Shell and BP face tough call on first-quarter shareholder returns

  • Higher buyouts possible but could be politically dangerous
  • Chancellor indicates increased support for windfall taxes

While Chancellor Rishi Sunak seems to agree with the idea of ​​an exceptional tax on energy companies, Hull (SHEL) and BP (BP.) are also seeing rising shareholder returns among other energy majors.

Both companies will release March quarter numbers next week, with operating cash flow likely to soar even beyond fourth-quarter levels thanks to skyrocketing oil and gas prices.

Sunak said Mumsnet this week that a windfall tax – which he previously strongly opposed – could be considered if “corporations don’t make these investments in our country and in energy security, then of course that’s something I ‘would look into and nothing is ever ruled out in these things.’ Labor and the Liberal Democrats have called for a new tax on oil and gas profits to offset high energy costs for consumers.

At the same time, French major TotalEnergies (FR:FN) just increased its 2022 buyback program from $2 billion to $3 billion and increased its dividend by 5%.

“We didn’t expect TotalEnergies to increase its buyout today, given the potential political/social pressures on companies doing so in the current circumstances,” said RBC Capital Markets analyst Biraj Borkhataria.

However, the first quarter earnings levels of the two London majors will not fully reflect recent oil and gas prices. BP has forecast a $25bn (£20bn) writedown on its 19.75% stake in Rosneft (RU:ROSN)while Shell said its own exit from Russia would bring in $4-5 billion non-cash.

Shell also said in its production report for the first three months of the year that there would be a cash flow of $7 billion in the quarter due to “very large outflows of working capital“. Jefferies still forecast $7 billion in cash flow from operations and earnings per share of 101¢, more than double the figure from a year ago.

But Jefferies analyst Giacomo Romeo is still expecting good news for shareholders in releases. “Despite some uncertainty around working capital, we believe [BP] should be able to increase its buyback plan from the excess cash generated in the first quarter to $2 billion (from $1.5 billion),” he said. “Beyond that, BP will need to offer clarity on how it could further increase shareholder compensation, given share liquidity constraints.”

BP’s dividend policy is to increase its quarterly payout by 4% per year and return excess cash flow to shareholders through buybacks.

Romeo said further buyouts from Shell would be a catalyst for the share price in the current quarter after the completion of the $8.5 billion program related to the sale of its Permian assets.

Looking at the June quarter, oil and gas prices are down from March highs. Oil is trading lower (at around $100 a barrel) on Chinese demand concerns as Covid-19 lockdowns continue there, while natural gas futures in the UK Uni are at the 135p per therm level, up from over 250p per therm in early April.

On a purely political front, increasing buyouts seems like a risky game, although Sunak would be the only Cabinet member not to be outright opposed to increased taxation of the majors.

Again the Chancellor also said ‘the right thing to do would be to encourage these businesses to invest in the UK’ rather than introduce a new tax, so BP and Shell can test its resolve with an increase in payments. Shell has already gained some goodwill by promising to spend £20-25billion in the UK over the next decade, although only a quarter of that will go to oil production or refining at most. and gas.

Last week we looked at the likelihood of new windfall taxes in the UK and their impact on production in the North Sea.

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