UK oil stocks make up a sizeable section of the London Stock Exchange.
This explains why the FTSE index has performed stronger than many other major global stock indexes in 2022. Soaring oil prices — and the impact that this has had on oil stocks’ profits — have helped keep the broader index afloat.
However, in response to rocketing crude oil values and the cost-of-living crisis, the government has announced plans to impose an Energy Profits Levy on the industry.
These measures mean oil firms will have to pay an extra 25% tax, taking their total liability to 65%. Some have argued that this could impact oil investments.
So are they a good investment? Let’s take a look.
What are oil stocks?
Oil stocks are companies within the energy sector that process, drill, produce, transport, and store oil.
An oil company can operate in one or more of the following three areas:
- Upstream — Broadly speaking this involves exploring for oil deposits, drilling to test their commercial feasibility, and finally producing oil itself. Firms at this part of the process are known as exploration & production companies (or E&Ps).
- Midstream — UK oil stocks here process, store, and transport oil, natural gas, and natural gas liquids. They can also be involved in the trading of these energy products.
- Downstream — This relates to the refining of crude oil into a product like petrol, diesel, or lubricants. It also applies to the sale of products to the end customer, as in the case of petrol filling stations.
Top oil stocks in the UK
Let’s now look at three of the largest oil companies on the London Stock Exchange today. Each is listed on the FTSE 100 index.
| Oil producer | HQ | Description |
| Shell (LSE: SHEL) | London, UK | A fully integrated oil stock operating upstream, midstream, and downstream. |
| BP (LSE: BP) | London, UK | A major crude oil producer operating in around 70 countries. |
| Harbour Energy (LSE: HBR) | Edinburgh, UK | A North Sea-focused oil producer. |
Shell
Shell is by some distance the largest UK oil stock out there (and the world’s fourth-biggest by market cap). As of the end of 2021, the Footsie firm’s proven reserves stood as a colossal 9.4bn barrels of oil equivalent.
The business was until recently known as Royal Dutch Shell in a nod to its Anglo-Dutch heritage. But recent restructuring has seen it shorten its name, drop its dual-class share structure, and relocate its headquarters from the Netherlands to Britain.
The oil company believes the new Shell plc and its single-class share structure will provide big benefits for shareholders. It will boost the firm’s ability to make share buybacks and reduce risk for investors by bringing its structure in line with other oil stock, it says.
Finally, Shell says that the move will improve its ability “to rise to the challenges posed by the energy transition”.
Shell is a major upstream, midstream, and downstream operator. But it is rapidly building a broad position in the field of green energy and is spending between $2bn and $3bn in renewables and other green technology a year. For example, the business just announced plans to build what it claims will be Europe’s largest renewable hydrogen plant in the Netherlands.
BP
BP is another oil major with integrated operations that span the globe. But like Shell, the business has taken a big blow following Russia’s invasion of Ukraine in early 2022.
In February 2022 the firm said it would sell its near-20% stake in Russian oil company Rosneft, valued at a whopping $14bn at the end of 2021. Exit from Russia is particularly painful for BP because the country was home to half of the company’s oil and gas reserves and a third of total group production.
Like other oil majors, BP is aggressively improving its own green credentials and taking steps to have 20GW of renewable energy capacity by 2025. And it is seeking to increase the total to 50GW by the end of the decade. It plans to match Shell by reaching net zero by 2050.
The UK oil stock also has plans to supercharge its position in the realm of ‘green’ hydrogen. This is the least carbon-intensive way of producing the gas as it uses renewable sources instead of fossil fuels. And so it is tipped by many to be set for massive growth in the coming decades.
Harbour Energy
Harbour Energy is the UK’s largest independent oil and gas explorer producer. It was formed after the merger of Premier Oil and Chrysaor in 2021.
This oil company generates around 90% of production from its British assets and 93% of its reserves are in UK waters. Last year’s merger has made it a leading player in the North Sea and its assets include the Great Britannia Area, the J-Area, and the Catcher Area.
Premier Oil’s push into South-East Asia means that Harbour Energy also produces oil from offshore projects in Indonesia and Vietnam. In total, the firm has claims in 48 oil and gas-producing fields across the globe. The business also owns stakes in exploration and development projects off the coast of Norway and Vietnam.
What to consider before investing in oil stocks
Here are a few things to keep in mind before you start investing in oil stocks:
Oil price
Oil is a commodity that, like most raw materials, is highly sensitive to broader economic conditions. When GDP is growing, demand is up and prices can be expected to rise. When the global economy is shrinking, the opposite can be expected.
Investing in oil stocks then can be considered a broader play on economic conditions. But it’s important to remember that oil prices can move wildly irrespective of the state of the world economy.
Take again oil’s recent surge to multi-year highs following Russia’s invasion of Ukraine. Brent crude prices in London soared to their highest level since 2008 at $139 per barrel as worries over Russian oil supply ignited. That’s even as investors fretted over the impact the military campaign would have on global growth.
The OPEC+ factor
Oil prices are also highly dependent upon the supply strategy of Organization of the Petroleum Exporting Countries (or OPEC) group of nations. The cartel includes 13 countries such as major oil-producing nations like Saudi Arabia and Iraq.
In 2017, the OPEC+ group was established, which marked collaboration between OPEC and an extra 10 countries. Other major producers like Russia are part of this enlarged collective and together these nations account for around half of total oil supply and a whopping nine-tenths of crude supplies.
Consequently, any decision they make on how much oil to pump has significant implications for oil prices, and consequently profits of UK oil stocks.
The rise of renewable energy
The returns that one can make by investing in oil depends on both the geopolitical and macroeconomic landscape, then.
It is also highly sensitive to the accelerating transition to low-carbon energy sources in response to global warming. Therefore, major oil companies like BP and Shell are investing heavily to boost their exposure to renewable energy.
The problem is that these companies are playing catchup following chronic underinvestment in recent decades. So they are having to pay a premium to not get left behind during the green energy revolution.
It’s also important to recall that renewable energy still forms a small part of their operations today. And oil majors continue to dedicate the lion’s share of capital expenditure to fossil fuels, too. Nine-tenths of Shell’s spending is dedicated to oil and gas.
Crude oil and gas still have a critical part to play in everyday life. And by extension the role of UK oil stocks remains critical. However, investing in oil and oil companies does involve a notable amount of risk as the world pivots towards green energy.
Are oil stocks right for you?
Oil stocks have long been popular buys for those seeking to generate passive income. During the good times, fossil fuel providers can watch on as profits and cash levels gush higher. This has often meant shareholders can grab a piece of the bounty by way of gigantic dividends.
Up until the pandemic, Shell hadn’t reduced its annual dividend once since the Second World War. Very few global stocks can lay claim to that kind of record.
However, it’s important to remember that the profitability of oil stocks can be highly volatile. And this can have a significant impact on shareholder returns.