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A new report from Westwood Global Energy Group has laid bare the impact of the UK Government’s fiscal tinkering on Harbour Energy’s (LON: HBR) share price in 2022.
Among the “big 15” international oil companies (IOCs) studied by the oil and gas research body, just two operators finished the year with a lower share price than they started it.
One of those to buck the trend for 2022 was London-listed Harbour, with shares in the North Sea’s biggest producer closing out the year 23% down.
The other was Australian multinational OMV, which suffered from its exposure to Russia.
On average, shares in the big 15 IOCs finished the year 32% higher, according to research from Westwood.
Oil and gas prices boosting stocks
Putin’s invasion of Ukraine in February sent already high oil and gas prices through the roof, with many energy companies subsequently posting record quarterly results.
Swathes of firms also announced their intention to pull out of Russia, incurring significant financial hits as a result.
For Harbour though, its outlying share performance was primarily due to the impact of the windfall tax on the sector.
The UK Government first introduced the energy profits levy (EPL) in May 2022, before increasing it a few months later.
Harbour spend tax© Supplied by Harbour Energy
Harbour Energy’s Everest platform in the North Sea.
Combined with other taxes, it means North Sea producers now face handing over 75% of their profits to the government, though their is investment relief.
Westwood said: “Only two of the big 15 IOCs had lower share prices at end-2022 than at the start. OMV (down 9%) is the most exposed of the big 15 IOCs to Russia. Harbour Energy (down 23%) is badly affected by the UK Government’s introduction of an upstream windfall tax given 94% of its production is from the UK North Sea.”
Given its position as the top producer in the basin Harbour has been amongst the harshest critics of the EPL, shunning the latest licensing round and announcing job losses as a result of the policy.
Following the ramp up of the tax in November, the company, a result of a merger between Permier Oil and Chrysaor, was also relegated from the FTSE 100.
Wheeling and dealing
Westwood’s report also underlined a “considerable drop in the aggregate value of upstream” oil and gas deals completed last year, despite higher commodity prices.
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Research body Westwood Global Energy Group recorded 57 significant agreements in 2022 worth $48 billion and involving 2.8 billion barrels of oil equivalent (bnboe) of 2P reserves and 1.8 million barrels of oil equivalent per day (mmboe/d of production).
That compares to with 53 deals in 2021 worth $87bn, which traded 6.2 bnboe 2P reserves and 2.0 mmboe/d of production
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France’s TotalEnergies said it expected to take a $2.1bn hit from windfall taxes in the UK and EU on its earnings for 2022, with half the bill coming from Britain.
Oil and gas groups have been totting up the cost of levies introduced in Europe in recent months to try to capture profits boosted by a surge in commodities prices exacerbated by Russia’s invasion of Ukraine.
In Britain, where Total is the second-biggest oil and gas producer in the North Sea, a 25 per cent energy profits levy introduced in May was increased to 35 per cent from January 1, taking the headline tax rate on UK oil and gas production to 75 per cent.
Total said in a trading update on Tuesday that it expected a $1bn overall hit on its 2022 adjusted results from the UK windfall tax, with a $400mn charge reflected in its fourth-quarter earnings.
The group said in December it would cut its North Sea investments for 2023 by a quarter, or £100mn, as a result of the taxes, especially as they did not include a mechanism to account for any drops in oil or gas prices. It said it would ditch projects including one on the Elgin gasfield off the Scottish coast.
“The energy industry operates in a cyclical market and is subject to volatile commodity prices,” said Jean-Luc Guiziou, Total’s British head of exploration and production. “We believe that the government should remain open to reviewing the energy profits levy if prices reduce before 2028.”
Shell disclosed a $2.4bn hit from UK and EU levies earlier in January. BP, the third-largest oil and gas producer in the North Sea, has said it expects to pay about $2.5bn in UK taxes in 2022, including about $800mn under the new levy.
Private equity-backed Harbour Energy, which is the UK’s biggest producer, expects to pay $900mn in UK taxes this year, including $400mn under the levy.
Total has so far largely absorbed the hit from taxes on its operations, as well as writedowns on some of its operations in Russia, as earnings soar. It said on Tuesday that cash flow from its liquefied natural gas and trading business would come in higher in the last three months of 2022 than the previous quarter, despite a drop in gas prices.
It also said it was likely to maintain the pace of its share buybacks at $2bn for both the fourth quarter of 2022 and the first quarter of this year.
The group has come under pressure in France to help consumers deal with inflation, including by cutting petrol prices at the pump in the autumn.
Total said the hit from writing down its 19.4 per cent stake in ind
Revisions to the windfall tax – or energy profits levy – increased the estimated bill of Harbour Energy (LON:HBR) by over $2bn, according to analysis.
Harbour Energy, the North Sea’s largest producer, is one of the strongest opponents to the windfall tax, and analysis from Welligence has shed further light on its impact.
North Sea head John Corr said the firm is now facing a $5.5bn bill for 2022-2025, equating to around 24% of its profits, due to chancellor Jeremy Hunt’s latest reforms in November.
The windfall tax was first introduced by then-chancellor Rishi Sunak in May 2022 at a 25% rate, increased to 35% in November by Jeremy Hunt.
Mr Corr set out how that has impacted Harbour.
“Under the old system, Harbour’s EPL payments basically over the 2022 – 25 period were about $3bn, or around 19% of their profits went into the EPL.”
When Hunt’s changes came in “it went from $3bn to, in our estimates, $5.5bn. So overnight it’s a $2.5bn add and it amounts to 24% of their profits over the period.”
windfall tax harbour energy© George Cracknell Wright/LNP/Shut
Chancellor Jeremy Hunt
Harbour is so hard-hit due to a lack of spending pipeline to take advantage of an investment incentive linked to the EPL.
Mr Corr compared Harbour Energy to Equinor, the operator of the huge Rosebank project in the West of Shetland, which is hugely insulated against the EPL.
In contrast to the estimate, it is understood that Welligence’s $5.5bn figure would be at the very top end of analyst concensus for Harbour through to 2028, rather than 2025.
Harbour, which did not comment on the stats, issued a trading update on November 3 saying its total tax liabilty for 2022 would be $900m, of which just $400m is linked to the EPL.
Windfall tax
The levy’s investment incentive mechanism – repaying 91p for every £1 spent – means companies spending on new projects will see relief.
“Although Harbour have, according to us, over $1.5bn of capex, coming up over the next three years or so, it really hurts,” Mr Corr said.
No one has taken into account the windfall tax costing, that’s why the share is on its knees. I have no doubt that 2022 earning will be good but when they also say in there report 2023 earnings will be impacted due to WT we will be lucky to get up to £3,20. I have a **** load of these at 3,80 and all I want is my money back, to get there the oil price will have to be over $100. Unfortunately this ****ed up government has destroyed this companies future. The only reason why buy backs have stopped, I believe their using it to pay down debt before the results.