After much to-ing and fro-ing, the UK government has finally gone ahead with its highly debated windfall tax on oil and gas companies, including the likes of BP (LSE: BP) and Shell.
But what does that actually mean for my BP shares, and more importantly – should I be worried?
What is the new windfall tax?
First up, what exactly is the not-so-catchily named “Energy Profits Levy”? Well, the name’s not very subtle, right?! It is indeed pretty much what it says on the tin. A new 25% levy on UK oil and gas profits, in addition to the 40% rate already paid.
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That sounds pretty hefty and makes for impressive headlines. But, as ever with government announcements, the devil is in the detail… so I looked a little deeper.
How will the windfall tax impact BP?
If you take the time to read the actual government announcement, the potential impact to BP becomes a lot clearer.
The first noticeable detail is that for this additional levy, companies will not be able to offset previous losses or decommissioning expenditure. This is perhaps not too surprising given both Shell and BP have, quite legitimately, been using this route to pay little tax in the UK for a while now.
So that’s not great news from a shareholder perspective.
The second detail, though, is far more interesting. At the same time as introducing the new windfall tax, the announcement also contains a new ‘super-deduction’ investment allowance. This is set at a very generous 80% level – and more importantly, available in the year the expense is occurred.
No wonder Bernard Looney, CEO of BP, was quoted as saying its UK investment plans would go ahead regardless of any windfall tax plans!
Essentially, the more spend they can pull forwards from existing plans, the more tax they will offset through this mechanism.
So, my takeaway here is that this is much more about cash-flow timing, rather than a massive blow to BP.
What is the impact on the BP share price?
It looks like the markets have this figured out, too. The BP share price was actually up on the day of the announcement.
And yes, the price of oil was also up – but only slightly. So the announcement appears to have done little to dent confidence in its ability to weather this tax.
In fact, BP continues to be one of the rare risers of 2022: it’s in the top ten of FTSE 100 risers this year to date.
That’s something that looks likely to stay the case whilst oil and gas markets remain both volatile and high.
The obvious risk is that, once introduced, a tax rarely disappears. Especially when you have a government looking for help to balance the books.
This levy is due to end “when prices return to more historically normal levels” — which sounds a suspiciously vague statement. The sunset clause of December 2025 sounds far more likely.
But so long as that super-deduction for investment remains in place, this windfall tax will be manageable for BP.
And that’s why I’m sticking with my long-term buy-and-hold strategy on my BP shares.
