Any guesses as to when the next update / RNS is likely.
Thinking it is likely a clarification on shipping method and notification that production / sales has increased to 10-15k barrel per day level?
I agree that Eland is a growth company and is unlikely to ever pay a dividend, but the value of a company is in its distributed or retained post-tax earnings. If Eland is paying 20% oil royalty, followed by 67.5% rising to 80% corporation tax then clearly most of the earnings are going to go to the Nigerian government rather than shareholders. That said, the market seems to be assigning quite a lot of value (and rising) to the company, so clearly it knows more about the tax situation that I do. Clearly the tax take must be lower than I am assuming or the market must be wrong. I have not yet got a reply from IR but will post any reply here when it arrives.
I have a small speculative position in Eland, which is doing quite nicely, and I am just trying to understand the company more.
Hi Delboy, thanks for that. I understand that the 85% tax rate will only apply to profits, but that is the chunk that I would expect to get paid my dividends out of. That is all I really needed to know. That means that for every marginal $1 increase in the oil price above breakeven and after the initial 5 year period, the company will only receive 15 cents after tax. Not great.
Re the table on page 24, my problem basically comes down to the numbers in the bottom two tables under the $50 and $60 price scenarios for the rows "Capex/Boe", "Opex/Boe", and "Govt take/Boe". As you say the numbers in the cells should be ratios. Why then do the Capex and Opex numbers not change as the oil price does? Presumably opex and capex are fixed and so as a percentage of revenue they should fall as the oil price increases from $50 to $60. Why also does the Govt take/Boe rise as the oil price rises from $50 to $60: i.e. the percentage marginal tax rate rises as the oil price rises? I have tried to copy and paste an image of the table into this post but it didn't work.
Thanks for your help on this. As someone who understands this company better than I do, what are your thoughts?
I'm failing to understand where you are getting the marginal tax rate from that slide?
The Income tax rate that is applied to Eland is 65.75% for the 5 years that company are exempt from paying petroleum profits tax, and will revert back to 85%. The tax rate doesnt change if oil is higher or lower, the tax they recieve will though, but Eland has about $160 million in taxes losses to claim back first
It is difficult to answer your other questions without knowing the PSA agreement, however I suggest you review Kirsen Bindemanns thesis on Production Sharing Agreements to give you an idea on how things change, but basically the higher revenue at 20% attributes to an increase in government take
The company will be subject to 50% in PPT after 2019 and 85% in income tax, however without a full understanding of the PSA, which will highlight that the 85% is only attributed to company profits, it is difficult to explain. It is not 85% of all revenues
Thanks Delboy, reading it again I see that you are right about the numbers in that section being percentages. I also now understand about the 20% royalty and how it is applied. However, still don't see why the marginal tax rate for Opuama-3 is higher at $60 than at $50.
If my understanding is now correct, according to the table, at $50 the % Govt tax take is 36.3%, while at $60 it is 44%. Why?
Also, assuming that capex and opex remain constant. Then in the scenario analysis shouldn't the percentage spent on them fall as the oil price rises from $50 to $60 (a smaller percentage of rising revenue is spent on them), instead they remain the same. Hence, my confusion as to whether the numbers in that section were in USD or percentages
What I am trying to understand is Eland's tax liability. I see that all oil production is subject to a 20% royalty for onshore development as per p.13 of the KPMG report linked earlier, but I remain very disturbed by the potential 85% Petroleum Profits Tax Ac mentioned in the same report:
2.2.2 Petroleum Profits Tax Act (PPTA)
Companies engaged in petroleum operation are
subject to tax under the PPTA. Their income is
liable to tax at 85% (subject to the incentives
contained in the MOU as relevant), or 65.75%
within the first five years of operation during
which they are recovering their capitalized preproduction
expenditure. However, for petroleum
companies operating under PSC terms, the
applicable PPT rate is 50% for the contract area
(see 2.2.3 below for further discussion).
