BP PLC (LSE:BP.) and Shell PLC (LSE:SHEL, NYSE:SHEL) this week revealed astonishing levels of cash flow and profit, timidly offset by non-cash write-offs for leaving Russia.
And they’re pouring billions of dollars into share buybacks.
Perhaps, it's easy to understand calls for a ‘windfall’ tax on their profits given the UK’s soaring energy utility bills and the price of petrol at the pump.
But, is it so straightforward?
It’s a blip, sort of
Oil prices are massively cyclical and transitory. Today oil is above US$110, a year ago it was below US$70, during Covid it was stuck between US$63 and US$11 a barrel, averaging nearly US$40 in 2020 - and on one particular pandemic day, for a brief moment on a spreadsheet some, oil companies would technically have had to pay for oil to be taken away.
In 2016, the price of oil crashed to as low as US$40 and after we told ourselves post-2014 that the ‘peak oil’ days had long gone.
At US$30 and US$40 a barrel nobody was suggesting the government should send BP and Shell a stimulus package, but today there are calls for a pay-out to the state.
Precisely how much of the oil market’s current premium would be unwound if the Russian hostilities disappeared overnight is too tricky to pinpoint, the dynamics of the petro-economy are too entwined to so specifically guesstimate.
What we can more easily predict is that eventually, the price will again fall, as the cycle turns over.
Don’t say boo or UK’s goosed
At the most rudimentary level, the argument is “don’t scare them away”.
Shell recently packed up its bags and (on paper) left the Netherlands, at the same time losing the ‘Royal Dutch’ portion of its moniker.
Elsewhere, British Petroleum is now merely BP. It’s a two-letter brand name that doesn’t represent a national oil company anywhere other than in certain nostalgia-prone minds.
The multinational oiler does, however, retain a meaningful footprint and a corporate culture in the UK.
BP this week, alongside its bumper Q1 results, published a sort of manifesto detailing £18bn of planned investment in the UK, comprising a mix of North Sea refurbishment and more loosely prescribed proposals in the area of ‘energy transition’.
It included ventures in offshore wind, new EV charging networks, along with hydrogen and carbon capture hubs in England’s ‘Northern Powerhouse’.
On top of the £18bn pledge of inward investment, BP said that it expects to pay £1bn in UK taxes this year which, if anybody is keeping score, is nearly £1bn more than Apple.
Simply saying don’t upset the bigger boys isn’t a very compelling or assertive argument. Shell and BP could be only a bit of admin, a few lawyers’ fees and a new PO box away from parachuting into to some tax haven somewhere.
Big oil profits are Britain’s profits
Take a quick step back and ponder, why does any investor own a share like BP or Shell?
Even in the days before responsible capitalism got a sexy rebrand and the ESG acronym, the likes of BP and Shell could hardly be described as growth stocks. Investors have always bought and held these shares for income.
They are very large, very geologically diverse and they sell products that are (at the moment) essential and ubiquitous.
Big oil’s ability to provide investors with material dividends come rain or shine remains its strongest appeal, even as Elon Musk drives Tesla into the electric vehicle future, and, as shareholders become increasingly earnest and morally diligent in their stock-picking.
Moreover, over a decade of non-existent returns on cash savings make secured and amply covered yields of 4% and 3% irresistible to pension fund and packaged investments managers.
If you’re targeting cash returns, whether you self-manage or invest off-the-shelf, it is very likely that you’ve got one or both oil majors as stalwart dividend payers in your portfolio.
Indeed, BP’s largest shareholders (State Street, BlackRock, Dimensional Fund Advisors, and Fisher Investments) are institutions best known for pensions and packaged investment products.
Like at BP, Shell’s top ten list of shareholders is comprised almost entirely of institutional fund management groups like Vanguard, BlackRock, Royal London, and Northern Trust.
At the same time, Shell is the single biggest weighting in the FTSE 100 representing some 7.94% of the index, presently making it a tiny sliver larger than AstraZeneca, whilst BP is the eighth largest company with a 3.85% weighting in the benchmark. For context, only the likes of Astra, HSBC, Unilever, Diageo, GlaxoSmithKline and Rio Tinto are larger in the index than BP.
It’ll only be ‘spaffed’ against a wall anyway
Let’s say, hypothetically, that billions of pounds are handed over in windfall taxes, and, let's say all that pound for pound that all the money goes directly into a scheme that actually could offset rising fuel costs, without dilution or distraction.
Even then, dispersed at household level, how far would the money go and how long would the relief on family purse strings last?
If the government really wants to action to ease the price at the pump then someone ought to be reminded that the wholesale cost of petrol is presently a bit more than 133p per litre, and the price at the pump includes about 53p per litre of duty and VAT tacks on another 20% to the total.
Rishi Sunak with his Spring Statement cut 5p per litre off the duty. Can anyone say they felt any difference – if you even briefly saw actual prices drop (reports at the time claimed forecourt retailers ‘gouged’ the government relief by hiking prices on the eve of the relief.
Of course, soaring crude prices and the onset of Russia’s invasion of Ukraine are quite obvious distracting factors overlooked by many media outlets.
The government’s other grand gesture was the benefit-come-loan of £200 against household utilities, which has been met with similar popular cynicism and scorn.
So, if a windfall tax and some sort of universal petrol benefit won’t fly, what should Big Oil be doing?
Invest to keep future oil prices lower instead
The geopolitical and petropolitical spheres will continue to spin, that’s for sure.
At some future point the squeeze on international fuel prices will ease, and, the oil price cycle should turn over again.
Anyone familiar with the oil market knows that reinvestment is key.
Those that don’t must suffer a quick and scientifically naive milkshake analogy.
Right then, so … let’s say oil fields are glasses of milkshake. Now, imagine every oil company as a table with a bunch of really big glasses of milkshakes on it.
Some milkshakes are bigger than others and some milkshakes have straws that are easier to drink from. Every day, the company drinks from each glass knowing that someday in the future the glass will be empty. To keep drinking milk in perpetuity, they also need to be making new milkshakes to replace the empty glasses.
In the real world, this is what the oil industry calls reserve replacement. Oil companies constantly need new production to replace the declining output from existing operations.
To sum up simply, less investment now means less supply in future – that means higher oil prices in the future.
As companies like BP and Shell promise ‘net zero’ on emissions by the end of the decade, the easiest way to achieve that would be to shun oil investments now.
The era of ESG makes big money investments into new projects quite unpopular and unpalatable (see the debate that swirled around the Jackdaw and Cambo projects in recent months). In the meantime the likes of BP and Shell are pouring profits into multi-billion pound share buy-back programmes instead.
If the oil and gas-consuming consumer wants action from the oil majors to help bring fuel prices down, then sensible investment into new projects might be a more pragmatic move – albeit one with far fewer cheerleaders.