New tax rules proposed for the UK’s upstream sector could unlock M&A activity across a large array of fields. Draft legislation was published in early July to introduce Transferable Tax History (TTH), as announced in the autumn 2017 budget. The measure, aims to improve the attractiveness of late-life fields to potential new investors by expanding the availability of tax rebates on decommissioning losses.
A company without existing UK operations buying a late-life asset may not currently be able to fully offset their decommissioning losses as the remaining profits may be significantly less than the decommissioning costs. The proposed TTH rules aim to resolve this issue by allowing the seller of a field to allocate a portion of its previously earned profits that can be used to offset decommissioning losses incurred by the buyer. If decommissioning losses for the field cannot be fully offset against the profits earned from the field since purchase, then these transferred profits may be activated in order to generate a full tax rebate.
NPV comparison for fields that may benefit from TTH
|Source: Upstream Economics, GlobalData Oil and Gas © GlobalData|
Over 40% of producing fields are estimated to have remaining taxable income less than the cost of decommissioning. Many of those fields are at the very end of life, with little or no value to any potential purchaser. However, 56 of these fields still have a positive remaining net present value and could therefore conceivably be acquisition targets. These fields have aggregate remaining reserves of 762mmboe, and both the government and any potential purchaser would hope that increased recovery can be achieved to further add value. Notably, a number of these fields have participation by major E&Ps that now view mature North Sea assets as non-core and have looked to divest.
Potentially not having enough future income to offset for a full rebate could mean that the purchaser’s valuation of a field interest is significantly lower than that of a seller who has significant tax history and can therefore expect the full rebate if they retain the asset. By allowing the purchaser to expect the full tax rebate, TTH can increase the purchaser’s valuation closer to that of the seller, significantly increasing the likelihood of a transaction moving forward.