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THE SUNDAY TIMES: BP and Shell ‘will hand back $60bn’

THE SUNDAY TIMES: BP and Shell ‘will hand back $60bn’

“Last week, shareholders in Shell brought to an end nearly 100 years of corporate history when they voted overwhelmingly to unify the two arms of the Anglo-Dutch energy group. This will create a company with a market value of £73 billion.”

Sunday 3 July 2005

John Waples and Dan Box

THE soaring price of oil will lead to Shell and BP returning more than $60 billion (£34 billion) to shareholders over the next two years — equivalent to Bulgaria’s gross domestic product, and £6 billion more than the amount British motorists spend each year refuelling their cars.

The huge figure, which is a combination of share buy-backs and dividends, is unprecedented, and if the price of oil soars above $60 per barrel it could go even higher.

Goldman Sachs, the investment bank, estimates BP — Britain’s biggest company with a market value of £123 billion — will pay out $13 billion in dividends in the next two years and spend $24 billion on buy-backs. Shell will pay dividends of $15 billion and spend at least $15 billion on acquiring its shares.

Matthew Lanstone, an oil analyst at Goldman Sachs, said it represented a total cash return of 6.7% per annum for investors. “The buy-backs reflect the fact the oil majors can’t find any better things to do with their cash. There is such a broad base of competition in the energy market compared with a couple of years ago that competition for new projects has gone up dramatically,” he said.

Many analysts have hastily revised their estimates of both future prices and oil-company earnings. Last Tuesday, Morgan Stanley, the investment bank, upgraded its long-term forecast of the price of oil traded on Nymex to $50 a barrel for 2005 and 2006, falling to $45 a barrel only in 2007.

Many oil traders, however, believe the real price spike is yet to come and are increasingly hedging themselves against oil hitting $75 a barrel by the end of the year. Adam Sieminski, chief energy economist at Deutsche Bank, said: “We’ve basically gone from a one in 20 probability of oil hitting $75 to a one in five chance.”

As a result, the oil majors are sitting on top of ever-increasing revenues they are having difficulty disposing of due to a lack of obvious acquisitions or areas for fresh exploration. Analysts say BP and Shell could hit profits of $6 billion in the second quarter. For the year, they could make $29 billion and $27 billion respectively.

Last week, shareholders in Shell brought to an end nearly 100 years of corporate history when they voted overwhelmingly to unify the two arms of the Anglo-Dutch energy group. This will create a company with a market value of £73 billion.

Mark Iannotti, a Merrill Lynch analyst, said: “Theoretically, if the companies had no plans to increase their organic spend and no plans for acquisitions, you could argue that if $50 was here to stay they have the scope to more than double their dividend.”

A spokesman for BP said: “While oil remains above $20 a barrel, free cash will go back to shareholders in the form of buybacks or dividends.” A spokeswoman for Shell said that the company would seek to increase dividends “at least in line with inflation over time”.

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