Introduction: Centrica profits surge
Good morning and welcome to our rolling coverage of business, the financial markets, and the world economy.
Energy group Centrica has posted a surge in earnings this morning as the owner of British Gas continues to profit from rising energy prices.
Centrica made a statutory operating profit of £6.5bn for the first six months of this year, up from a £1.1bn loss in 2022.
The figures were boosted a near 900% surge in profits at British Gas, which made £969m in January-June during the cost of living crisis, up from £98m a year ago.
British Gas’s profit boom is largely thanks to a tweak to the regulator Ofgem’s energy price cap that allows the supplier to recoup some of the costs of supplying its 10 million customers during the energy crisis, our energy correspondent Jillian Ambrose explains.
Centrica’s overall profits were swelled by £4.7bn from unwinding “unrealised losses from UK energy supply hedging positions at the end of 2022”.
Without that, it made an adjusted profit of £2.1bn, up from a £1.3bn loss a year ago, a figure that will reignite calls for wider windfall taxes on the sector.
As well as selling energy to consumers through British Gas, Centrica also produces it through gas and oil exploration and production assets, and a 20% interest in the operational UK nuclear power generation fleet.
Centrica chief executive. Chris O’Shea, who faced anger over his £4.5m pay packet earlier this year, says:
“Nothing is more important than delivering for our customers – its why we are here. Today’s results allow us to increase our customer support package to more than £100m, and the new green investment strategy we’ve announced will see us invest several billion pounds in the energy transition, creating thousands of new well-paid jobs.
Our robust balance sheet has allowed us to invest heavily in the UK and Ireland’s energy security and will make sure that our customers have cleaner energy at the right price.
UK companies posting earnings today – Anglo American, BT, Shell, Diageo, Barclays, ITV, CMC Markets, M&B, Centrica, Drax, Hammerson, Inchcape, Invidior, Rentokil Initial, Sage, Relx, St James’s Place, Schroders
— David Buik (@truemagic68) July 27, 2023
Also coming up today
The European Central Bank is expected to raise eurozone interest rates at its latest meeting today, a day after the Federal Reserve lifted US borrowing costs to the highest in over two decades.
We also learn how the US economy fared in the second quarter of the year, when new GDP figures are released.
And NatWest remains under pressure in the row over the closure of Nigel Farage’s bank account, following the resignation of Dame Alison Rose as CEO early yesterday morning.
The prime minister and the chancellor have been accused of “damaging UK plc” and failing to follow due process amid concern over anonymous briefings that triggered the early-hours resignation of NatWest boss Dame Alison Rose.
“There is a real sense of disquiet that political pressure has led to a midnight exit for such an important banking CEO,” an official at the City regulator, the Financial Conduct Authority, told the Guardian.
“They should have allowed due process.”
The agenda
-
11am BST: CBI distributive trades survey of UK retailers
-
1.15pm BST: European Central Bank interest rate decision
-
1.30pm BST: US durable goods orders for June
-
1.45pm BST: European Central Bank press conference
-
3pm BST: US pending home sales for June
Key events
Shadow climate secretary Ed Miliband has repeated Labour’s call for a more stringent windfall tax, after Shell reported profits of over $5bn for the last quarter.
Miliband said:
“These figures demonstrate the continuing scandal of the Conservatives’ failure to act on the windfalls of war being pocketed by the oil and gas companies.
“Labour would bring in a proper windfall tax to help tackle the cost-of-living crisis.”
Last November, chancellor Jeremy Hunt increased the current energy profits levy (EPL) from 25% to 35% and extended by two years, until March 2028.
The EPL is levied on North Sea oil and gas operators, but is criticised for not capturing excess cash generated by oil and gas giants’ trading, refining and forecourts divisions.
Although Shell’s shares are down today, -1.7% at £23.57, they’re sharply higher than before Russia’s full-scale invasion of Ukraine.
In mid-February 2022, Shell’s shares traded around £20. During 2022, its shares jumped by around 43%, as did rival BP.
This year, Shell are only up around 1%, as the drop in wholesale oil and gas prices eat into its earnings.
