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BP May Widen Valuation Gap With Shell on Higher Profits, Output


By Fred Pals

Jan. 29 (Bloomberg) — BP Plc, Europe’s largest oil company, may continue to widen the valuation gap with Royal Dutch Shell Plc as it’s set to post about $2 billion more in profit than its European rival in the final quarter of 2009.

BP is likely to report Feb. 2 that fourth-quarter profit excluding one-time items and gains or losses from holding inventories rose 81 percent to $4.7 billion from $2.6 billion, based on the median estimate of nine analysts compiled by Bloomberg. The Hague-based Shell’s profit on the same basis may have fallen to $2.7 billion from $3.89 billion a year earlier, according to the median estimate of seven analysts. Shell is due to report Feb. 4.

“BP has been delivering slightly better earnings performance in the last several quarters,” Ivor Pether, who is part of a team that manages about $9.7 billion at Royal London Asset Management, said Jan. 25. Pether holds 70 million BP shares and 21.5 million Shell shares. “Shell is in the stage more akin to where BP was two years or 18 months ago.”

BP said its analyst survey showed a mean estimate of $4.6 billion for replacement cost profit, within a range of $4.4 billion to $4.9 billion. Shell said its analyst survey showed an average forecast of $2.9 billion for its profit.

BP raised production to 3.9 million barrels of oil equivalent a day in the third quarter and expected cash costs to have been about $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 cut 5,000 jobs. It’s also reorganized management by erasing 20 percent of senior posts.

Weak Demand

London-based BP has risen 19 percent over the past 12 months compared with a 3 percent decline for Shell. BP overtook Shell as Europe’s largest oil company earlier this month. The Dow Jones Europe Oil & Gas Index is up 18 percent.

Crude futures in New York averaged $76.13 a barrel in the fourth quarter, 29 percent higher than a year earlier. Prices rose as high as $83.95 on Jan. 11 and crude for March delivery was at $73.53 in electronic trading at 12:42 p.m. London time today.

Weak demand for fuels such as gasoline and diesel amid the slowdown has cut profitability for refiners. Refining margins, or profits from turning crude into fuels, slid 71 percent in the fourth quarter from a year earlier, according to BP. The company’s Global Indicator Margin, a broad measure of refining profitability, declined to $1.49 a barrel from $5.19 a barrel. Shell has four refineries for sale in Europe.

Restructuring Program

“Shell began restructuring last year, so is lagging BP, and furthermore its massive capex expenditure in recent years does not see new volumes start to kick in until 2011-2012,” Richard Griffith, a London-based analyst at Evolution Securities Ltd., said in a note to investors Jan. 13. “On balance, earnings won’t look great when they’re announced but we see more scope for positive surprised at BP and less dividend risk.”

Both Shell and BP signed agreements with the Iraqi government for the exploration and production of fields. Iraqi production may exceed 10 million barrels per day by 2020, BP’s Hayward told the World Economic Forum’s annual meeting in Davos, Switzerland yesterday.

BP unseated Shell as Europe’s largest oil company by market value this month for the first time in more than three years.

To contact the reporter on this story: Fred Pals in Amsterdam at [email protected]

Last Updated: January 29, 2010 07:49 EST

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