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MARKET EXPECTATIONS: Shell looks most exposed to weak energy markets compared with rivals


EARNINGS PREVIEW: Weak Gas, Refining Mkts Determine UK Oil 3Q

By James Herron


OCTOBER 12, 2009

TAKING THE PULSE: Profits will clearly be down sharply year-on-year across the U.K. oil sector, given that the average oil price for the third quarter was more than 40% lower on the year. The key differentiator in earnings will be exposure to the weakest sectors in energy, namely U.K. and U.S. gas prices and global refining.

Refining margins, already weak in the second quarter, have worsened and are down by more than half on the U.S. Gulf Coast, compared with a year-on-year decline of 30% in the second quarter, according to BP data.

The global economy may be stabilizing, but industrial consumption of natural gas remains weak on both sides of the Atlantic. Combined with a supply surplus of domestic U.S production and internationally traded liquefied natural gas, tepid demand has pushed down prices considerably. U.S. natural gas has hit a seven-year low and U.K. prices a three-year low recently.

Weakness in the U.S. dollar will also hit profits.

These developments have further reduced earnings estimates. Royal Bank of Scotland cut its earnings estimates for European integrated oil companies this week by 6% for 2009 and 8% for 2010.

Analysts will be looking at which of the three companies shows the greatest resilience to these tough times through cost cutting and operational turnaround programs.

  Royal Dutch Shell PLC (RDSB.LN) (Thursday October 29)

MARKET EXPECTATIONS: Shell looks most exposed to those energy markets weakened by macroeconomic forces and will probably fare poorly in comparison to its rivals, as it did in the second quarter. “Shell is disproportionately exposed to spot gas (prices) in Europe, pointing to both volume and pricing risk during the quarter,” said a report from Citigroup. It will also see a big impact from low refining margins. Declining oil and gas output, which Citigroup sees down 2.8% on the year, will exacerbate these problems.

MAIN FOCUS: Progress in Shell’s pipeline of major projects, which should reverse the trend of declining production by 2011-2012, will be a major focus. Shell indicated last quarter that its huge investment budget will be 10% lower than expected next year. Analysts will be looking for any evidence that the restructuring program of new Chief Executive Peter Voser could yield further savings.

  BP PLC (BP) (Tuesday October 27)

MARKET EXPECTATIONS: BP looks set to shine again in the third quarter. It will deliver strong year-on-year production growth the and refining profits that are a little less bleak than competitors thanks improvements in plant operational performance, said Royal Bank of Scotland. BP is also materially less exposed to weak European gas markets than its rivals, said Citigroup.

MAIN FOCUS: BP surprised the market last quarter by announcing it had already achieved its 2009 cost cut target of $2 billion and was targeting an extra $1 billion in savings in the second half. Analysts will be looking for an update on progress toward this target. Investors will also be looking for hints that BP could resume the growth of its quarterly dividend now that the oil price has stabilized in a range where the company should be cash flow positive.

  BG Group PLC (BG.LN) (Wednesday October 28)

MARKET EXPECTATIONS: Strong production volume growth, estimated by Citigroup at 8.9% year-on-year, will go some way to mitigate BG’s exposure to weak U.K. gas prices. Weaker sterling may also affect earnings, it says. Despite this risk, analysts still favor BG as the strongest growth story in the sector driven by big oil discoveries in Brazil and unconventional gas projects in Australia. RBS raised this week its annual output growth figure for 2005-2020 for BG to 6.6%, far ahead of BP’s 1.0% and Shell’s 0.8%.

MAIN FOCUS: BG is set to announce the average prices for its U.K. gas contracts for the year ahead, which will be closely watched by analysts as this accounts for 60% of its gas sales in the British Isles. “Fears of a collapse in the average contract price to 25p a therm or less, versus 55p/therm in the last year,” are overdone, says RBS, which assumes a 40 p/therm average price. Analysts will also be looking for guidance on liquefied natural gas profits for 2010-2011.

Company Web sites:

-By James Herron, Dow Jones Newswires; +44 (0)20 7842 9317; [email protected]


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