Victoria Scholar, head of investment at interactive investor, says:
After collapsing in 2020 at the height of the pandemic when the global economy ground to a halt, shares in Shell have been sharply rebounding off the lows, although the pace of gains has tempered with shares up modestly so far in 2023.
Despite this, the analyst community remain bullish towards the stock with no sell recommendations and a majority of buy recommendations. Today Shell is under pressure, dragged down by lower earnings.”
Roberto Rivero, market analyst at Admirals, reckons the drop in Shell’s profits in the last quarter shows the energy sector is moving from boom to bust.
“The nature of the oil and gas industry is one of boom and bust. Prices rise, then they fall. When prices are high, oil and gas companies inevitably make hefty profits. When they fall, these profits begin to normalise.
It has been evident for some time that we are entering the “bust” phase of the oil and gas cycle, as prices ease from the multi-year highs of last year. As prices have trended downwards over the last year, so too have Shell’s earnings, which dropped more than 50% in the second quarter.
Shell could take a further hit in the second half of 2023 as sluggish economic growth in advanced economies and a lacklustre post-Covid Chinese recovery could exert further downward pressure on oil and gas prices.
However, OPEC+, who have been cutting production since November to shore up oil prices, may have something to say about that.”
Barclays plays down risks of mortgage crisis
Kalyeena Makortoff
In the banking sector, Barclays has played down the risks of the UK mortgage crisis for its own customers.
Barclays says more than half are five-year fixed contracts and have been “behaving rationally” by dipping into savings to make larger payments, our banking correspondent Kalyeena Makortoff reports.
The comments came as the London-headquartered bank revealed its own profits had jumped by nearly a third to £1.96bn in the second quarter, despite putting aside £372m to protect against potential defaults by borrowers.
Around £95m of those loan loss provisions were linked to its UK business, but executives assured that Barclays’ mortgage book was sound.
“There are a number of factors that contribute to our comfort in the higher rate environment,” Barclays CFO Anna Cross told journalists, including that the bank applied “strict affordability tests” since 2013.
“Second, looking at the profile for refinancing, the proportion…on five-year and over initial fixed rates [mortgage] has increased materially since 2019, from 33% to 51%. This shift delayed the potential increase in rates for many borrowers, allowing them more time to mitigate the impact.”
Cross added that despite forecasts for more persistent inflation and a higher peak for UK interest rates, she was assured by the fact that customers were “behaving rationally and have started to use surplus deposit balances to manage their finances more accurately.”
She added:
“Over a quarter of our customers with mortgages have been making excess repayments reducing their loans ahead of potential remortgaging.”
Barclays CEO tells @steve_sedgwick reason UK NIM guidance has been revised lower is because customers are using their savings to pay down mortgages
This is a ‘benefit downstream’ as it will reduce the impairments businessStock is -5% namely on back of this lower guidance
— Joumanna Nasr Bercetche 🇱🇧 (@CNBCJou) July 27, 2023
Financial data firm Moneyfacts has reported that the average 2-year fixed residential mortgage rate has dropped to today, to 6.83% from 6.86% on Wednesday.
The City view is that Shell’s results are somewhat disappointing, as Jamie Maddock, equity research analyst at Quilter Cheviot, explains:
“In its latest quarterly report, Shell disappointed by missing consensus profit expectations by around 10%, reporting sharply lower year-on-year performance due to weak oil and gas prices plus refined product margins. While the energy crisis resulted in elevated plus volatile prices that had previously boosted Shell’s results across a couple of divisions, this was no longer the case for Q2’23.
However, the hike in dividend payments – and a new $3bn share buyback – should cushion any disappointment.
Maddock says:
“Analysts had previously called for an increase in dividends and Shell has delivered by raising its dividend by 15%, as previously indicated at its capital markets day.
The company remains committed to using its bumper profits over the past 18 months to fund a repurchasing scheme. Its stock buyback programme of at least $5.5bn is better than previously indicated, but only modestly so. The high end of the company’s capital expenditure guidance has also been trimmed.
