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Slick Shell leaves BP in slipstream

Shell remains interested in a merger – if the terms and conditions are right…

Oil battle: The Gulf of Mexico crisis has proved disastrous for BP’s shares, while Shell’s have soared

By Hugo Duncan
Last updated at 10:42 PM on 28th April 2011

In the battle of the UK super majors, the first leg of 2011 belongs to Shell by a considerable margin, said Richard Hunter, head of UK equities at Hargreaves Lansdown stockbrokers, yesterday.

It is easy to see why. While BP is plagued by the toxic legacy of the Gulf of Mexico oil spill and troubles in Russia, Royal Dutch Shell powers on.

Shell put its beleaguered arch-rival firmly in the shade yesterday with a 41 per cent rise in first quarter profits to £4.1billion. Just 24 hours earlier, BP revealed that its profits for the period dropped 2 per cent to £3.3billion. And that is not all.

While production at Shell slipped 3 per cent, it tumbled 11 per cent at BP as the company sold assets to help pay for cleaning up the biggest environmental disaster in US history.

‘Whereas BP has had to recognise its business model and turn its attention to the on-going fallout from the Gulf of Mexico spill, Shell has continued to power ahead unabated,’ said Hunter.

The contrasting fortunes of the two companies have not been lost on investors – particularly with BP shareholders missing out on three quarterly dividend payments in the wake of the explosion at the Deepwater Horizon rig in April last year that claimed 11 lives.

The BP dividend has since been reinstated but, at 7 cents a share, it is well behind the 42 cents a share payment at Shell. BP shares have bounced back from the depths plumbed in the crisis but are still 25 per cent lower than they were at the start of 2010. In that time, Shell is up 23 per cent. Such has been the decline at BP – a once-proud oil giant now fighting to repair its battered reputation – that it is now seen as a potential takeover target.

ExxonMobil is among those thought to be interested. It reported a 69 per cent rise in first-quarter profits to £6.4billion yesterday. Shell itself weighed an opportunistic bid during the Gulf of Mexico crisis but the board pulled back from making a rescue offer on fears that legal liabilities could blow a huge hole in BP’ s future prospects.

But it is understood that Shell remains interested in a merger – if the terms and conditions are right. At their lowest point in early June 2010, BP shares were trading at just 296p, valuing the group at £55.6billion. That was less than half the peak value of £123.6billion before the disaster.

The group currently has a market capitalisation of £88billion to Shell’s £145billion. It marks a dramatic role reversal from the middle of the last decade when BP under Lord Browne was the darling of the sector and Shell was in crisis after overstating how much oil it had in reserve.

But over the last 12 months, BP has been bogged down by the Gulf of Mexico disaster – it has so far set aside £25billion to cover costs – and Shell has been flying.

‘Much changed from its troubled days seven or eight years ago, Shell is the perfect example of what any company should do when it finds its back to the wall,’ said Howard Wheeldon, senior strategist at BGC Partners.

Shell has certainly benefited from the surging oil price while its rival floundered. Brent crude averaged $105.52 a barrel in the first quarter of the year, 36 per cent more than the same period in 2010. It has since surged to over $125 a barrel.

Although production at Shell fell 3 per cent to 3.5million barrels of oil a day – compared with 3.6million at BP – output was in line with last year once asset sales are excluded and included 230,000 barrels from new fields.

Shell chief executive Peter Voser aims to increase output to 3.7million barrels a day by 2014 and in March set out a new £60billion investment programme to meet demand for oil and gas. At the same time, he pledged a further £600million in cost cuts.

The Anglo Dutch giant’s big bet on liquefied natural gas looks to be paying off. The largest shipper of LNG in the world, it has benefited from higher prices following the Japanese earthquake as the loss of nuclear power in Japan boosts demand for other sources of energy.

Analysts also welcomed the sharp turnaround in the performance of Shell’s downstream arm, which saw profits more than double to £1billion in the three months.

Investors are now hoping the ramp-up in production and high oil prices could allow Shell to increase its dividend, making it harder still for BP to catch its old rival.

‘These were good results helped by higher prices but also a better operating performance,’ said Tony Shepard at Charles Stanley.

‘Shell appears to be making good progress against its targets,’ he added.

‘Clearly, Shell is delivering a superior performance to other oil majors.’ Shell shares rose 14p to 2322.5p yesterday. BP slipped 3.45p to 462.55p.

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