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Shell Reports 38% Fall In Profits – Whither That Windfall Tax?

Tim Worstall
Tim Worstall trader
Updated 5 May 2022

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Key points:

Shell (LON: SHEL) shares are up 4% this morning on the back of the Q1 2022 results announcement. The headline result is that profits are down by 38%. This is not though, what is actually driving that share price for this includes the effects of Russia.

Shell is – yes, to be obvious – an oil producer as well as an oil refiner, trader, and transporter. So, a rise in the oil price feeds through rather nicely to the bottom line. This is exactly what has happened. Cashflow from operating activities is up 81% for example – and that’s, roughly enough, whether we look at QoQ as compared to Q4 2021, or YonY, to Q1 2021.

This means that adjusted earnings are roughly triple what they were a year ago or 50% up on last quarter. This is just what the effect of a rising oil price is going to be on an oil producer.

That something like this was going to happen was both obvious and well known – we do know that rising oil prices benefit oil producers so the Shell share price already includes much of this.

Royal Ducth Shell

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There is also that Russia thing. The costs of leaving Russia – that phased withdrawal – come to a $3.9 billion hit which is on this quarter’s numbers. It’s including this which leads to the 38% fall in profits. It’s worth pointing out that this is a real, cash, charge, not a non-cash one like BP’s announcement yesterday.

Shell also announced the interim dividend of $0.25 and the second stage of the share buyback programme. As is usual these days the two together should be considered as being the total payments to shareholders from those reported profits.

What we really want to know though is where are Shell shares going to go next? That future being unknowable but there are things we need to think about. The biggest determinant is clearly going to be the international oil price. That’s going to depend upon both the course of the war – how much Russian oil isn’t going to make it into the global market? – and the general health of the global economy. A widespread recession would of course cut the oil price substantially.

There is though this other issue of the windfall tax. There’s considerable political pressure for the UK to announce a rise in the taxation of the oil companies. Both Shell and BP are British resident so they would be caught by any such tax. Any such tax comes off profits so, of course, it would have a substantial effect on share prices.

On the other hand, both Shell and BP have now announced lower, not higher, profits. So the political argument in favour of taxing windfall gains might seem to lose a little steam. In fact, the net position between the two is a $13.3 billion loss this quarter just reported.

This all then becomes an entirely political question – but that is the biggest short-term risk to the Shell share price – will there be a windfall tax or not?

Tim Worstall
Tim Worstall is a freelance writer specialising in economics and the financial markets.