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Oil companies poised to unveil huge profits

Britain’s three biggest oil companies are set to reveal huge profits totalling almost $15bn (£9.2bn) for the past three months, with market leader Royal Dutch Shell making around $75m (£46m) per day.

High oil prices have boosted the earnings of Royal Dutch Shell, BP and BG Group, with the cost per barrel of crude averaging above $100 for the entire quarter.

Rowena Mason


9:30PM BST 23 Jul 2011

High oil prices have boosted the earnings of Royal Dutch Shell, BP and BG Group, with the cost per barrel of crude averaging above $100 for the entire quarter. This has kept UK petrol prices near record highs, touching 140p a litre and causing hardship for millions of motorists.

Profits for the oil companies are expected to be their highest since oil prices rose to $147 per barrel in July 2008, just before the world tipped into financial crisis.

Analysts believe Royal Dutch Shell could this year equal or exceed its record annual profits of $27.5bn in 2008, which is the highest amount ever made by a British company in one year.

Consensus estimates suggest that Royal Dutch Shell will again lead the pack on Thursday with second quarter profits of $6.7bn, up by 43pc on last year.

BP is expected to come in slightly behind with profits of about $5.7bn on Tuesday, up from a multi-billion dollar loss last year caused by the Gulf of Mexico oil spill. BP received Indian government approval yesterday to buy stakes in Reliance Industries’ oil and gas blocks.

Both oil companies measure their profits by stripping out changes in their inventories, describing them as “cost of supply” or “replacement cost” profits.

Meanwhile, BG Group, their smaller rival, is expected to have doubled its profits to $2bn for the past three months, compared with the previous year.

However, analysts claim that the high oil price is masking serious operational challenges in the sector that may soon begin to show.

Despite the optimistic headline numbers, Deutsche Bank analysts Lucas Herrmann, Mark Bloomfield and Elaine Dunphy argue that the oil companies are going to have a tough time maintaining production.

“A key facet of a sector bull thesis is that, after a number of years of disappointment, 2012 to 2013 will see the sector return to growth. Unfortunately, second quarter 2011 results are unlikely to build confidence in this theme,” they said.

“A combination of divestments, maintenance, extreme seasonality [low European gas demand], limited production from Libya and a series of stock-specific issues, drive our expectation for a 7pc year-on-year production decline.”

There may also be pressure among investors for oil companies to investigate breaking off their exploration and production divisions from refining and marketing, like ConocoPhillips has done this month.

BP would be considered the most likely candidate for such a break-up, since its sell-off programme following the Gulf of Mexico oil spill has whet investor appetite for asset sales at much higher prices than book value.

Bank of America Merrill Lynch estimates that BP’s market capitalisation still stands at a 50pc discount to the value of its assets.

Shareholders are going to want to know how BP’s chief executive, Bob Dudley, plans to boost the company’s fortunes, after the Gulf of Mexico oil spill and a failed £10bn deal in Russia with Rosneft. One top 20 investor in BP said: “Break-up is a radical strategy but one whose logic must be considered by the companies in terms of value creation.”

This time last year, BP was in the throes of its Gulf of Mexico crisis, following an explosion on April 20. Over the past year, its share price has risen 17pc, compared with Shell’s increase of 30pc. Taken from the worst of BP’s crisis, its price has increased 54pc to 470p per share, while Shell’s share price is up 45pc at £22.86.

Separately, Centrica will this Thursday release its first set of results since British Gas raised prices substantially this month.


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