The point to remember about BP chief executive Bernard Looney’s infamous comment about how the company is “a cash machine at these types of prices” was that it was made a year ago – so before the price of hydrocarbons surged a second time after Russia’s invasion of Ukraine in February. BP’s profits today, then, are exactly what you’d expect to see. The third quarter figure was $8.2bn (£7bn) – more than double the same period a year ago.
And the best guide to how far BP is beating its own definition of a par score is the pace of its share buybacks. At a steady $65-a-barrel oil price, the company reckons to spend $1bn a quarter, or $4bn a year, on buying in its own equity. At the nine-month stage of 2022, it has already earmarked $8.5bn for that purpose thanks to a Brent oil price that has been above (and sometimes well above) $85 for 11 of the past 12 months. BP isn’t just outstripping its base case assumptions – it is smashing them.
The case for applying a bigger windfall tax, then, is simple. Life for the likes of BP looks even easier than it did six months ago when Rishi Sunak, as chancellor, introduced the “energy profits levy” on North Sea producers. There is now a fair argument for increasing the levy from 25%, which produces a current overall effective tax rate of 65%, and extending its life. The government is reportedly considering those options and should probably adopt both given the squeeze on the public finances.
But here’s the rub: do not confuse BP’s overall profits – about $23bn so far this year – with what it earns on the home front. Only about 15% of the group’s earnings come from the UK, where BP says it expects to pay $2.5bn of tax from its North Sea business this year, including about $800m from the windfall levy.
Since there is zero possibility of the UK government being able to slap a levy on BP’s earnings from the US, or Azerbaijan, or any of its other big non-UK production bases, upping the North Sea windfall rate from 25% to, say, 30% will not produce oodles of additional revenue from BP for the Treasury.
Rather, the real detail to re-examine is the allowance-based deductions that enabled Shell last week to say it expects to pay nothing under the windfall levy this year. That outcome is a nonsense: the allowances are either too generous or something has gone wrong in the design.
Critics will decry further UK fiddles as a deterrent to investment but a readjustment is really a case of keeping up with events. The outlook has changed to the companies’ advantage. Besides, these global operators will be infinitely more bothered by President Biden’s windfall threats.
Not Made to weather the storm
The label of the worst IPO in London’s history clung to Deliveroo for ages after last year’s terrible stock market debut but, by rights, the title of worst dog in the 2021 flotation parade should now pass to Made.com. The online furniture retailer said it plans to call in administrators on Tuesday at its main operating subsidiary just 16 months after coming to market at a £775m valuation and paying £10.2m to advisers, underwriters and so on.
Yes, Made was unlucky in that global supply-chain disruption in 2021 played havoc with an operating model that relied on just-in-time sourcing from the far east. But, with hindsight, the giveaway on the company’s inability to withstand storms was the fact that its “asset-light vertically integrated model” hadn’t generated a profit in 11 years of existence.
The explanation at the time, naturally, was a Deliveroo-style one about prioritising investment and growth. Come on, furniture is the definition of an old-economy gig. New-fangled “adjusted” cashflow metrics shouldn’t have counted for much.
Therein lies the miracle of that brief post-lockdown flotation boom in 2021: investors’ willingness to suspend disbelief and think Covid had changed everything. Investing is rarely so simple.
The problem with gilts
Having spent more than a decade buying government IOUs under its quantitative easing programme, the Bank of England is now a seller. About £750m of short-dated gilts were sold on Tuesday in an operation that Threadneedle Street can view as a success: prices barely flickered.
The less uplifting news is that there’s “only” £837bn-worth of gilts left to sell or allow to mature. The current programme imagines reducing the pile by £80bn over the course of 12 months, so a full unwind would take another decade. That’s if everything goes to plan, which it won’t.
