BP Set to Pass Shell in Market Value for First Time Since 2006

Jan. 11 (Bloomberg) — BP Plc is poised to unseat Royal Dutch Shell Plc as Europe’s largest oil company by market value for the first time in more than three years after reviving output growth and cutting costs at a faster pace.

BP rose as much as 2.7 percent to 638.30 pence, the highest price in almost 20 months, and traded at 634.20 pence as of 3:15 p.m. in London. That valued the company at 118.979 billion pounds ($192 billion). Shell added as much as 1.6 percent to 1,941 pence, and was last at 1,928 pence, giving it a market value of 118.346 billion pounds.

More than two years into a turnaround program at London- based BP, Chief Executive Officer Tony Hayward has reversed a decline in output by ramping up operations in the Gulf of Mexico and doubled a cost-savings target. Peter Voser, who heads Shell, is now taking similar steps to reduce spending and cut jobs. A close at current levels would be the first time BP has been worth more than Shell since October 2006, Bloomberg data show.

“BP seems the most likely of our coverage group to pursue more material opportunities given the funding headroom, greater scope to deploy stock and potential areas of strategic interest,” Mark Bloomfield, a London-based analyst at Citigroup Inc., wrote today in an e-mailed report. He raised his recommendation on BP shares to “buy” from “hold.”

Hayward pledged in October 2007 to catch up with competitors and regain investor confidence after a fatal explosion at a U.S. refinery in 2005 and delays in starting projects dragged the share price down.

Production, Costs

BP raised production to 3.9 million barrels of oil equivalent a day in the third quarter. The London-based producer expects cash costs to have been around $4 billion lower in 2009, compared with an initial forecast of $2 billion.

Shell, whose production has dropped below 3 million barrels of oil equivalent a day, has already cut 5,000 jobs. It’s also reorganized management by erasing 20 percent of senior posts.

Shell and BP both reported lower third-quarter earnings as the economic slowdown eroded demand for energy and dragged down the price of crude and fuels.

The recession has forced oil producers and refiners to delay projects and sell units, protecting dividends in anticipation of higher prices in the years ahead. U.S. oil futures, which touched a record $147.27 a barrel in July 2008, averaged $62.03 a barrel last year.

‘Difficult’ Year

Voser said the world economy hasn’t fully recovered and that 2010 will be a “difficult” year, according to an interview in the company’s internal magazine Shell Venster. The company is holding talks with Essar Oil Ltd. to sell its Stanlow refinery in northwest England and the Hamburg and Heide refineries in Germany, David Williams, a spokesman at The Hague- based company, said today.

BP, which doesn’t plan to sell refineries or shut down capacity, has said global refining margins fell about 71 percent in the fourth quarter from a year earlier.

Shell is developing projects in Qatar and Malaysia to revive production growth. Record investment in 2009 let Voser expand an oil-sands venture in Canada and deep-water projects in the Gulf of Mexico and Brazil. Shell aims to increase production from existing reserves through 2020 by starting new projects that can pump more than 1 million barrels a day.

Citigroup Recommendation

Shell’s “operational story emerging over the next 12-24 months should be a powerful mix of growth, potentially sustainable beyond 2012,” Citigroup’s Bloomfield said. “The valuation gap will narrow over the forthcoming 12 months. We continue to prefer Shell to BP.” Citigroup recommends investors buy Shell shares.

BP said Sept. 2 its giant Tiber prospect in the U.S.’s deep waters of the Gulf of Mexico may hold 3 billion barrels of crude and gas. The find will help it boost pumping in the region by 50 percent to 600,000 barrels of oil equivalent a day after 2020.

BP became the largest oil and gas producer in the region after boosting output from the Thunder Horse platform and bringing the Dorado and King South fields on stream.

Investor confidence in BP shrank after a 2005 explosion at the company’s Texas City refinery that killed 15 people and injured hundreds. BP admitted responsibility for the blast and settled most of more than 4,000 claims out of a $2.1 billion fund. The U.S. Occupational Safety and Health Administration in October said it imposed a record $87 million fine on BP for its failure to correct safety lapses at the plant.

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

Last Updated: January 11, 2010 10:25 EST

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