Israeli-owned drilling company Ithaca Energy is in advanced discussions to significantly expand its presence in the North Sea despite a sharp decline in profits that the company largely blamed on the UK's Energy Profits Levy (EPL).

Ithaca said as a direct result of the windfall levy, which was introduced in May 2022 to tax exceptional profits arising from the surge in energy prices, it will reduce investment in near-term projects such as its Greater Stella Area, Montrose Arbroath Area, Elgin Franklin Area and Alba assets. This is expected to cut total production by as much as 20% in the current year to between to between 56,000 and 61,000 barrels of oil equivalent (boe) per day, versus 70,239 in 2023.

Nevertheless, Ithaca also revealed that it is in exclusive advanced discussions to acquire nearly all the upstream assets of Italian rival Eni. Under the terms of the agreement Ithaca would take over four key production hubs and assume control of Neptune Energy, which was acquired by Eni earlier this year, giving Ithaca a share in six of the 10 largest fields in the UK North Sea.

READ MORE: Words and actions out of step as Ithaca eyes North Sea deal

“We believe this potential combination would be a strong strategic fit with Eni UK’s cash generative portfolio complementing Ithaca Energy’s high-quality, long-life asset base with significant development opportunity," executive chairman Gilad Myerson said.

Ithaca has four weeks to decide if it wants to confirm the deal. If it goes ahead, Ithaca would issue new shares to Eni with its investors owning between 38% and 39% of the enlarged group.

Ithaca shares are listed on the London Stock Exchange but 89% of its equity is currently in the hands of Israel's Delek Group. Delek would retain more than half of the shares if an agreement is reached.

Ithaca added that although discussions are at an advanced stage and are now exclusive, "there can be no certainty that a potential combination will occur".

READ MORE: Boss of Cambo oilfield company quits with immediate effect

"Ithaca Energy may talk about reducing investment in the UK North Sea thanks to the Energy Profits Levy, but its actions and words are somewhat at odds given the announcement of a proposed share-based deal with Italy’s Eni to acquire the latter’s UK oil and gas fields," said Russ Mould, investment director at AJ Bell.

"This deal makes Ithaca the second largest operator in the region and leaves Eni with a near-40% stake in the group. 

"That said, disquiet in the industry at the way companies have been treated by the Treasury is real, with the lack of consistency, as much as the absolute rate of tax, a bone of contention in the sector."

Ithaca paid £263 million last year under the EPL as profits slumped to $215.6m (£170.1m) from $1bn, driven by impairments related to its oil and gas projects. The windfall levy was extended to a sunset date of March 2029 as part of Chancellor Jeremy Hunt's Spring Budget earlier this month.

READ MORE: Ithaca profits up as decision on Rosebank oilfield looms

Beyond 2024, the group expects a return to production growth towards 80,000 boe per day by 2027. The addition of Eni's assets would take oil and gas production to more than 100,000 barrels a day, making Ithaca the second largest independent operator in the UK North Sea after Harbour Energy.

The controversial Rosebank development, in which Ithaca has a 20% stake, is expected to achieve first production in 2030 after getting the go-ahead from the North Sea Transition Authority in September of last year. Ithaca is also the prospective developer of Cambo, another key environmental battleground, and is said to be seeking approval for the project before an autumn General Election.

Shares in Ithaca closed yesterday's trading 3.4p higher at 145.6p.