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BP’s Huge Uptick in Earnings Spark Harsher Windfall Tax Debate

By:
Carolane De Palmas
Published: Feb 8, 2023, 09:36 GMT+00:00

The enormous yearly profits coming from the top energy companies from last year have prompted fresh demands for a stricter windfall tax.

Wall Street, FX Empire

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It’s a good time to be in the oil and gas industry, according to the most recent earnings reports for last year. BP, the London-based multinational British oil and gas company, has posted astronomical profits yesterday to join a whole host of other energy companies raking it in recently. With a more than doubled annual profit of $US28 billion announced compared to 2021’s $US12.8 billion, the numbers were characterized as a “good set of results” by CEO Bernard Looney.

Rival British company Shell reported its greatest annual profit of about $US40 billion last Thursday. Prior to that, the American oil company Exxon Mobil announced a $US56 billion profit for 2022, a record high for the Western oil sector. Chevron also reported record 2022 earnings of US$36.5 billion.

According to the US Energy Information Administration, Brent crude oil, the worldwide benchmark priced in Northwest Europe, finished at $85 per barrel on the last trading day of 2022, $7 more than the price on January 3, 2022. The Brent price increased greatly in the first half of 2022, but fell in the second half. The West Texas Intermediate (WTI) spot price, a benchmark price for US crude oil, followed a similar path, closing the 2022 trading year $4/b higher than on January 3. In 2022, the Brent crude oil spot price averaged $100/b, while the WTI spot price averaged $95/b.

Weekly Charts of Brent and WTI – Source: ActivTrades Online Platform

All told, the biggest fossil fuel corporations in the West are predicted to have earned combined profits of about $US200 billion for the year, and given the circumstances, there’s understandably plenty of people not too impressed to hear it.

Inside the Report

BP’s quarterly underlying replacement cost profit was $4.8 billion, down from $8.2 billion the prior quarter. In comparison to a bumper third quarter, the statement said the result was hurt by a below-average gas marketing and trading result, lower oil and gas realizations, a greater level of refinery turnaround and maintenance work, lower marketing margins, and seasonally lower volumes.

Operating cash flow was $13.6 billion and $40.9 billion for the fourth quarter and full year 2022, respectively, compared to $6.1 billion and $23.6 billion for the same periods in 2021, owing principally to greater underlying earnings and working capital movements.

Capital expenditure in the fourth quarter and full year 2022 was $7.4 billion and $16.3 billion, respectively, compared to $3.6 billion and $12.8 billion in the same periods in 2021, owing to acquisitions completed in the fourth quarter of 2022.

The company also declared a dividend per ordinary share of 6.61 cents for the fourth quarter, a 10% increase, and they remain committed to spending 60% of excess cash flow for share buybacks in 2023, subject to retaining a high investment grade credit rating.

Based on current predictions, BP expects to be able to deliver share buybacks of roughly $4.0 billion per year, at the lower end of its capital expenditure range, and to have the capacity for a yearly increase in dividend per ordinary share of around 4% at around $60 per barrel Brent.

Calls for Higher Taxes on Energy Company Profits

The enormous yearly profits coming from the top energy companies from last year have prompted fresh demands for a stricter windfall tax. This is additional taxation levied by the government on a business, which usually happens after they obtain benefits from something for which they are not responsible for, such as natural disasters or wars for instance.

It comes as many of the public and businesses of all sizes struggle to keep up with a significant increase in energy costs, while companies like BP and their peers benefit from increasing gas and oil prices and disruption from the conflict in Ukraine.

BP said in its earnings statement that it had paid $15 billion in taxes globally last year, its highest yearly amount. It said in November that it expects to pay $800 million in windfall tax on its North Sea activities, while the company recorded a $505 million accounting charge as a result of the EU’s version of the windfall tax.

Investor vs Activist. Whose Voice Is Loudest?

When Bernard Looney became the BP CEO back in 2020, he made a commitment at the time to decarbonize the company as soon as possible by decreasing oil and gas output by 40% by 2030 and investing billions in renewable energy projects.

While many investors supported Mr. Looney’s plan at the time, BP’s shares have lagged top Western oil firms since the CEO assumed office, staying virtually flat compared to Shell’s 17% increase and Exxon’s roughly 80% climb.

Weekly Charts of BP, Shell and Exxon – Source: ActivTrader Trading Platform

It’s true that there’s been some movement towards the lofty goal, and the company highlighted its dedication to green energy and the many billions of dollars in investments it has made to support it in its earnings statement. However, the goal posts seem to have apparently shifted somewhat, and the output is now actually expected to decrease by 25% by 2030. The company also made shareholders a guarantee that it would make significant investments in oil and gas projects alongside the transition.

The company has not made changes to its 2050 net zero goals so far, but one wonders whether to take these statements seriously or not.

Mr Looney in his comments about the earnings spoke of the purchase of Archaea Energy as evidence that the company was providing the world with much-needed energy while investing with discipline in their energy transition. With their highest upstream plant dependability and lowest production costs in 16 years, he said they are also generating solid returns and have lowered debt for the 11th quarter straight. With buybacks and dividend growth, Mr Looney suggested the company was doing their best by shareholders. “We’re performing while transforming.” He said.

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About the Author

Carolane graduated with a Masters in Corporate Finance & Financial Markets and got the AMF Certification (Financial Markets Regulator in France). Afterward, she became an independent trader, investing mostly in European and American stocks/indices.

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