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Shell shareholders unfazed by $2.4bn windfall tax: RDS stock keeps rising after Q4 levies

By Jenal Mehta

12:14, 9 January 2023

oil rig
Shell confirms $2.4 bn in windfall tax, energy stock investors remain undeterred. Photo – Getty Images

Shell (RDS) announced it will be hit by $2.4bn in windfall taxes in the EU and UK. Markets appear not to be discouraged by the news, share prices have been on an incline since.

Shell confirmed last week it will be paying $2.4 bn in windfall taxes in the UK and European Union. This news has not discouraged the markets however, the oil giant’s share price has increased 5% since the announcement.

Shell (RDS) Price Chart

The debate about introducing windfall taxes has been a part of political discourse since the year 2020.

The argument being that the astronomical profits which were achieved by the energy giants such as BP (BP) and Shell (RDS) were seen as being obtained at huge cost to consumers and should be taxed higher which, in turn, could benefit the government with higher income to help fund energy aid to end users.

In recent months, markets were expecting the higher levies to be inevitable.

The UK government did indeed increase taxes on energy firms from 25% to 35% starting January 2023, and this will stay in place until 2028. This is expected to earn the UK $65bn in additional income in the next five years.

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BP (BP) Price Chart

The markets do not appear to be swayed by Shell revealing the $2.4bn additional cost, likely because this is less than 10% of its net profits as of 2021. Furthermore, markets appear to already have priced this in during the months leading up to the announcement.

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Russ Mould, investment director at AJ Bell commented: “Markets are forward-looking discounting mechanisms and they have already factored in an increase in taxes, and their possible impact upon Shell’s profits, cash flow and thus valuation, and moved on.”

The bigger concern now for energy stock investors is whether the source of the higher profits, oil prices, will be able to sustain for much longer.

Oil price pressure appears to have eased in recent months. Brent crude oil has lowered to $80 per barrel this week, levels last seen at the start of 2022.

Despite this, energy stock prices remain resilient. BP (BP) shares have been up 5% in the past week. Exxon Mobil (XOM), Chevron (CVX) and TotalEnergies (TTEF) have seen a similar rise.

Mould says one possibility is that “stock markets may be thinking current oil price weakness will not last, once China shakes off the worst of Covid, America starts to replenish its SPR, the global economy starts to pick up pace once more (as it surely will at some stage) and that increased demand meets supply which could still be constrained by sanctions on certain producers and lowly levels of investment by the oil majors.

On the other hand he says “it may be that the oil market has it right and the stock market has it wrong, in that a deep recession could take a further, heavier toll on the price of crude, just as it did in 1980, 1991, 2001, 2008 and 2020.”

Markets in this article

BP.
BP - GBP
4.531 USD
0.024 +0.530%
SHELa
Shell - EUR
33.070 USD
0.25 +0.760%
Oil - Brent
Brent Oil
80.774 USD
-0.031 -0.040%
CVX
Chevron
155.25 USD
1.06 +0.690%
XOM
Exxon Mobil Corp (Extended Hours)
115.45 USD
1.66 +1.460%

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