LONDON (ShareCast) - Merchant Securities has warned investors of east Africa-focused oil and gas group Cove Energy to watch the developments in Mozambique closely, after the firm confirmed the possibility of a tax charge levied by the government.

The tax is in connection with the proposed indirect transfer of the Cove's 8.5% participating interest in Rovuma Offshore Area One pursuant to a possible takeover of the company. Cove put itself up for sale in January and integrated oil and gas colossus Royal Dutch Shell looks like its preferred suitor.

"This is very upsetting news with very serious ramifications for explorers across Africa. By the standards of oil & gas tax-grabs, taxes on capital gains are the worst possible type and they are also the rarest," said Merchant analyst Brendan Long.

"This is worse than a retroactive modification of the tax parameters because it goes against the principles of tax agreements between oil companies and host governments and leaves companies with effectively no visibility," he said.

Long explains that the Ugandan "tax grab" on Heritage Oil was very damaging to the country's reputation and slowed development of Ugandan oil projects.

Nevertheless, the broker maintained its buy rating on the stock but warned investors to "watch this very closely".

Furthermore, investors of other firms (within Merchant's oil exploration universe) such as Chariot Oil & Gas and Tower Resources should note that Namibia has not yet established its reputation in terms of oil taxes.

BC

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