Public ownership is the only way to end the ‘chaos in Britain’s energy sector, argues Unite general secretary Sharon Graham:
“British Gas’ owner Centrica has just reported its highest ever first half year profits, raking in almost £1 billion.
“We need to stop dancing around our handbags and grasp the nettle. The only way to end the chaos in our energy supply is staring us in the face – public ownership. It is absolutely affordable. It would protect businesses and households. Put simply, it’s a no brainer.
“Both the Government and Labour need to decide whose side are they on.”
Oxfam: Rich polluters should be taxed more
Katy Chakrabortty, head of policy and advocacy at Oxfam GB, says we shouldn’t be fooled by the fall in Shell’s profits in the last quarter.
Profits still running into the billions, points out Chakrabortty (to $5bn in Q2, from $11.5bn a year ago.)
These colossal profits are a gross injustice – a symptom of an economy that is putting short-term profits above people and planet. As we are seeing this summer with heatwaves, droughts and floods that are destroying lives on an unprecedented scale, these profits come with a huge climate cost.
“The UK government should be taxing these rich polluters more and helping to incentivise a fair switch to clean, renewable energy. Funds are urgently needed to support people in low-income countries, who have done the least to cause the climate crisis but have been hit the hardest, rebuild their lives. Surely it is a no brainer that the biggest and richest polluters should be the ones who pay.”
Shell’s windfall profits have not translated into higher investment in its renewable operations, says Sophie Flinders, analyst at the Common Wealth thinktank.
Shell’s payouts of $2.6bn in dividends and $3.6in share buybacks exceed even the company’s profits this quarter, with shareholders receiving bigger sums than the oil giant’s own surplus. In 2022, their CEO made £9.7m, up 53% from 2021.
In short, there’s too much money to be made in fossil fuels to place the responsibility of decarbonising energy on oil giants like Shell. These windfall profits have not translated into higher investment in Shell’s renewables. Deadly heat waves in America, wildfires across the Mediterranean and floods in the Philippines and Pakistan show that the crisis is already upon us — and that oil giants need to be consigned to the dustbin of history.
Shareholders are lining their pockets at the cost of a habitable climate. Clear, ambitious political interventions are needed to decarbonise energy and avert the worst of the climate crisis.
Ed Miliband, Labour’s Shadow Secretary of State for Climate Change and Net Zero, says energy firms are bringing in “unearned, unexpected profits” due to Russia’s invasion of Ukraine driving up gas prices.
Miliband told BBC Breakfast that the only long-term answer is to move off fossil fuels as quickly as possible, by increasing on-shore and off-shore wind and solar energy systems.
He adds:
My regret is not just that we don’t have a proper windfall tax, we don’t have a government commited to that green sprint either.
Liberal Democrat leader Sir Ed Davey has said:
“It beggars belief that after all these months this Conservative Government is still allowing energy firms to rake in extraordinary profits while millions of families struggle.”
Campaigners are warning that that UK energy system is broken, with companies such as Centrica and Shell making such large profits when households are sinking into debt.
Simon Francis, co-ordinator of the End Fuel Poverty Coalition, said:
“These profits are a further sign of Britain’s broken energy system.
“At a time when household energy debt is spiralling to record levels and energy bills remain double what they were just a few years ago, the profits posted will be greeted with disbelief by those struggling through the crisis.
“There will of course be questions about how these profits were made, but the reality is that energy firms are operating on a playing field set by the Government.”
Heidi Chow, executive director of Debt Justice says the government must create a ‘help to repay’ scheme to assist households to clear their energy debts:
“These obscene profits have been made at the expense of millions of UK households that have been plunged into debt and arrears because of record energy prices.”
“The UK government needs to create a ‘Help to Repay’ scheme to tackle the £2bn of energy debt weighing down households. These profits show the money is there to pay for it, we just need the political leadership to put people first.”
Shares in Centrica have jumped over 4% at the start of trading in London, as traders react to its bumper profits so far this year.
They’re the top riser on the FTSE 100 leaderboard, at their highest level since February 2019 (at 129.5p).
Shell have dropped by 1.7% though, after its earnings dropped in the last quarter.
