The UK government recently announced an Energy Profits Levy, widely dubbed a ‘windfall tax’. The policy includes a 25% surcharge on extraordinary profits in the oil and gas sector. It’s notable that the Treasury announcement has had a muted impact on leading FTSE 100 energy stocks in the immediate aftermath. Indeed, the BP (LSE: BP) share price has held steady since the news after a stunning 52-week rally.
Would BP shares make a good addition to my portfolio today? Let’s explore.
The windfall tax
On 26 May, the headline tax rate on the profits of oil and gas companies operating in the UK and UK continental shelf increased from 40% to 65% with immediate effect. Chancellor Rishi Sunak’s announcement is expected to raise £5bn over the coming year.
BP adopted a cautious tone, pointing to the longevity of the levy, which was also highlighted by Shell. BP stated: “It is a multi-year proposal. Naturally we will now need to look at the impact of both the new levy and the tax relief on our North Sea investment plans”. The oil giant’s current target is to invest up to £18bn in the UK energy system by 2030.
The tax is only due to be phased out if oil and gas prices return to historically more normal levels by December 2025. It has wide cross-party support in Parliament. This presents a clear long-term risk to the BP share price in my view, but not an insurmountable one. After all, BP is a global integrated energy major and it has lived through windfall taxes imposed by previous governments.
Where next for BP shares?
Brent crude prices have rocketed around 73% over the past year to $117 per barrel today. The war in Ukraine and shortages in US gas inventories have contributed to surging global demand for natural gas, causing prices to double or even treble in some countries. There’s no doubt BP shares are buoyed considerably by these conditions.
Previous bull cycles in oil and natural gas have sometimes lasted for several years, often with a backdrop of geopolitical uncertainty. If commodity prices continue their meteoric rise, this may outweigh the windfall tax’s impact on the BP share price.
However, BP faces challenges from recent global developments. In its latest quarterly results the company posted a $20.4bn loss. This largely resulted from its exit from its Rosneft stake amid the swift imposition of sanctions on Russia. Whether it’s domestic tax policy or collective Western foreign policy, it seems there’s no shortage of political risks confronting BP stock.
Would I buy today?
The remainder of BP’s quarterly results show considerable strength. Underlying replacement cost profit ballooned by $3.6bn year-on-year to $6.2bn, exceeding analysts’ expectations. Additionally, the company intends to deliver $2.5bn in share buybacks.
Net debt fell for the eighth consecutive quarter and BP generated surplus cash flow of $4.1bn. Finally, the company also offers a FTSE 100 index-beating dividend yield of 4.18%.
I currently don’t own any energy giants, but I believe this could still be a profitable corner of the stock market in 2022. Although not without risks, the macroeconomic outlook remains sufficiently bullish for the BP share price in my view. At 433p today, I see room for further growth this year. I’d buy.