ALEX BRUMMER: Big oil back in the stocks


Big oil back in the stocks: Taxing share buybacks might seem an easy hit, but it will have unintended consequences, says ALEX BRUMMER

BP is used to finding itself in the vortex of political storms. It was a target for Barack Obama when he was seeking to demonstrate his climate change credentials following the Deepwater Horizon explosion in 2010.

Earlier this year it had to swallow a loss of £17.8billion on its stake in Russia’s Rosneft and now it faces accusations of profiteering.

The company’s estimate that it will end up paying £2.2billion of taxes on its UK operations in the current financial year has not satisfied critics.

Profits: This year BP had to swallow a loss of £17.8bn on its stake in Russia’s Rosneft and now it faces accusations of profiteering 

Nor is anyone willing to give chief executive Bernard Looney credit for the company’s embrace of a green agenda more ambitious than any other oil major, with a commitment to net zero by 2050 and to spend £18billion in the UK over the next eight years on renewable projects.

Looney wasn’t kidding when he remarked that the company had become ‘cash machine’. In these days of exceptionally high oil and gas prices BP earnings more than doubled to £7.1billion in the third quarter. 

What fuelled the anger of dissenters is a £2.2bpillion share buyback. The ‘progressive’ think-tank IPPR, a favourite of the Blair-Brown era, argues that such buybacks are a transfer of income from the poorest households to wealthy shareholders.

It notes that US President Joe Biden, who accuses big oil of ‘war profiteering’, is targeting buybacks and demands the UK do the same with a swingeing 25 per cent levy. 

What it fails to mention is the US levy on buybacks has been set at just 1 per cent. This is a bit like praising Biden’s increase in taxes on the highest earners which starts at $400,000 a year.

Investors like a mix of share buybacks and dividends because the former enjoys better tax treatment. It needs to be asked who the ‘already wealthy’ shareholders might be?

Most of them are pension funds. And with New Labour’s reforms of the pensions industry, the vast majority of the workforce are now automatically enrolled in private sector pensions, as is the case in Australia and Sweden.

The main issue for pensions analysts is whether colleagues are paying in enough.

Oil majors, because of cash generation, are big contributors to all private pensions, supporting more vulnerable members of society who are in the workforce. Taxing share buybacks looks like an easy hit.

But as was the case in 1997, when dividend tax relief for pension funds was abolished, the Government must recognise the unintended consequences of even a small move on the fiscal dial.

Keeping faith

A near-40 per cent jump in the share price of online grocer Ocado is good to behold.

In Ocado’s case, it is worth remembering that stock in Tim Steiner’s creation has fallen to a third of a peak valuation a year ago. 

The evergreen critique of Ocado has been that it has failed to sell its network of robotic warehouses, known as Customer Fulfilment Centres, into enough markets.

That is patently untrue given the addition of South Korea’s Lotte Shopping to a list now made up of 12 alliances.

The difficulty with Ocado is that investors can never be sure when deals signed will generate cash flows.

Patience with the Korean venture, as with previous tie-ups, is necessary as no cash fees will be recognised until revenue operations commence.

Aside from the joint venture with M&S, visibility on Ocado’s future earnings is tricky. Ocado has asked for forbearance and for investors to buy into the Amazon narrative of losses in the investment phase followed by an income gusher. For the sake of the UK’s vibrant but depleted tech sector, in Steiner we must trust.

Planet life

Edward Bonham Carter has been the leading light at Jupiter Fund Management for three decades.

His decision to sever ties with the group he brought to the London Stock Exchange is a signal event. It comes as one of his successors, Matthew Beesley, has been slashing the number of funds under management and striving to stem outflows.

Bonham Carter – with a famous political lineage, oodles of charm and pursuit of responsible investment – has been the glue holding Jupiter together even in his more recent semi-detached role.

Will Jupiter follow those other UK shooting stars, Mercury, New Star and Neptune, on a different odyssey?

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