“We’re a cash machine at these types of prices,” Bernard Looney, BP’s chief executive, cheerfully declared last November when the price of a barrel of Brent fetched $85 (£60). Now a barrel costs $105, so it’s safe to predict that BP will be swimming in dollars when it reports first-quarter profits next Tuesday, even allowing for its well-flagged whack from getting out of Russia.
The billions on show on Thursday at Shell, the larger company, will be even greater. Cue another round of debate about the merits of a windfall tax on North Sea oil and gas producers.
Thus Rishi Sunak, at the very least, was being politically smart this week in fudging his stance. The chancellor has previously been a firm opponent of a windfall tax, arguing it would discourage investment, the very thing he is trying to accelerate during an energy crisis that is partly about security of supply. Now he’s not so sure, or so he seemed to suggest to the Mumsnet website. “Nothing is ever off the table” if companies don’t ramp up investment in new projects, he said.
A U-turn still feels a long way off given the force of past statements; and note that Sunak’s interesting remark was preceded by a longer defence about why he hasn’t taken the windfall route, and how oil and gas producers are already paying tax at an effective rate of 40%. Perhaps the comment was just a prod to Looney to stop boasting about his cash machine and start hyping the BP billions going into UK windfarms, carbon-capture projects, hydrogen developments and electric charging points.
Yet one comes back to that high oil price – or, rather, to its persistence. It is impossible to be precise about the “war in Ukraine premium” in current oil and gas prices, but it obviously exists – and it is a premium being enjoyed by companies and being paid by consumers. The longer it lasts, the harder it is to resist rejigging the balance in the interest of fairness.
Yes, the companies would grumble. But, if the sum was as little as £3bn, as some models suggest, the bleating would quickly fade as long as windfall taxes were still seen to apply only rarely. Boards would get back to modelling returns over a decade, which is what really drives their investment decisions. Having opened the door, Sunak would be wise to keep it open. Come the autumn, when consumers’ bills will rise again, the political pressure may be overwhelming.
Sainsbury’s may be right to err on the side of caution
Supermarkets are a good place for investors to hide during periods of high inflation, runs traditional thinking, since food is always in demand and higher prices on shelves should eventually provide some protection. Life is more complicated, however, when inflation combines with a cost of living squeeze and a possible consumer recession.
Sainsbury’s comments about “significant external pressures and uncertainties” says the outlook is genuinely unclear. In the absence of a takeover bid – on which front, the chat has gone quiet after last year’s entertainment at Asda and Morrisons – it’s a case of giving thanks for the dividend, lifted by almost a quarter with Thursday’s full-year numbers.
Pre-tax profits in the current financial year are predicted to fall from £730m to anywhere between £630m and £690m, a wide range that was reflected in Sainsbury’s chief executive Simon Roberts’ description of consumer mood. In the same sentence, he used “early signs” of caution, which sounds tolerable from the point of view of the shopkeeper, and “watching every penny, every pound”, which is several notches more severe.
Sainsbury’s is far from helpless, it should be said. It can find cost savings, as it always does, and the Argos combo should have more efficiencies to yield. Confidence that free cashflow this year will be “at least” £500m provides freedom to react to events – certainly more freedom than enjoyed by the heavily indebted buyout brigade.
Sainsbury’s balance sheet is strong, a slice of market share has been gained and the freshly tweaked dividend policy is to be slightly more generous with the payout as a proportion of earnings. So, yes, the investment caricature of stability is roughly intact. But one can also see why the shares, down 4%, were the biggest faller in the FTSE 100 index. Boards everywhere in retail-land are erring on the side of caution amid uncertainty, and may be right to do so.
