Why tax matters for the Harbour Energy share price

Tax is often ignored when analysing results. But our writer explains why he thinks it will determine the future direction of the Harbour Energy share price.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

One English pound placed on a graph to represent an economic down turn

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The Harbour Energy (LSE:HBR) share price barely moved last week after the company released its 2022 results. Like most investors, I usually focus on profit before tax (PBT). But for this FTSE 250 oil and gas producer, tax has a huge impact on its earnings.

PBT is generally believed to be a better indicator of performance than post-tax earnings.

Tax rates vary across the world and most listed companies have operations in multiple jurisdictions. And the level of taxation can be very different. For example, the rate of corporation tax in Ireland is 12.5%, whereas it’s 35% in Argentina. The amount of tax paid by a company therefore reflects where its profits are generated, rather than the success of its operations.

Harbour Energy derives over 90% of its revenue from extracting and selling North Sea oil and gas. This means it pays UK tax on the majority of its earnings. However, in response to rising commodity prices, and the huge profits that energy producers were making, the government introduced a windfall tax — or the Energy (Oil and Gas) Profits Levy (EPL) as it’s officially known.

Oil and gas producers in this country already pay a higher rate of tax than other companies. The Ring Fence Corporation Tax Rate — and supplementary charge — means energy companies pay 40% tax on their UK profits. The EPL adds another 35% on top. Harbour Energy therefore faces an astronomical tax rate of 75% through to 2028.

2022 results

As to be expected, the EPL has had a significant impact on the results of the company.

Due to an accounting technicality, the company had an effective rate of tax in 2022 of nearly 100%! Profit after tax fell by over 90%.

Measure2021 ($m)2022 ($m)Change ($m)
Profit before tax3152,462+2,147
Profit after tax1018-93

Most of the benefits from increased production, a higher oil price and a reduction in operating costs went to the UK taxpayer, rather than to shareholders of the company. Even so, the directors increased the dividend by 9%. And they announced a share buyback programme worth $200m.

Due to the EPL, the company will now be reducing its investment in this country. Instead, it will be looking to grow and diversify internationally. The company sees great potential from its interests in Indonesia and Mexico. The governments of these countries haven’t introduced a windfall tax.

Government policy

The UK government is due to announce it latest Budget on Wednesday. But for political reasons, I can’t see it cutting the EPL. Nor is it likely to reduce the scope of the tax.

As a shareholder of Harbour Energy, I’m not happy about that. I believe it will take the company several years to significantly expand its overseas operations.

In the absence of a change in government fiscal policy, I believe Harbour’s share price will come under continued pressure. Over the past year its fallen by nearly 30%, and it’s down 13% over the past month.

But I’m going to wait until after the Budget before deciding whether to sell my shares.

Conscious of the need for the country to become more energy-self-sufficient, I’m hopeful that the government will announce additional incentives to encourage investment in the North Sea. These might offset some of the impact of the EPL, and help improve the profitability of Harbour Energy along the way.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

James Beard has positions in Harbour Energy Plc. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Smart young brown businesswoman working from home on a laptop
Investing Articles

Should I be watching the Greatland Gold (LSE: GGP) share price?

Recent rallies in valuable metal prices has boosted the Greatland Gold share price, but is there still an opportunity for…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

The abrdn share price is down 23% in the last year, should I buy?

Asset management firms have had a rough time lately, but with the abrdn share price down heavily, is now the…

Read more »

Hand of a mature man opening a safety deposit box.
Investing Articles

If I’d invested £5k in red hot BAE Systems shares 5 years ago here’s what I’d have today

BAE Systems shares have smashed the FTSE 100 for years and Harvey Jones is keen to buy more as they…

Read more »

Investing Articles

How I’d aim to earn £16,100 in passive income a year by investing £20k in a Stocks and Shares ISA

Harvey Jones is building a portfolio of high-yielding FTSE 100 dividend stocks that should give him a high and rising…

Read more »

Investing Articles

Down 8% in a month! The BP share price is screaming ‘buy, buy, buy’ at me right now 

When crude oil falls, the BP share price invariably follows. Harvey Jones is wondering whether this is the right point…

Read more »

Bus waiting in front of the London Stock Exchange on a sunny day.
Investing Articles

Could the 9.8% M&G dividend yield get even bigger?

Christopher Ruane reckons that, although the M&G dividend yield is already close to a double-digit percentage, it could get better…

Read more »

Investing Articles

How much passive income could I earn by putting £380 a month into a Stocks and Shares ISA?

Christopher Ruane explains how he'd aim to turn a Stocks and Shares ISA into four-figure passive income streams each year.

Read more »

Investor looking at stock graph on a tablet with their finger hovering over the Buy button
Investing Articles

2 passive income stocks I’m buying before an interest rate cut

With the market expecting interest rates to fall in August, time might be running out for investors looking to buy…

Read more »