like Harbour and IGas, somewhat cushioned.”
Nevertheless, Serica still aimed some criticism at the government’s plans, as the business argued“fiscal instability” is unwelcome.
Flegg said: “Although Serica has financial strength, our industry operates within unusually long investment horizons against a backdrop of often highly volatile commodity markets and business cycles.”
Serica’s shares jumped around 10 per cent following today’s developments.