Greenpeace protest at Shell HQ
Protesters from Greenpeace UK have erected a giant spoof advertising billboard outside Shell’s HQ this morning, calling out the company for posting profits of nearly £4bn ($5.1bn) in the April-June quarter.
The billboard links Shell’s fossil fuel-driven earnings to the devastating wildfires linked to climate change in Southern Europe, North Africa and North America.
It features an image of a Greek firefighter battling to contain a wildfire near Athens last week, is emblazoned with Shell’s logo and features the slogan “Our profit, your loss”.
Maja Darlington, campaigner at Greenpeace UK, said:
“While millions attempt to rebuild their lives after months of extreme weather has wreaked havoc from Rhodes to Rajasthan, Shell is upping oil and gas production, slashing investment in renewables and posting billions of dollars in profits. They’re partying like there’s no tomorrow and ordinary people around the world are being forced to pick up the tab.
“It is blazingly clear that global leadership is needed to end this fossil fuel free-for-all, but instead the UK government is flip-flopping on its climate commitments and further enriching the oil giants with new fossil fuel developments. It’s time for the government to find its backbone and force Shell and the rest of the industry to stop drilling and start paying for the damage they are already causing around the world.”
Shell’s CEO, Wael Sawan, was criticised by climate campaigners this month for claiming that cutting the world’s oil and gas production would be dangerous and irresponsible.
Since Sawan took over at the start of this year, Shell has abandoned plans to cut oil production each year for the rest of the decade.
IPPR: Shell puts profits and shareholders over our planet
Shell actually paid more cash to its shareholders during the last quarter than it made in profit.
The energy giant paid $2bn in dividends during April-June, and also repurchased shares worth $3.6bn through its buyback programme.
That gives total total shareholder distributions in the quarter of $5.6bn.
But this morning, we’ve learned that its profits shrank to around $5bn in Q2.
Dr George Dibb, head of the Centre for Economic Justice at progressive thinktank IPPR, is unimpressed, saying:
“Shell has proven its commitment to putting profits and shareholders over our planet. It continues to make huge amounts of money off the back of the war in Ukraine and high energy prices.
Meanwhile, incredibly, Shell is now paying more out to its shareholders in dividends and buybacks than it makes in profit, clearly prioritising these transfers over investing a net zero future. If fossil fuel firms refuse to invest in decarbonisation then it’s right for the UK government, like the USA and Canada, to tax share buybacks to support greater public investment in the transition to net zero.”
TUC: government has let energy companies ‘laugh all the way to the bank’
The TUC has blasted the UK government for – it says – allowing energy companies to “laugh all the way to the bank”.
Following this morning’s jump in profits at Centrica, TUC General Secretary Paul Nowak said:
“While families across Britain have struggled to pay their bills, energy companies have been allowed to laugh all the way to the bank.
“The government could have imposed a proper windfall tax on excess profits. But instead it has chosen to leave billions on the table.
“This was a political choice that has benefited shareholders instead of hard-pressed households. Big oil and gas have gotten away with treating the public like a cash machine.
“Our failing energy retail companies should be brought into public ownership. That’s the way to bring down bills and invest in home improvements.”
Shell profits drop, but more cash funneled to shareholders
Energy giant Shell has reported a drop in profits, down from its bumper results a year ago, due to the drop in energy prices this year.
Adjusted earnings at Shell roughly halved year-on-year in the second quarter of 2023, but that still left the company with profits of $5bn (£3.86bn), down from $9.6bn in January-March and almost $11.5bn a year ago.
Shell says the fall reflected lower profits from liquified natural gas (LNG), lower realised oil and gas prices, lower refining margins, and lower volumes.
Brent crude has traded between $70 and $90 a barrel this year, down from 2022 when it was as high as $139 and never lower than $75.
Despite this slowdown in profits, Shell has hiked its dividend by 15%.
It has also announced a new share buyback programme of $3bn, which follows the $4bn it announced in its first-quarter results, as it continued to funnel spare cash to shareholders.
