Tullow Oil settles capital gains tax dispute in Uganda for $250m

Tullow Oil said on Monday that it had settled its capital gains tax dispute with the government of Uganda and the Uganda Revenue Authority(URA) with regard to its farm-downs to CNOOC and Total in 2012.

The company has agreed to pay $250m in full and final settlement of its capital gains tax liability. This sum comprises $142m that Tullow paid in 2012 and $108m to be paid in three equal instalments of $36m. The first of these was paid upon settlement and the remainder will be paid in 2016 and 2017.

Chief executive Aidan Heavey said: “The settlement of this long-running dispute is good news for Tullow and Uganda. In recent months, the government of Uganda has proposed welcome and necessary changes to its tax regime for oil and gas investments which it is hoped will enable substantive progress to be made towards the sanction of the Lake Albert oil development."

Tullow disputed the URA's assessment of $473m of capital gains tax payable following the farm-downs and appealed against the assessment before the Uganda Tax Appeals Tribunal (TAT) and commenced an International Arbitration in September 2013.

In July 2014, the TAT rejected Tullow's appeal and assessed Tullow's capital gains tax liability for the farm-downs at $407m less $142m previously paid.

In its 2014 accounts, Tullow recorded a contingent liability of $265m in relation to the dispute. Tullow subsequently appealed the TAT ruling to the Ugandan High Court and continued with its International Arbitration claim. Following this settlement, both these legal proceedings have been withdrawn.

Societe Generale said the settlement was good news for Tullow as it looks to move its East African projects towards sanction over the next 18 months.

JPMorgan Cazenove said that Tullow Oil’s settlement of a tax dispute with the government of Uganda and Ugandan revenue Authority clears another obstacle in the path of developing East Africa’s substantial oil resources.

It said that Uganda’s decision to settle may imply that there is tangible progress on the vital oil export pipeline, with Uganda more clearly positioning to move forward with the project.

“Given the liability reduction and implied project de-risking, we expect Tullow shares to outperform today, and look for further updates on the Uganda-Kenya pipeline in the coming weeks,” said JPM.

It said that the price of $250m is better than expected, down from the most recent assessment in July 2014 of $407m and the $473m originally assessed on the transaction.

“The $157m saving (Tullow booked a $265m contingent liability in its 2014 accounts) will help to ease some of the forecast strain on Tullow’s balance sheet in coming years,” said JPM.

The brokerage rates Tullow at neutral with a 424p price target.

At 10:25, Tullow shares were up 0.8% at 364.10p.