Shell and BP profits could be hit by crude collapse

Sun Jan 25, 2009 10:45am GMT

By Tom Bergin

LONDON (Reuters) – Oil majors including Royal Dutch Shell and BP are expected to announce the end of a four-year run of record-breaking earnings over the coming weeks, after crude prices collapsed from over $100/bbl during the fourth quarter.

Analysts believe the big international oil companies will be forced to curb generous dividend rises, rein in soaring investment spending and may even cut back on jobs, after four years of complaining of difficulties in finding staff.

A Reuters poll of six analysts gave an average forecast of $4.1 billion (3 billion pounds) for Shell’s fourth-quarter earnings next Thursday — a 40 percent drop compared to the same period in 2007.

However, bumper profits earlier in the year on the back of the ramp up of oil prices to over $147/bbl mean the world’s second- largest non-government controlled oil company is expected to yet again break annual earnings records for a European company.

Full-year net profit is forecast at $30.6 billion, beating the record the Hague-based company set in 2007 of $27.6 billion.

London-based BP was predicted to post fourth-quarter net profit of $2.98 billion – in line with the same period in 2007, when it suffered a big loss due to problems at its U.S. refining business.

This would generate full-year results of $26.5 billion, over 50 percent up on the 2007 result of $17.3 billion, thanks in part to improved performance at the troubled U.S. refining unit.

The drop in oil prices is expected to also hit companies such as France’s Total, Italy’s Eni and U.S. oil majors Exxon Mobil Corp and Chevron Corp.

“We see average sector earnings in 4Q, 2008 down 27 percent year on year,” Jason Kenney, analyst at ING, said.

Sluggish production growth is also expected to weigh on the sector.

Shell’s four-year slide in oil and gas production is expected to continue, with fourth-quarter output forecast to fall around 3 percent compared to the same period in 2007, to 3.3 million barrels of oil equivalent per day (boepd).

BP’s output is forecast to stay stable, at 3.91 million boepd.

A jump in European refining margins will help companies like Shell and Total, which have large crude processing operations in the region.

BP’s refining unit is more focussed on the United States, where margins fell, but a return to normal operations at some facilities which suffered outages in 2007 means BP’s downstream business should swing to profit from a loss in the previous quarter.

DIVIDENDS, CAPEX CAUTION

Record oil prices in recent years have made shareholders used to seeing double-digit increases in dividends and this is expected to stop.

“The current decline is likely to incite the companies to be more cautious as regards dividend payout,” Aymeric de-Villaret, oil analyst at Societe Generale, said in a research note.

The fall in crude is also prompting oil companies to rethink investment plans. Big projects are being delayed, partly in the hope that the costs of projects will come down.

As always, investors will also be watching the results statements closely for updates on how well the companies performed at adding new reserves.

However, analysts cautioned that 2008 is likely to represent another year in which the industry’s reserves base shrunk, as new additions failed to match production.

“Organic reserves replacement ratios are almost certain to be less than 100 percent across the board. We estimate reserves life will drop further,” Citigroup said in a research note.

Companies may even be forced to take write-downs on high cost projects, such as Canadian tar sands operations, which, under current oil prices, no longer appear to be profitable, on paper. Oil companies expect a recovery in oil prices to help many such projects in the future.

(Editing by Simon Jessop)

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