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Profits collapse but BP and Shell set to hold dividend steady

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Institutional investors will cheer news after string of payout cuts as recession bites big businesses

By John Phelps

OIL GIANTS BP and Shell are set to provide a much-needed boost for the UK’s beleaguered savings and pensions industries this week as they are due to at least maintain their hefty dividends despite tumbling profits.

The two will confirm they are on course to pay out a combined annual total of about £12.75 billion to their shareholders, the overwhelming proportion going to institutions such as pension funds and insurance companies. They have been hit by the collapse in payouts from big institutions such as Royal Bank of Scotland, Lloyds Banking and a string of industrial companies.

Some 95% of all BP shares are now held by big investors with holdings worth more than £5 million each, and it is a similar story at Royal Dutch Shell.

The payout from the two majors represents more than 20% of all income that these institutions are expecting this year from their investments in leading FTSE 100 companies.

The dividend is thought likely even though BP’s outgoing chairman Peter Sutherland is expected to announce a 67% slump in quarterly profits to around £1.7 billion when he issues his latest trading update on Tuesday. Shell boss Jorma Ollilia is set to follow on Thursday with the news that returns dropped by as much as 70% to around the £1.64bn mark in the early summer, as a result of a halving in the price of oil and still deeper falls in global natural gas prices over the past year.

But BP, at least, is likely to point out that it was one of only a handful of oil majors to record an increase in the latest profits – albeit a small one – against returns in the first quarter of this year as chief executive Tony Hayward continues plans to take $2bn (£1.21bn) costs out of the business this year. BP has also gained from increased production from the Gulf of Mexico and Russia.

The two groups could also get a boost from rising oil prices if the global economic recovery gathers pace.

At present, though, both companies look set to dip into reserves or increase borrowings this year and some industry watchers believe that their capital spending could drop below previous forecasts. BP has already trimmed its budget by 10% to $20bn (£12.1bn), although Shell has indicated that it is ready for an increase in its spending to as much as $32bn (£19.3bn).

Other oil majors have announced bigger cutbacks and a lack of investment has been seen, particularly in mature areas such as the North Sea, as the big operators concentrate on promising new finds, such as BP’s Thunder Horse field in the Gulf of Mexico.

One analyst said: “You can’t blame the oil companies for holding back But the time is fast approaching when they will have to increase their spend to replenish resources.”

His views are echoed by researchers at Barclays Capital, who said more than half of 400 companies polled in a survey are planning to increase their budgets in 2010 after slicing spending by an average of 15% during 2009.

Some believe that both BP and Shell could be interested in cutting short the process of finding new reserves by announcing takeovers of existing companies. Gossips say BP could swoop on the £7bn Santos group in Australia to boost its global interests in liquefied natural gas and there are perennial rumours that Shell could move on BG after its big Brazilian discoveries.

BG, with its hefty North Sea gas output, releases its own second-quarter figures on Wednesday. Brokers expect to hear that earnings slipped from £800m to around the £500m mark.

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