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.

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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)
Revenue3,6185,431+1,813
Profit before tax3152,462+2,147
Tax2142,454+2,240
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.

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