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Shell, BP Earnings May Drop Most in Five Years on Oil Price

Bloomberg.com

By Fred Pals and Eduard Gismatullin

April 27 (Bloomberg) — Royal Dutch Shell Plc and BP Plc, Europe’s largest oil companies, may post the biggest drop in quarterly earnings in at least five years after the recession dragged down crude prices.

U.S. oil futures averaged $43.31 a barrel in the quarter, 56 percent lower than a year earlier, after plunging from a record $147.27 reached in July. The companies responded by shelving projects and demanding price cuts from suppliers. BP may scale back its joint Sunrise oil-sands project in Alberta to cut expenses, while Shell has said industry costs could fall as much as 50 percent.

“We are going to see a very substantial drop in income and there’s very little they can do about costs in the short- term,” said Colin Morton, who helps manage about $2 billion, including BP and Shell stock, at Rensburg Fund Management in Leeds, England. “It’s going to be quite a tough period.”

Shell is likely to report April 29 that first-quarter profit excluding one-time items and inventory changes slumped 67 percent to $2.56 billion from $7.85 billion last year, based on the median estimate of 11 analysts compiled by Bloomberg. BP’searnings due tomorrow may have declined to $2.2 billion from $6.49 billion, a survey of 9 analysts showed.

ConocoPhillips, the third-biggest U.S. oil producer, said April 23 that net income declined 80 percent to $840 million. Eni SpA, Italy’s biggest oil company, last week said first- quarter earnings fell 43 percent to 1.9 billion euros ($2.5 billion). Exxon Mobil Corp., the world’s largest company by market value, will release results on April 30.

Share Drop

Shell and BP reported their first quarterly losses in 10 and seven years respectively in the final three months of 2008, as the value of fuel inventories plunged.

Shell fell 13 percent in the first quarter, compared with an 11 percent drop for BP. Both underperformed the 40-member Dow Jones Europe Oil & Gas Index, which lost 3.5 percent.

BP’s Global Indicator Margin, a broad measure of refining profitability, rose to $6.20 a barrel in the first quarter from $4.64 a year earlier, according to data on its Web site.

Shell spokeswoman Catherine Aitken said on April 24 the average estimate of a “fair number” of analysts surveyed by the company was for earnings of $2.6 billion.

BP spokesman Robert Wine also said last week that the average estimate of 19 brokers was for profit of $2.23 billion, with estimates ranging from $1.92 billion to $2.43 billion.

Spending Plans

Shell, based in The Hague, last month pledged to pay out around $10 billion in dividends this year, even as the company funds the biggest spending program among its peers to revive production growth. Shell is betting on capital-intensive projects such as a gas-to-liquids plant in Qatar and the mining of oil sands in Canada to boost production from 2010.

“What they say about capital expenditure, that’s what determines their growth rate for the next four to five years,” Andy Lynch, who helps manage about $2 billion in assets at Schroder Investment Management Ltd. in London, said April 24. Both BP and Shell want “to share the benefits of falling costs,” he added.

Output at Shell may have fallen by 4 percent in the latest quarter because of militant violence in Nigeria, according to Citigroup Global Markets Inc. Production may have also been held back by declining gas demand in Europe, Citigroup analysts Mark Bloomfield and David Thomas wrote in an April 20 note.

Shell’s production may fall for a seventh consecutive year, the company said March 17, even as it reached a milestone at the end of the first quarter with the first commercial shipment of liquefied natural gas from its Sakhalin-2 venture in Russia.

Thunder Horse

Peter Voser, Shell’s chief financial officer, will take over as chief executive officer in July, succeeding Jeroen van der Veer who is retiring.

BP, based in London, boosted production by the most in almost four years in the first three months of 2009.

Chief Executive Officer Tony Hayward said April 16 that output climbed to “just above” four million barrels equivalent a day following the ramp-up of the Thunder Horse platform in the Gulf of Mexico. Thunder Horse, the world’s largest semi-submersible platform, is currently producing more than 300,000 barrels of oil equivalent a day.

“One of the problems they have is that their costs have gone up in the last few years and obviously as costs have gone up they need a higher oil price to sustain their business,” said David Crawford, a U.K. equity fund manager at London-based Octopus Investments.

Dividend Payments

BP has cut its production outlook and reduced a spending target because of lower crude prices. Hayward expects cash flow to break even with crude prices at $60 a barrel this year. Given the current economic climate, BP Chairman Peter Sutherland told shareholders earlier this month that he was aware of the importance of maintaining dividend payments.

BP “will need to use a lot of levers, particularly if oil falls further,” Jason Kenney, an Edinburgh-based analyst at ING Wholesale Banking, said in report on April 23. “In a ‘slash and burn’ scenario” it “would reassess capital expenditures first, then gearing to ensure investment in growth, and then dividends.”

To contact the reporters on this story: Fred Pals in Amsterdam at[email protected]Eduard Gismatullin in London at[email protected]

Last Updated: April 26, 2009 19:00 EDT 

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