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Oil price surge set to lead Shell and BP to big profit jumps this week

Jillian Ambrose

Shell and BP are preparing to bask in the benefit of the recent oil price surge with big profit jumps helping to draw a line under years of ferocious cost cutting.

On Tuesday Shell is expected to unveil profit of just above $3bn after a loss of $460m in the same quarter last year, using the oil industry’s standard ‘current cost of supplies’ measure.

Meanwhile BP investors are poised for profits of $1.26bn in Thursday’s results, using the major’s equivalent measure, after reporting $532m in the first quarter of last year.

The profit boom follows a triumphant set of results from US supermajor ExxonMobil late last week in which net net income rose to just over $4bn from $1.81bn a year earlier.

Equity analysts at UBS have estimated that net income within the European oil sector will double compared to the same quarter last year and climb 63pc above the final quarter of last year.

However, analysts have warned that oil majors will need to prove that cash flows are strong enough to weather a slowdown in the oil market recovery.Companies are under pressure to show that the industry wide efficiency drive has taken hold and can drive further gains even as the recovery struggles to break above $55 a barrel.

The earnings boom comes as prices recover from their lowest ebb in the first quarter of last year when a low of just under $28 a barrel was reached. In the first months of this year, prices have averaged $55.11 a barrel, up 54pc from the depths of the crash and 6pc higher than the last quarter of 2016.

“The stalling in the recovery of oil prices since the beginning of the year is a timely reminder to the industry that there is no room for complacency,” said Jon Rigby, an analyst at UBS.

Although the fourth quarter reporting season highlighted good intentions and some progress it wasn’t effective in convincing investors. At each opportunity through 2017 investors might reasonably expect to see these benefits tangibly accruing to the bottom line,” he added.

Shell closed a difficult year in which it carried out the takeover of BG Group with better than expected cash flows at the end of 2016. It succeeded in slashing underlying costs to $10bn lower than the two companies combined only 24 months ago, but investors will be looking for further signs of cashflows in order to pay down its outsized debt pile.

Iain Reid, an analyst at Macquarie, said the strong inflows of cash have covered Shell’s dividend payouts for the last two quarters as pushes past the 60pc mark on its post-takeover asset disposal programme which is targeting $30bn in sales.

Mr Reid added that BP has been capable of better cost reduction than rivals“as it had more fat to cut due to its post-Macondo cost additions” meaning it should achieve the spending cuts it has outlined.

“The recent bout of acquisitions by BP has strengthened what we thought was a relatively thin portfolio compared to peers, especially Shell, despite BP having been adamant in the recent past that it did not need to acquire further growth opportunities,” he added.

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