Shell’s Foggy Outlook Sways Investors but Not Politicians

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Record profits have raised the risk of a UK windfall tax, even though investors don’t expect the good times to last

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The possibility of a UK windfall tax looms. In Thursday’s call with reporters, Shell emphasized its role in ensuring energy security and plans to invest up to £25 billion, equivalent to about $32 billion, in the UK over the next decade, mostly in low-carbon energy. Chief Executive Ben van Beurden also sought to dampen expectations about the company’s future performance.

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“It is actually probably the hardest quarter to call what is going to happen next [for prices], The only thing I can say with some high degree of confidence is that it will be a rocky ride,” he said.

Despite the warning and spending promises, record profits for both Shell and BP have increased public pressure on the British government to hit up the industry, as local households struggle with souring home energy bills, higher prices at the pump and broader cost inflation. So far, Boris Johnson’s Conservative government has resisted calls from opposition parties for a one-off levy, but the British prime minister is given to pleasing crowds and there are precedents for this type of tax in the UK

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Mr. van Beurden is right that the outlook is foggy. The war in Ukraine has prompted escalating sanctions on Russia, most recently including a possible EU ban on its oil. There is the prospect of retaliation from Moscow. Whatever happens, global supply lines for oil and gas are shifting as Europe scrambles to wean itself off Russian fuels. Energy security has shot up the public agenda, causing some to rethink the pace of the energy transition. There are also two wild cards: Covid-related lockdowns in China, which can greatly affect demand, and the outside chance that OPEC increases supply.

That is a great deal of uncertainty, but most factors are tailwinds for oil and gas prices, lockdowns and OPEC being the exceptions. The green transition isn’t likely to shift near-term demand and the reactions will probably be mixed: Europe seems to be speeding up, while nations with oil and gas reserves may slow down. A crucial factor is that publicly listed producers continue to show serious capital discipline, prioritizing buybacks and deleveraging despite soaring prices and calls from politicians to drill more. It all adds up to an uncertain and volatile outlook, but on balance one skewed toward tight markets and relatively high prices.

That should be good news for the sector, but investors aren’t bullish. Shell shares trade at an enterprise value of 3.7 times earnings before interest, tax, depreciation and amortization—at the bottom end of the historic range. Investors seem to agree with Mr. van Beurden that current profit levels are unsustainable. If only he could get the message out to the public.

Write to Rochelle Toplensky at [email protected]

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Credit: www.wsj.com /

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