Is the North Sea being taxed to a slow death? Ithaca Energy doesn’t seem to think so.
The London-listed oil and gas producer yesterday confirmed plans mooted since the start of this year that it will buy up Italian energy giant Eni’s UK assets in a blockbuster $940m (£756m) deal.
The purchase takes Ithaca, which boasts a £1.2bn market capitalisation, up into the echelons of the North Sea’s biggest oil and gas players, capable of producing up to 100,000 barrels of oil equivalent a day until at least 2028.
From an investor perspective, the buy is a welcome boost to potential returns. Ithaca said when the deal was announced yesterday that it is targeting $500m (£401m) in dividend payouts in 2024 and 2025.
A deal of this scale is something of a bet on draining the North Sea dry while the opportunity remains, but is the juice worth the squeeze for Ithaca?
The tie-up encompasses all Eni’s oil and gas-producing assets in Britain, including those from the Italian firm’s buy-up of Neptune’s $4.9bn (£3.9bn) buy-up of Neptune Energy last year.
According to Eni chief executive Claudio Descalzi: “The agreement affords the opportunity to build scale, realising efficient upstream growth and maximising value under a dedicated and focused management structure.”
The deal certainly gives Ithaca Energy a more influential footprint within the North Sea basin, argues Stifel’s oil and gas managing director, Chris Wheaton.
“For Ithaca, it makes them bigger and a key thing for them is that they are using equity not debt, so it gives them more capacity to borrow,” Wheaton told City A.M.
“So, that’s to borrow to do future deals, either in the UK or outside and it increases the optionality of the ability for them to do bigger deals elsewhere.”
This potential could be fuelled by an almost-immediate boost in firepower, with US-based credit rating agency Fitch Ratings estimating that the deal will give a $400m (£321m) boost to the Ithaca’s pre-tax earnings between 2025-27.
But over the North Sea hangs the dark clouds of the energy transition and the government’s windfall tax.
Firstly, the North Sea Transition Authority is overseeing the area’s inevitable journey from producing dirty fuel to clean energy sources.
Ithaca Energy’s deal is a pure oil and gas play, with little, if any, room for a pivot into the green technologies of the future.
And what fossil fuel business does remain in the area is already suffering at the hands of government policy.
Chancellor Jeremy Hunt used his Spring Budget statement to extend the sunset on the Energy Profits Levy for an additional year to 2029, a move that is set to raise an additional £1.5bn.
Additionally, an increasingly likely-looking change of government in November could very well see Labour punish the UK’s oil and gas sector with a higher rate of tax, that reaches further into the future.
They will also likely move to ban new North Sea oil and gas licenses.
Offshore Energies UK, the UK’s oil and gas industry body, has said that Labour’s plans would be a “hammer blow” to the industry and potentially cost up to 42,000 jobs and billions of pounds in lost income.
For Stifel’s Wheaton, a ‘wait and see’ approach should be applied to Ithaca Energy’s buy based on these uncertainties.
Capital markets analysts SP Angel concur with Wheaton’s analysis.
In a note circulated today, the company said: “The market remains sceptical of the merits of the deal and we think management needs to deliver on its growth pipeline, despite the negative UK media attention surrounding the Rosebank and Cambo development projects and the fiscal uncertainty surrounding the proposed plans of an incoming Labour government.”
Peel Hunt analysts Werner Riding and Matt Cooper are more bullish on the deal’s power to enable Ithaca to both survive and thrive.
Today the pair highlighted that Ithaca’s goal at the time of its initial public offering (IPO) in 2022, which resulted in an 11.6 per cent share sink on the day, was to both grow and boost shareholder value and this deal enables both of those goals to be met.
Wheaton added: “This is about running a mature basin more efficiently; if you’ve got fewer operators, you can optimise over more efficiently over more assets so it’s part of the maturation of the North Sea to pushing it in late life.”
Under the terms of the deal, set to close in the third quarter of this year, Ithaca, which is owned by Tel Aviv-listed petroleum conglomerate Delek Group, will issue new shares to Eni, which will hold 38.5 per cent of Ithaca’s enlarged share capital.
Additionally, according to Reuters, Delek will hold just over 50 per cent of Ithaca when the deal closes and will be entitled to nominate its next chief executive.
Interestingly, Eni has chosen to retain its assets in the Irish Sea and its carbon capture and storage activities in the UK, marking a clear dividing line between its North Sea fossil fuel assets and other parts.
Whether that turns out to be an astute read of the tea leaves or a missed opportunity appears to be out of both Eni and Ithaca’s hands.