FTSE 100: Sunak's windfall tax fails to dent energy companies' share price

Rishi Sunak  A view of part of the BP Etap platform (Eastern Trough Area Project) in the North Sea, around 100 miles east of Aberdeen, Scotland, as David Cameron visited the oil and gas platform as the focus of the Scottish independence debate shifted to the future of North Sea production.
Rishi Sunak has drawn up an emergency package to help offset spiralling domestic fuel bills.

The UK’s biggest power companies have staved off a sell-off as Rishi Sunak announces a windfall tax to help offset spiralling energy bills.

Energy firms Shell (SHEL.L) and BP (BP.L) rose about 1% each as crude prices firmed on signs of tight supply.

Investors have been expecting a windfall tax on oil majors and have likely already factored that into the share price.

The wider utilities sector however, is under pressure as it is understood that electricity generators, which may have landed £10bn in excess profits due to surging prices, might be included in the windfall tax.

Read more: Rishi Sunak to announce windfall tax to fund emergency aid for energy bills

Shares in power group SSE (SSE.L) are down 1.8% as the company’s boss warned that a windfall tax could damage the UK’s progress on building windfarms and other sources of domestic supplies.

Power generators Drax (DRX.L) and Centrica (CNA.L) are in the green this morning after falling sharply earlier this week on fears of windfall taxes.

Drax, owner of the UK’s biggest power station, tumbled 16%, Centrica lost 10% and SSE lost almost 9% in London earlier this week.

“There is a lot to consider with a windfall tax. Questions remain over how much money the tax can raise and how it can be used to alleviate the cost of living burden on those who need it most. It is difficult to imagine that the cash raised will be enough to nullify the £800 increase in energy bills come Autumn – let alone other areas of inflation such as shopping and petrol,” Myron Jobson, senior personal finance analyst at Interactive Investor, said.

Over 62% of investors said they would not support a windfall tax if that hurt their investments, according to a poll conducted by the DIY investment platform. However, over a quarter (28%) said they would.

Just over half of consumers (53%) thought a windfall tax on oil and gas companies to help ease the cost-of-living crisis squeeze would have an adverse impact on their pension.

But 16% of respondents weren’t sure, while just under a third (31%) believe it wouldn’t hurt their retirement savings.

“While the majority of respondents to our survey appeared spooked by the adverse impact a windfall tax on gas and oil companies might have on their investments, over a quarter support it if used to ease cost of living,” Jobson added.

Read more: Rishi Sunak £15bn support package to cut to cut every energy bill by at least £400

“It is important to remember that investors are consumers too and are not only thinking about their profits. Not all investors are high net worth individuals, and many have been caught between a rock and a hard place amid the escalating cost of living crisis.

“For many, investing for tomorrow has taken a back seat to staying financially buoyant today as rising prices continue to weigh on budgets. So, measures to help support consumers through the raging cost of living storm is in the interests of many investors – particularly those nursing paper investment losses following recent market underperformance.

Education secretary Nadhim Zahawi warned earlier this week that pension pots could be damaged by a one-off levy on energy companies as it would likely result in dividends being slashed or even axed.

The energy watchdog this week said the price cap will rise another £800 in October, taking the average bill to £2800.

The big question is how it will be paid for, with speculation that we could see the announcement of a windfall tax of some description, in a move that while politically popular, could have wider unexpected and negative consequences further down the line, when it comes to encouraging business to invest in the UK,” Michael Hewson, chief market analyst at CMC Markets, said.

“It would also be seen as a political win for the opposition parties who have been campaigning for such a move for weeks now. Either way, it would be the latest example of a government reacting to events, rather than shaping them,” he added.

Jason Hollands, managing director of online investment platform Bestinvest, added: “The announcement of a ‘windfall tax’ on UK oil and gas companies today appears to be creating considerably more turbulence on the Conservative parliamentary benches than it has on the financial markets. Both BP and Shell’s share prices look set to end the day higher (BP +1.6% and Shell +1.3%), shrugging off the chancellor’s tax raid.

“Don’t forget, these are businesses who’ve lopped off billions worth of Russian assets in recent months and seen their shares move higher. This tax – which the chancellor expects to raise £5bn - represents a tiny proportion of the combined £265bn market caps of BP and Shell. Against a tough backdrop from the wider equity markets, BP’s share price is up ~24% since the start of the year and Shell’s by almost ~42%.

“While Russia’s war against Ukraine has undoubtedly been a major factor driving energy prices higher, underinvestment in oil and gas as capital has walked away from fossil fuels could lead to a continued mismatch between supply and demand that sustains high prices for some time yet.”

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