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Reuters: BP and Shell to end record earnings run

Fri Oct 20, 2006 10:17 AM BST

By Tom Bergin

LONDON (Reuters) – BP and Royal Dutch Shell are expected to report a fall in underlying third-quarter profits in the week ahead, ending a three year run of record earnings on the back of rising oil prices.

Analysts believe higher oil prices quarter will fail to have compensated for soaring oil field costs, higher taxes, a fall in refining margins and lower production.

The results will bolster the view that big oil companies’ earnings have peaked and that a fall of over 20 percent in oil prices since early August points to tougher times ahead.

A Reuters poll of 10 analysts gave an average forecast of $4.7 billion (2.5 billion pounds) for BP’s replacement cost profit excluding non-operating items, such as gains from asset sales.

This would represent a 12 percent fall from the same period in 2005 at the world’s second-largest fully publicly quoted oil company by market capitalisation.

However, because BP was hit with a $700 million charge for damage by Hurricane Rita in the third quarter of 2005, the headline result is likely to be up year on year.

A poll of 11 analysts gave an average forecast of $5.7 billion for smaller rival Shell’s third quarter current cost of supply CCS net income, excluding one-off items, down from $5.8 billion in the same period last year.

The replacement cost and CCS figures are similar measures and exclude changes in the value of inventories. Analysts say these figures, excluding one-offs, best reflect the underlying performance of oil firms.


Other oil companies such as Chevron Corp and Exxon Mobil are expected to report higher year-on-year profits, but Merrill Lynch said for the first time in 13 quarters, the big oil companies as a group will report a drop in earnings compared with the previous quarter.

This is despite the fact that average oil prices were at a record high of around $70 per barrel during the period.

“We expect a lacklustre quarter from the (large oil companies) due to lower volumes, higher taxes and a greater exposure to the fall in global refining margins,” analysts at Morgan Stanley said in a research note this week.

Given none of these negative trends are expected to disappear any time soon, a forecast $10 drop in average oil prices in the fourth quarter suggests the sector’s prospects may continue to deteriorate.

Analysts forecast Shell’s production of oil and gas to fall to 3.1 million barrels of oil equivalent (boepd) per day in the third quarter from 3.3 million in the third quarter of 2005, as ethnic strife in Nigeria kept fields shut.

BP has already flagged lower production in the third quarter, partly due to lower output from the Prudhoe Bay field in Alaska after the discovery of leaks and corrosion in pipelines.

In addition to scrutinising the results, investors will be looking to BP and Shell for reassurance that growing tension between Russia and foreign oil companies does not jeopardise the companies’ investments there.

Shell’s $20 billion Sakhalin-2 gas project is the biggest single foreign investment in Russia, while BP’s half share of TNK-BP, Russia’s third largest oil producer, is the biggest corporate involvement in the country’s oil sector.

Investors will also be hoping no further delays to big projects are announced next week. Citigroup said delays could prompt Shell to ditch its 2009 production target.

BP trades on around 10.3 times expected earnings according to Reuters data, while Shell is on 8.9 times, reflecting BP’s better growth prospects.
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