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Financial Times: Lex Column: Shell and BP

Published: April 30 2008 03:00 | Last updated: April 30 2008 03:00

Mega-cap energy stocks are not supposed to move this much. Yesterday’s first-quarter figures from BP and Shell – comfortably above consensus in both cases – sent the pair’s shares up about 6 per cent. Investors may have been waiting for an excuse to pile back in; BP had underperformed the sector by 13 per cent over the past 12 months and Shell had lagged behind by 8 per cent.

Is the rally justified? Earnings were boosted by forces beyond the duo’s control: average crude oil selling prices during the period were two-thirds higher than a year earlier, with gas about a quarter better. And there is nothing to alter the underlying story of structural decline. Shell’s crude oil output was down 6 per cent year on year while BP’s fell 2 per cent. At the oil sands division, Shell’s big hope – accounting for 3 per cent of earnings but 9 per cent of capital expenditure – net production fell by a quarter after mechanical setbacks. Glitches are becoming a habit for a unit that represents about a third of Shell’s proved reserves.

Investors’ optimism seems to be founded on signs of operational improvement. BP’s refining and marketing unit reported a profit for the quarter in spite of heavy losses in the US caused by refinery shutdowns, suggesting that cost-cutting measures are delivering results earlier than expected. Shell, meanwhile, reminded investors of its earnings power by smartly steering shipments of its liquefied natural gas to wherever prices were highest.

In spite of the share price spike, the bigger picture is unchanged. Both companies have ordinary valuations, good cash flow, mixed execution and poor immediate growth prospects. A step change in production is unlikely until after 2011 when new but risky projects are forecast to come onstream. It is hard to imagine yesterday’s bounce occurring without the backdrop of record oil prices.

Copyright The Financial Times Limited 2008

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