Shell PLC's (LSE:SHEL, NYSE:SHEL, EURONEXT:SHELL) bulging fourth-quarter results are terribly timed, revealing an embarrassment of cash slap bang in the centre of UK political circus over the fuel costs and growing calls for a ‘windfall’ tax on energy companies.
The UK domiciled producer – that actually produces most of its hydrocarbons abroad – revealed it generated nearly US$55bn of cash through 2021, in a results statement a mere three hours before British energy watchdog Ofgem lifted the ‘cap’ for household energy bills by 54% to £1,917.
It comes as the domestic energy market is in crisis after around two-thirds of intermediate gas and electric suppliers, most of which buy wholesale to resell to consumers, have collapsed in the past year.
There’ll be plenty of time to weigh the structural and philosophical questions about the layers of manufactured ‘competition’ created by the introduction of small resellers over the preceding decade.
In the meantime, the sector has a definite retro feel about it as it reverses into a market with ever smaller numbers of suppliers, meanwhile pricing is effectively being set and subsidised by government.
All the while the global fuel prices threaten to keep going higher.
Presently at around US$90 a barrel, crude is at its highest level since the so-called ‘peak oil’ days of half a decade ago, yet, some industry commentators reckon on the price rising higher still, predicting a push above US$100 or even US$110 per barrel.
Global and domestic gas prices have similarly surged due to resurgent post lockdown demand and because of a petropolitical ‘tightness’ of supply, particularly along the pipelines that connect European buyers and supply out of Russia.
While energy market intermediaries and consumers are pinched, the companies producing hydrocarbons are raking in revenue, simply because their main product is being sold at higher prices.
Tensions and resentments appear high.
In Westminster yesterday, during Prime Minister’s Questions, Boris Johnson batted away calls from political opposition for a tax on the oil and gas sector’s burgeoning profits.
Such calls will be further inflamed by Shell’s strong financial showing today.
It reported US$6.4bn of earnings for the fourth quarter. Shell generated some US$55bn of cash flow over 2021, with US$11.1bn raked in during the fourth quarter and since then the price of fuel has only gone higher.
A substantial chunk of the inflow will now go to a beefed by share buy-back programme that targets US$8.5bn of purchases through the first half of 2022 – reducing the number of shares in issue and increasing Shell’s per share valuation – whilst the next quarterly shareholder dividend will be lifted by 4% to US$0.25 per share.
Dani Hewson, analyst at stockbroker AJ Bell, underlined the gulf in fortunes between Shell and the end users they eventually serve.
The analyst meanwhile set stark context to the growing chorus of calls for a ‘windfall tax’.
“Profits for the last quarter stormed in at an incredible £12bn bolstered by scorching energy prices that are having such an impact on the lives of ordinary people,” she said.
“Just that one quarter of one company’s profits would go a long way to cover the anticipated cost to UK households when the new energy price cap is introduced.”
The energy cap is just one of a number of body blows for British households.
An hour later came the news of a 0.5% Bank of England interest rate rise. Add to that more generalised consumer price inflation and incoming jump to the cost of national insurance.
Against a backdrop of Brexit, supply chain nightmares and ‘Partygate’ perhaps its little wonder that pointy fingers are out and some are aimed at the likes of Shell.
“Shell has been unlucky with its timing, but with BP just days away from its trading update questions about whether a windfall tax is a viable solution to the current energy crisis will hang around,” Hewson added.
“Of course, it’s not a straightforward argument, both businesses have a duty to their shareholders, the people who bankroll their operations in good times and in bad.”
Even less straightforward would be the concept of Shell’s Britishness, or its nationality of any kind for that matter.
After all, the company was half Dutch only a week ago. But, that’s not really the point either.
Considered British by many (British) people, Shell and BP are domiciled in the UK and their primary listings are both in London.
Shell is presently shrugging of its Dutch identity. Meanwhile, the pair of consonants over the door at BP now technically symbolise only a brand identity rather a ‘British Petroleum’ company.
The vast majority of the current ‘windfall’ was certainly not generated in the UK, which makes a windfall tax less rationale and less feasible, and probably a lot less lucrative than you might on the face of it imagine.
Giving its outlook for the current quarter, Shell details that it is producing 2mln to 2.2mln barrels of oil equivalent per day in its upstream division whilst its downstream (i.e. refined) oil products business is expected to sell 4.1mln to 5.1mln barrels of product per day.
These are worldwide volumes.
In the UK North Sea, Shell is the fourth largest producer yielding over 130,000 barrels oil equivalent per day (based on 2020 data). BP was the third largest producer in the region whilst French major TotalEnergies would be second.
The North Sea’s largest producer, meanwhile, is Harbour Energy (LSE:HBR) which some might unfavourably describe as a heavily geared Frankenstein’s monster of ex-private equity assets (sold off in the last decade by oil majors) and 2020 basket case Premier Oil.
Without going any deeper into caricature, it’s easier to say that Harbour is neither a Shell nor a BP.
The company has a market capitalisation of £3.23bn and at last accounting (its interims, released in September) carried £2.5bn of debt.
Half year earnings (EBITDAX) of around US$843mln boiled out to US$302mln of free cash flow and US$87mln of post-tax profit.
Centrica, the British Gas parent company, meanwhile has little to no upstream business as its remaining exploration and production interests were recently sold off (with a US$800mln deal for Norwegian assets reducing its production footprint by over 92% back in December).
The North Sea, Britain’s only commercially meaningful oil territory, is not the money tree some seem to think.
The very root of the energy crisis is that Britain is an energy dependent. As a net importer it is just a passenger on the evidently volatile waves contemporary petropolitics.
Multinational energy companies also have their own battles, tight rope walking oil profitability and investment in renewable projects to establish more sustainable so-called Net Zero futures.
Looking ahead, it is not clear that Shell, BP and the likes of Exxon will be able to win either PR battle.
It is a tough gig, though there are tens of billions of reasons not to feel too sorry for them.
At present, the issue of a windfall is apparently a moot point ruled out in recent days by the UK Government. But, one would suspect this isn’t the last we’ll be hearing about it.