All expenses which are wholly, exclusively and
necessarily incurred in furtherance of the petroleum
operation of the company are tax-deductible
against the companys revenue before
ascertaining the taxable profit. Expenses that
do not satisfy the above conditions are disallowed
If the company is subject to an 85% profits tax then it is uninvestable. It is unclear to me what its tax rate will be. I understand from the table that the Return on Investment ratios look compelling, but I would like to be reassured about the tax position.
Thanks for your help. Shares doing well today, so the market understands this company better than I do.
Sorry DelBoy, I don't think that is right. If it were a percentage then it would have a % sign after it, and it does not. The denominator is given as "/boe", i.e. per barrel or oil, the numerator therefore has to be a number, i.e. the tax rate in USD. That would make it consistent with both the opex and capex numbers which are both reported in USD. Also, if you are right and it is a %, then what it still shows is that the marginal tax rate is higher at $60 a barrel than at $50, which is not a good thing. Obviously the tax paid per barrel will rise as the oil price rises, but I would expect the marginal rate to remain constant whereas this report would seem to show a rising marginal rate.
Thanks for the explanation of DPIR. The return on investment figures look compelling, but I am still concerned about the tax rate. Is there a fixed royalty payment in addition to the corporate tax rate? Why is the table titled "Flat oil price of $60 ($48 post royalties)"?
DelBoy, thanks for pointing out the 5 year tax holiday. I missed that. However, re the Eland presentation p.24, if you look at the figures for the Opuama 3 well. The "Govt Take Boe" under the $50 a barrel oil scenario is $36.3 or 60.5%. Under the $60 scenario the "Govt Take/Boe" is $44 or 73.3%. The marginal Govt tax rate seems to rise as the oil price rises, which is not what I would expect. Anyone understand this?
The governments take rises because the 20% royalty of $60 dollar a barrel is higher than 20% of $50. In other words, they receive another 2$ per barrel. The same applies to the PSA which I believe is 55% NNPC / 45% Eland. 55% of $60 is higher than 55% of $50, thus the rise.
Focus on the DPIR's....
Marginal field operators (such as Eland) are also eligible for a five year tax holiday under the pioneer status, which I believe started in 2014
The "Govt Take/Boe" seems to rise as a percentage of the oil price, as the price of oil goes from $50 to $60. As a result the company's post tax profit seems to be inversely related to the oil price. This seems wrong. Does anyone understand the calculation? I have emailed IR about this today.
Also, according to KPMG the Nigerian Petroleum Royalty tax is levied at 85%, discounted to 65.75% for the first 5 years. Or is 50% for production sharing agreements for deepwater developments (this does not apply to Eland). These tax rates seem punitive. Does anyone know what the tax rate Eland can expect to pay is?
Enterprise value is currently around $60m. It is expecting to produce around 10k bopd. If the company makes $15 in post tax profit (as per the presentation) then Eland is on a PE ratio of 1. However, if the tax rate is 85%, then it is much less profitable. The tax rate is crucial for understanding the investment case. Anyone understand it?
Just look at the presentation. Payback from the current wells and wells coming online is 11 days - 13 days - 16 days when oil was at $50
It's at $60 now and stockpile is being built up. One this is for sure, when they get the different route sorted and they will then this will have so much cash flow coming in the sp will 100% double in a matter of weeks.
I have done extensive research and found the following that makes eland stand out against afren, lek oil n other Nigerian
- company is not HQ in Lagos Nigeria but in Scotland Aberdeen.
- the brokers and contact addresses n details have nothing associated with Nigerians.
- registration is not in Nigeria.
- majority of senior personnel not Nigerian and intact trusted / respected Scottish n other nationality businessmen.
- doesn't seem to have any nasty hidden mates rates or dodgy personnel on board.
- no debt or will be debt free very quickly
- no black market finance received or third part involvment here.
- management will wait a few years and diversify all the money and invest it away from Nigeria n probably in to North Sea n more stable areas closer to HQ.
- multi-bagger potential here with production levels at records.
I'm not invested but did my last due diligence today.
