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BP Shines Among UK Oil Companies; Shell Suffers


EARNINGS PREVIEW:BP Shines Among UK Oil Companies; Shell Suffers

JANUARY 19, 2010

By James Herron


TAKING THE PULSE: The price of crude oil in the fourth quarter of 2009 was up almost 30% year-on-year, giving the major integrated oil companies the first chance to show some profit growth since the oil price crash that began in third quarter of 2008.

However, a particularly grim set of conditions in the refined oil products market will offset much of the upstream gains for BP PLC (BP) and Royal Dutch Shell PLC (RDSB.LN). The amount of money a refiner could earn by processing a barrel of oil in the fourth quarter was little more than a quarter of its level a year earlier according to industry data from BP. Oil product demand remains stifled and markets over supplied.

Weak average natural gas prices, down 50% in the U.K. and 40% in the U.S. year-on-year, are also likely to drag on Shell and BG Group PLC (BG.LN) earnings.

Fourth quarter earnings are expected to show major differences between how quickly each company can spring from the blocks and take advantage of the recovery in the oil price.

BP, fresh and nimble following a major restructuring, is expected to post a solid rise in profits. Shell, which only began its restructuring last summer, may put in a worse performance than a year ago.


BP PLC (BP) (Tuesday February 2nd 0700 GMT)

MARKET EXPECTATIONS: BP is widely expected to produce the best set of results of the three companies. “BP is firing on all cylinders,” following the completion of its restructuring, says ING analyst Jason Kenney. “BP should close out the year with upstream production of just over 4 million barrels of oil equivalent per day,” giving it an annual growth rate of 4%, double its internal target, says Evolution Securities analyst Richard Griffith. This will more than offset the weak downstream environment and Evolution expects BP’s net profit to be up 85% year-on-year to $4.8 billion.

MAIN FOCUS: At the start of 2009, BP promised to cut costs by $2 billion year-on-year. Last quarter it raised that figure to $4 billion. Now that the oil price has recovered and BP’s restructuring is largely complete, analysts will be keen to see if BP can manage to squeeze any more efficiencies from the system.

Royal Dutch Shell PLC (RDSB.LN) (Thursday February 4th 0700 GMT)

MARKET EXPECTATIONS: The weak refining market will be Shell’s nemesis this quarter, with a predicted loss of between $150 million and $200 million more than offsetting better upstream earnings due to the higher oil price, analysts say. RBS cut its fourth quarter Shell earnings forecast by 19% to $2.9 billion last week, “to reflect the impact of extremely weak refining margins.” The big gap with BP is due to, “Shell’s higher exposure to difficult conditions downstream and the less advanced stat of its cost reduction program,” RBS said.

MAIN FOCUS: Any information the company provides on progress in its restructuring program will be key. The speed with which cost savings and efficiencies introduced in the program can filter through to Shell’s financial performance will determine whether the company can return to profit growth early in the first half of the year, or if that recovery will be delayed to the third or fourth quarter as some analysts fear.

BG Group PLC (BG.LN) (Friday February 5th 0700 GMT)

MARKET EXPECTATIONS: Weak natural gas prices, compared with oil prices, will weigh a little on BG’s earnings, but the company’s decision to lock in much of its liquefied natural gas sales on contract at the top of the market last year are expected to again reinforce profit margins. “We expect the forthcoming strategy presentation to allay the market’s worst concerns on LNG profitability,” said Collins Stewart.

MAIN FOCUS: BG is expected to miss it’s 2009 production target because of the delayed startup of a gas field in Tunisia, so analysts will be looking for the company to provide greater confidence it can hit its 6-8% per annum long-term guidance on output growth. An update on appraisal activities on huge oil discoveries offshore Brazil will be key, said Collins Stewart. BG may be in a position to indicate lower development costs for the Tupi field, following a well test result late last year that showed the field may have a simpler structure than previously thought, it said.

Company Web sites:

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

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