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Shell and BP facing tough call on Q1 shareholder returns

Analysts forecast higher buybacks but handing back more cash to shareholders could trigger tax action
Shell and BP facing tough call on Q1 shareholder returns
  • Higher buybacks possible but could be politically dangerous 
  • Chancellor indicates more support for windfall taxes

As Chancellor Rishi Sunak seems to come around to the idea of a windfall tax on energy companies, Shell (SHEL) and BP (BP.) are also seeing rising shareholder returns among the other energy majors. 

Both companies will report March quarter numbers next week, with operating cash flows likely to soar even beyond fourth quarter levels thanks to very strong oil and gas prices. 

Sunak told Mumsnet this week that a windfall tax - which he previously was strongly against - could be considered if “companies are not going to make those investments in our country and energy security, then of course that’s something I would look at and nothing is ever off the table in these things”. Labour 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) has just increased its 2022 buyback programme from $2bn to $3bn and increased its dividend by 5 per cent. 

“We were not expecting TotalEnergies to raise its buyback today, given potential political/social pressures on companies doing so under the current circumstances,” said RBC Capital Markets analyst Biraj Borkhataria. 

The first-quarter profit levels for London’s two majors won’t fully reflect recent oil and gas prices, however. BP has forecast a $25bn (£20bn) writedown on its 19.75 per cent stake in Rosneft (RU:ROSN), while Shell has said its own Russia exit would bring a $4bn-$5bn non-cash knock. 

Shell also said in its production report for the first three months of the year that there would be a $7bn cash flow hit in the quarter because of “very significant working capital outflows”. Jefferies still forecasts $7bn 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 still expects good news for shareholders in the releases. “Despite some uncertainty around working capital, we believe [BP] should be able to boost its buyback plan relative to the surplus cash generated in Q1 to $2bn (from $1.5bn),” he said. “Beyond this, BP will have to offer some clarity as to how it could grow shareholders' remuneration further, given shares' liquidity constraints.” 

BP’s dividend policy is to increase its quarterly payout annually by 4 per cent and hand surplus cash flow back to shareholders through buybacks. 

Romeo said further buybacks from Shell would be a share price catalyst for the current quarter following the completion of the $8.5bn programme linked to the sale of its Permian assets. 

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

On a purely political front, ramping up buybacks looks like a risky play, even if Sunak is reportedly the sole member of Cabinet who is not fully opposed to taxing the majors more.

Then again, the Chancellor also said the "right thing to do would be to encourage those companies to invest in the UK" rather than bringing in a new tax, so BP and Shell could test his resolve with an increase in payouts. Shell has already gained goodwill by promising to spend £20bn-£25bn in the UK over the next decade, although only a quarter of this at most will go to oil and gas production or refining. 

Last week, we looked into the likelihood of new windfall taxes in the UK and how they might impact North Sea production.