I'm in Friday. 50k shares. Buy 40p TP £1.40 within 12 months.
A terrific oil play?
Its not often that we see a small oil company thats financially sound and has great earnings growth forecasts, but has suffered a share price crash but thats what we see at Eland Oil & Gas (LSE: ELA).
Forecasts suggest a massive escalation of earnings in 2017 and with the shares currently trading at 26.9p after having fallen by 66% in the past 12 months, that would give us a P/E for this year of a modest 5.7, falling to less than 1 in 2017! On the liquidity front, Eland has recently completed a $15m share placing, which should see it in a comfortable position. So why are the shares so cheap?
The big issue is that Eland operates mainly in the Niger delta in Nigeria, a country that is battling Boko Haram militants who are set on trying to destroy the countrys oil and gas infrastructure. But only last week Eland rejected unsubstantiated press speculation and confirmed that its operations are unaffected. Its risky, but barring any catastrophe, Eland could become a nice multi-bagger.
Read Panmure Gordon & Co's note on ELAND OIL & GAS PLC (ELA), out this morning, by visiting https://www.research-tree.com/company/GB00B8HHWX64
"On Friday, Eland announced that it had raised an upsized US$18.5m at a premium to the prior close. In total 37.4m new shares were issued, including 0.9m non-voting shares issued to Helios. The principal objective of the fund raise is to advance the Gbetiokun Early Production System. We adjust our forecasts to reflect the direct impact of the issuance and revise our ..."
The company did not "desperately" need funds at all. They could have quite easily sat back and waited untl the pipeline was reopened and sufficients funds generated sold from enhanced production could be used to fund other projects
Unfortunately shareholders dont like companies just sitting doing nothing. Infact it doesnt appear that shareholders like companies actually doing something either
Not cash strapped, but the firming of oil prices in conjunction with the planned reworking of the Gbetiokun-1 well (+ $5m working capital) combined to produce the inevitable placing (@ 34p ps).
I should have known better - as others have already themselves learned - oilies aren't for everyone and despite being bitten with this one earlier I thought I could ride a bit of recovery in the SP on the back of firming oil prices. Now it seems a more distant hope before my latest losses are reversed.
However if the oil price holds around the current $45 per barrel, this one should come good in time with of course the huge caveat of being a Nigerian operator where the usual risks are simply multiplied x times.
I have however been here before it seems. Please DYOR!!
With Trans Forcados out until May at least, there's little revenue generation going on here. With more pipeline and infrastructure issues, vandalism, sabotage, etc., , a high break even oil price at around $30 / bbl., and what must be now a cash strapped company, it's difficult to see how the company will monitise their assets in the short to medium term. Looks to me like a classic value trap even when oil price rises. As far as that report goes, it lacks detail but it's worth remembering Nigerian O&G outfits are way undervalued for very good reason. My previous posts of last year about this outfit are still pertinent. As usual, this is all in my opinion, of course.
Important message from the Financial Conduct Authority:
Posting inside information that is not public knowledge, or information that is false or misleading, may constitute market abuse.
This could lead to an unlimited fine and up to seven years in prison.
If you have any information, concerns or queries about market abuse, click here.
The content of the messages posted represents the opinions of the author, and does not represent the opinions of Interactive Investor Trading Limited or its affiliates and has not been approved or issued by Interactive Investor Trading Limited.
You should be aware that the other participants of the above discussion group are strangers to you and may make statements which may be misleading, deceptive or wrong.
Please remember that the value of investments or income from them may go down as well as up and that the past performance of an investment is not a guide to its performance in the future.
The discussion boards on this site are intended to be an information sharing forum and is not intended to address your particular requirements.
Whilst information provided on them can help with your investment research you need to consider carefully whether you should make (or refraining from making) investment or other decisions based on what you see without doing further research on investments you are interested in.
Participating in this forum cannot be a substitute for obtaining advice from an appropriate expert independent adviser who takes into account your circumstances and specific investment needs in selected investments that are appropriate for you.