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Reuters: Shell and BP profits set to fall sharply

Fri Oct 19, 2007 10:37 AM BST
By Tom Bergin

LONDON (Reuters) – Oil majors Royal Dutch Shell and BP are expected to report sharp falls in third-quarter profits in the coming week, despite record oil prices, due to lower production, tighter refining margins and higher costs.

A Reuters poll of 10 analysts gave an average forecast of $4.06 billion (1.98 billion pounds) for third-quarter replacement cost net profits at BP — a 10 percent drop compared to the same period last year.

Shell was forecast to report a 21 percent drop in current cost of supply net profits to $5.52 billion in the period.

The two measures of profit strip out the impact of changes in the value of inventories. Analysts also exclude one-off items such as asset sales from their forecasts as they believe this produces the best estimate of underlying business health.

The profit falls come in spite of Brent oil prices averaging $75 per barrel during the quarter — a record quarterly high.

However, the oil majors have not received the full benefit of higher oil prices because governments around the world are raising tax levels and tightening contract terms to keep more of the gains for themselves.

Lower production is also expected to weigh on earnings.

The analysts forecast that BP’s oil and gas production fell 3.0 percent to 3.7 million barrels of oil equivalent per day (boepd), due to natural field decline not being matched with new startups after key projects were delayed.

Shell’s production of oil and gas is seen down 4.1 percent to 3.12 million boepd, partly for the same reasons but also because it lost a big stake in the giant Sakhalin-2 project in Russia earlier this year.

It will be the lowest quarterly production level at the Anglo-Dutch major in about a decade, Irene Himona at Exane BNP said.

Shell, the world’s second-largest non government-owned oil company by market value behind Exxon Mobil Corp, and BP, the third-largest, are expected to report that higher costs also ate into profits.

A pull-back in refining margins will add to the companies’ woes. Average global refining margins fell to $8.05 per barrel in the third quarter from $8.40 in the same period a year earlier, BP said.


London-based BP’s refining and marketing division will also be hit by outages at some big U.S. refineries. Himona said all the division’s profit was likely to come from retailing fuel with the crude processing operation only breaking even.

Many analysts believe the quarter will represent the low point for BP, after project delays, pipeline leaks, a refinery explosion and probes into its trading weighed on investor sentiment and earnings in the past two and a half years.

However, Citigroup said Shell may yet again disappoint investors with an increase in near-term capital expenditure plans to $24-$25 billion a year from the $22-23 billion which the company forecast for 2007.

Analysts at Goldman Sachs predicted Shell’s 2008 capex may rise to $27.5-28 billion.

BP shares currently trade on a multiple of 11.06 times 2008 earnings, according to Reuters estimates, compared to 10.93 times for Shell, 10.54 times for France’s Total and 10.22 times for Italian oil major ENI.

Twenty-one analysts polled by Reuters rate BP shares a “buy” or “outperform” while four rate it a “sell” or “underperform”. Seventeen rate Shell a “buy” or “outperform” compared to three who see it as a “sell” or “underperform”.

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