The Times: Now is the time to tap into the profits at Shell

October 26, 2007
James Rossiter: Tempus

Third-quarter figures out yesterday from Royal Dutch Shell saw the oil major stealing a march on its arch-rival BP. Third-quarter profits were down 8 per cent to $6.39 billion but, considering that the industry is suffering from a slump in production volumes and trading margins, the fall was less than the City had been expecting.

Shell’s profits fall compares with BP’s 27 per cent fall in underlying third-quarter profits revealed earlier this week, a result that Tony Hayward, BP’s new chief executive, admitted was “dreadful” as he revealed plans to cut 10 per cent of the company’s North Sea workforce, the core of the company’s legacy business before it expanded into the US, Russia and Nigeria.

Andy Inglis, head of exploration and production at BP, explained that the cuts were needed to simplify the way the business is run and would ensure better “frontline delivery”.

Jeroen van der Veer, Shell’s chief executive, may have been making a thinly veiled side-swipe at his British rival when he said yesterday that Shell’s results were “underpinned by operating performance,” adding that the company was continuing to “rejuvenate” its old reserves and launch new refining and natural gas reserves.

Comparison with BP flatters Shell and underlines how effectively it has recovered in the three years since it admitted it had overstated its proven reserves by 20 per cent. Over the past two years, as Shell has cleaned up its act, investors who own both oil stocks have looked for stronger capital gains by going overweight in Shell and underweight in BP.

This week’s third-quarter figures seem to have rewarded that strategy.

Shell’s so-called clean net income – profits excluding exceptional gains – came in at $6.1 billion, some 9 per cent above City forecasts, the sixth consecutive time the company has beaten broker expectations.

Adjusting for nonoperating items net income was $6.13 billion, a 13 per cent fall on last year.

But the record oil prices meant that bottom line profits rose by 16 per cent to $6.9 billion allowing for a 14 per cent rise in the quarterly dividend payout. For the whole quarter Shell returned $3.7 billion to shareholders via dividends and buybacks.

Shell shares added 13p yesterday to £20.59. The shares have gained 18 per cent in six months and now trade on a multiple of 8.3 times projected earnings for 2008. BP shares trade on a multiple of 7.5 times next year’s earnings.

However, this might just be the turning point for BP, similar to the business transformation Shell began three years ago. Shell should remain a core holding for any oil sector investment but investors may want to take profits there and buy into a long-term growth story at BP under its new leader.

http://business.timesonline.co.uk/tol/business/markets/article2742006.ece

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