Subject to Board approval, another share buyback programme of at least $2.5bn is expected to be announced at the third quarter 2023 results announcement, Shell adds.
British Gas reports record £969m profit after price cap increase
Jillian Ambrose
British Gas has reported its highest ever first-half profits of almost £1bn after the energy watchdog let it claw back more money from household bills.
The UK’s biggest energy supplier reported profits of £969m for the first six months of 2023, up nearly 900% from £98m in the same period last year.
The profit boom is largely thanks to a tweak to the regulator Ofgem’s energy price cap that allows the supplier to recoup some of the costs of supplying its 10 million customers during the energy crisis.
The supplier’s historic profit highs are likely to anger consumer groups that have campaigned against the supplier’s treatment of vulnerable energy customers as record energy market prices forced millions into fuel poverty.
British Gas have a record £969m profit after an energy price cap tweak by Ofgem allowed them to recover costs during the crisis. 💰 could they not have used those “profits” to cover the costs? @ofgem isn’t fit for purpose https://t.co/pBMbk6hh4H
— Jennifer (@jen_burke_) July 27, 2023
Introduction: Centrica profits surge
Good morning and welcome to our rolling coverage of business, the financial markets, and the world economy.
Energy group Centrica has posted a surge in earnings this morning as the owner of British Gas continues to profit from rising energy prices.
Centrica made a statutory operating profit of £6.5bn for the first six months of this year, up from a £1.1bn loss in 2022.
The figures were boosted a near 900% surge in profits at British Gas, which made £969m in January-June during the cost of living crisis, up from £98m a year ago.
British Gas’s profit boom is largely thanks to a tweak to the regulator Ofgem’s energy price cap that allows the supplier to recoup some of the costs of supplying its 10 million customers during the energy crisis, our energy correspondent Jillian Ambrose explains.
Centrica’s overall profits were swelled by £4.7bn from unwinding “unrealised losses from UK energy supply hedging positions at the end of 2022”.
Without that, it made an adjusted profit of £2.1bn, up from a £1.3bn loss a year ago, a figure that will reignite calls for wider windfall taxes on the sector.
As well as selling energy to consumers through British Gas, Centrica also produces it through gas and oil exploration and production assets, and a 20% interest in the operational UK nuclear power generation fleet.
Centrica chief executive. Chris O’Shea, who faced anger over his £4.5m pay packet earlier this year, says:
“Nothing is more important than delivering for our customers – its why we are here. Today’s results allow us to increase our customer support package to more than £100m, and the new green investment strategy we’ve announced will see us invest several billion pounds in the energy transition, creating thousands of new well-paid jobs.
Our robust balance sheet has allowed us to invest heavily in the UK and Ireland’s energy security and will make sure that our customers have cleaner energy at the right price.
UK companies posting earnings today – Anglo American, BT, Shell, Diageo, Barclays, ITV, CMC Markets, M&B, Centrica, Drax, Hammerson, Inchcape, Invidior, Rentokil Initial, Sage, Relx, St James’s Place, Schroders
— David Buik (@truemagic68) July 27, 2023
Also coming up today
The European Central Bank is expected to raise eurozone interest rates at its latest meeting today, a day after the Federal Reserve lifted US borrowing costs to the highest in over two decades.
We also learn how the US economy fared in the second quarter of the year, when new GDP figures are released.
And NatWest remains under pressure in the row over the closure of Nigel Farage’s bank account, following the resignation of Dame Alison Rose as CEO early yesterday morning.
The prime minister and the chancellor have been accused of “damaging UK plc” and failing to follow due process amid concern over anonymous briefings that triggered the early-hours resignation of NatWest boss Dame Alison Rose.
“There is a real sense of disquiet that political pressure has led to a midnight exit for such an important banking CEO,” an official at the City regulator, the Financial Conduct Authority, told the Guardian.
“They should have allowed due process.”
The agenda
-
11am BST: CBI distributive trades survey of UK retailers
-
1.15pm BST: European Central Bank interest rate decision
-
1.30pm BST: US durable goods orders for June
-
1.45pm BST: European Central Bank press conference
-
3pm BST: US pending home sales for June
