Harbour Energy (LSE:HBR) is the FTSE 250’s largest oil and gas producer. And following Russia’s invasion of Ukraine, which led to a massive jump in the price of energy, the company saw a big increase in its pre-tax earnings.

However, to help fund various initiatives to cushion the impact of inflation on household finances, the UK government imposed an energy profits levy (EPL) — or windfall tax — on North Sea operators.

Energy companies already pay corporation tax of 30% while the standard rate for other companies is 25%. In addition, there’s a supplementary charge (10%) plus the EPL.

Initially, the EPL was 25%. But with effect from January 2023, it was increased to 35%. This means energy companies now face a 75% tax rate on their profits generated from the North Sea.

But the effective tax rate is even higher.

Company accounts must reflect future tax liabilities on current profits. These timing differences arise due to allowances that the government offers in return for investing in new capital equipment.

The upshot is that for the year ended 31 December 2023, Harbour Energy faced an effective rate of tax of 95%.

In the run up to the general election, the UK’s three biggest political parties have made various pledges on how they’ll tax energy company profits during the next Parliament.

The Conservatives have said they’ll retain the existing arrangements until 2029. But they point out that the legislation has provisions in place for extra taxes to be abolished should prices fall back to “normal” levels.

Should it form the next government, the Labour party has said it will close unspecified “loopholes” associated with the EPL. The levy will also be increased by three percentage points.

If elected, the Liberal Democrats have promised to implement a “proper” windfall tax. It’s unclear what this means.

Implications

Irrespective of which party wins the election, it looks as though Harbour Energy will face a tax rate of at least 75% (possibly 78%) for the foreseeable future.

But as a shareholder in the company, I’m not planning on selling.

That’s because the company has announced plans to acquire the upstream assets of Wintershall Dea. These are all located outside the UK which means they’re not subject to the EPL. And if the deal is approved, it will transform the size and scale of Harbour Energy’s operations.

Post-completion, the company plans to increase its dividend further. That’s impressive for a stock that’s already yielding 6.6%. However, it’s important to note that payouts are never guaranteed.

But in addition to the penal rate of tax, I’m also aware of the other risks associated with holding energy stocks. Due to fluctuating commodity prices, earnings can be volatile. And oil price forecasts are notoriously unreliable.

Also, energy production can be dangerous. For example, BP is still paying compensation following the Deepwater Horizon explosion in 2010.

But whether we like it or not, demand for oil is likely to continue rising. The International Energy Agency now believes it will peak in 2029.

And by acquiring oil and gas fields in different territories, Harbour Energy will be able to compensate for the high rate of tax in the North Sea.

Therefore, irrespective of which party wins the general election, I’m going to hold on to my shares.