Doubt on whether the windfall tax will go ahead. From Stockwatch Energy courtesy of loonietunes.
International oil and gas producer Vermilion Energy Inc. (VET) lost 32 cents to $30.35 on 2.22 million shares, slowing but not stopping its slide from nearly $40 over the last three weeks. Today's intraday low of $29.30 was the stock's first time below $30 in six weeks. Investors are worried about a recently proposed windfall tax in Europe, where Vermilion gets about one-third of its production (soon to rise to one-half with the closing of a large Irish acquisition by year-end. The rest comes mainly from North America).
The tax, proposed by the European Union last Wednesday, is part of a package of ostensibly temporary measures seeking to counteract soaring power bills by nabbing an estimated 140 billion euros from the oil, gas, coal and utility sectors. "In these times, it is wrong to receive extraordinary record profits benefiting from war and on the back of consumers," European Commission President Ursula von der Leyen stated last week. She said energy companies are making "huge profits" and must "pay a fair share."
"Fair share" was just one of the terms used by the commission, along with other euphemisms such as "crisis contribution" and "solidarity contribution." In other circles, the preferred term was tax raid. Looking specifically at the proposed windfall tax on oil and producers (which would bring in an estimated 25 billion of the 140-billion-euro total), it would apply to at least 33 per cent of taxable "surplus" profits in 2022, with surplus defined as being 20 per cent higher than a company's average taxable profits from 2019 through 2021.
The proposal has come under fire from energy executives and analysts. Alfred Stern, chief executive officer of Austrian oil and gas multinational OMV, told Reuters last week that the tax could have a "massive impact." He also criticized the decision to use a three-year baseline, seeing as this includes two pandemic years when companies were barely staying afloat. Meanwhile, JPMorgan analyst Christyan Malek told Bloomberg that the tax could deter investment and new production, right when Europe needs it most. "If you're planning your capital budget [as an energy producer], you have to think twice now," he said. "... It's the uncertainty, the unpredictability of this. There's a risk this becomes recurring."
As for Vermilion, even a temporary tax would be a "headwind," according to a research note last Friday from Scotia analyst Jason Bouvier. He estimated that the tax would strip away up to 6 per cent of Vermilion's free cash flow in 2022. This figure assumes that Vermilion can partially shelter itself using tax pools and hedging losses, which the EU has not confirmed. Mr. Bouvier went on to assume that the tax will stay in place for 2023 (also unconfirmed), by which point Vermilion's tax pools will be nearly dry and the hit to its free cash flow could be as high as 26 per cent.
Vermilion has made no comment on the situation, but shareholders have made their feelings clear by fleeing for the exits. The stampede slowed today as a raft of recent op-eds cast doubt on whether the windfall tax and other proposals will go ahead. They require unanimous approval by all 27 EU member countries, and several of them (such as Poland, Portugal and Spain) have voiced opposition. The measures also look "impossible to work out and implement in time for winter even if there were political consensus behind them -- which there isn't," opined S&P Global analyst Laurent Ruseckas. The EU will meet to discuss the proposals further on Sept. 30.
"Unanimous approval" I am sure VET and the CPPIB are lobbying the Irish government to vote this down given the amount of future investment they have proposed in Ireland's energy future.
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