Premier Oil Sees Tax Allowance Offsetting UK North Sea Tax Hike

Premier Oil Sees Tax Allowance Offsetting UK North Sea Tax Hike

Thursday, March 24, 2011
by  Alexis Flynn

U.K. government plans to raise taxation on North Sea oil and gas production are unlikely to have a significant impact on Premier's earnings for at least the next four years, as its effects will be mitigated by $1.1 billion in tax allowances from a 2009 acquisition, Premier Oil Chief Executive Simon Lockett said Thursday.

"We're not immune, but we are mitigated from the effects of this kind of situation," said Lockett.

The Chancellor of the Exchequer of the U.K. Wednesday announced plans to raise the supplementary charge levied on profits from oil and gas produced in the U.K. to 32% from the previous 20% level. Premier said it is insulated against the effects of the levee because of a tax allowance the company received when it bought explorer Oilexco's North Sea operations in 2009,

Shares in several small-and mid-cap producers with significant assets in the North Sea were sharply lower in the wake of yesterday's news. U.K. continental shelf-focused EnQuest's stock fell 12% Wednesday, while peer Nautical lost 9%. Although Premier Oil shares fell 4.6% on the news, they have since recovered much of the lost ground. At 1248 GMT, Premier Oil shares were up 0.6 pence, or 3.2%, at 1973p amid a broadly higher London market and after reporting earnings Thursday that beat forecasts.

Premier Oil's 2009 deal to buy Oilexco's North Sea assets included it assuming $1 billion of losses that can be written off against the tax, of which it can use about 25% -- around $250 million -- a year.

Deutsche Bank said in a note that these allowances could shelter Premier from the U.K. cash tax until at least 2014, adding that it sees "these tax increases as presenting Premier with growth opportunities, not just value risk." It recommends the stock as 'buy' with a 2275 pence price target.

The oil and gas producer, which also has significant interests in Vietnam and the Middle East, Thursday reported record net profits of $130 million, 15% higher than consensus analyst estimates. The company also said it was on track to reach production of 75,000 barrels of oil equivalent per day and expects to spend $500 million a day on acquisitions this year.

Lockett said a positive consequence of yesterday's budget announcement was that it could provide buying opportunities as peers come under further cost pressure as a result of the tax rise.

"If I can take one minor positive out of it, it means that if we were looking for acquisitions in the North Sea then they are now slightly cheaper than yesterday," said Lockett.

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