Shell, BP Profits, Dividends Fail to Reverse Decline in Stocks

By Fred Pals and Eduard Gismatullin

July 29 (Bloomberg) -- Record profits and almost $30 billion in dividends and share buybacks aren't enough to keep Royal Dutch Shell Plc and BP Plc from falling in the stock market as the price of oil falls and economies slow.

BP dropped 16 percent in London trading this year while Shell lost 13 percent, worse than the 12 percent decline in the FTSE Oil and Gas Index. Europe's two biggest oil companies are declining even though crude and gas prices climbed an average of 90 percent and 50 percent respectively in the second quarter from a year earlier.

The 15 percent drop in oil from the record high on July 11 will limit growth for the rest of the year, even though Shell, based in The Hague, will probably report a 20 percent profit gain for the second quarter and London-based BP may show a 47 percent increase, according to Bloomberg surveys of analysts. BP is struggling for control of its TNK-BP joint venture in Russia and Shell is facing attacks on its facilities in Nigeria.

``There is a lot of evidence of demand destruction and a slowdown of the global economy causing oil prices to weaken,'' said Jane Coffey, who helps manage $63.7 billion as head of equities at Royal London Asset Management. ``BP's issue with its Russian venture and Shell's production problems in Nigeria have also had an effect on the company's share performance,'' said Coffey, who holds both BP and Shell shares.

Shell lost about 160,000 barrels a day in production in Nigeria in the second quarter as militants attacked facilities and blew up pipelines.

Higher Earnings

The company, which will report earnings July 31, probably will say income excluding one-time items and gains or losses from inventories rose to $8.3 billion last quarter, based on the median estimate of 11 analysts compiled by Bloomberg. Shell spokesman Andre Romeyn declined to give earnings estimates.

BP's profit based on the same measure probably jumped to $7.84 billion, the median of 10 analysts surveyed by Bloomberg News. The company surveyed 18 analysts and their mean estimate for second-quarter profit was $7.6 billion, according to spokesman Robert Wine. BP is scheduled to report earnings today.

BP is losing control of the joint venture that provides almost 25 percent of its production. TNK-BP's Chief Executive Robert Dudley left Russia on July 24 because of ``sustained pressure'' over a dispute with billionaire investors who want control of the company, according to BP.

``Nigeria continues to be an issue for Shell while a BP withdrawal from Russia doesn't bode well for BP's production and reserves,'' Dirk Hoozemans, who helps manage the equivalent of about $23.8 billion at Rotterdam-based Robeco Group, said in a phone interview yesterday.

Dividend Payouts

BP may have to concede defeat in Russia, just like Shell did last year when the country took control of the $22 billion Sakhalin-2 venture, Hoozemans said. BP withdrew its technical specialists from Russia this month because of the dispute.

Shell earned the equivalent of $31.3 billion last year and BP's profits totaled $20.8 billion as oil rose 57 percent. Income continued to climb this year as oil rose to a record $147.27 a barrel on July 11.

Crude closed at $124.73 in New York trading yesterday and prices may fall as economies slow. The U.S. will expand 1.5 percent this year, while countries that share the euro will expand 1.7 percent, according to surveys of economists by Bloomberg.

The six-year rise in oil prices allowed the companies to return more in dividends as they face barriers to investing. Shell and BP paid a combined $17 billion in dividends last year, and $11.9 billion on buying back shares.

Stock Repurchases

BP's stock repurchases over the past eight years reduced its equity by about 16 percent, making higher dividends more affordable, Chief Executive Officer Tony Hayward said Feb. 5. BP repurchased $7.5 billion of shares and paid $8.1 billion in dividends last year.

Shell increased first quarter dividends 11 percent from a year ago, paid $9 billion in dividends last year and bought $4.4 billion of its shares.

Shell CEO Jeroen van der Veer plans to counter lost production in Nigeria and Russia by mining Canadian oil sands and developing a Qatari gas-to-liquids venture. Shell said July 14 it agreed to buy Duvernay Oil Corp. for about C$5.27 billion ($5.16 billion) to expand gas production from hard-to-tap formations in western Canada.

BP is counting on new production to boost profit. The company said yesterday it plans to pump the first oil from Block 31 off the Angolan coast in 2011, with a forecast of 150,000 barrels a day in 2012.

Last month, BP also said it began pumping and exporting oil and gas from the first well at its Thunder Horse field in the Gulf of Mexico. BP estimates Thunder Horse will produce 250,000 barrels a day of liquids and 200 million cubic feet a day of natural gas.

To contact the reporters on this story: Fred Pals in Amsterdam at fpals@bloomberg.net; Eduard Gismatullin in London at egismatullin@bloomberg.net