Shell, BP May Post Higher Profit; Plans Under Review

By Eduard Gismatullin and Fred Pals

Oct. 27 (Bloomberg) -- Royal Dutch Shell Plc and BP Plc, Europe's largest oil companies, may say third-quarter earnings rose from a year earlier while falling short of record second- quarter profits, after crude fell 53 percent from its July peak.

The companies may also scale back investment plans when they report earnings this week, according to a Bloomberg survey of analysts.

Declining demand for fuel in the U.S., the world's largest importer of crude, prompted a 28 percent oil-price plunge in the third quarter, the biggest decline since 1991. The global credit crisis and the Organization of Petroleum Exporting Countries' agreement to cut production may slow the economy further.

``In the first half of this year, generally oil company earnings were exceptionally strong,'' said Bob Parker, who helps oversee $600 billion as vice chairman of Credit Suisse Asset Management in London, in an Oct. 23 interview. ``You will see oil company earnings come off quite sharply'' in the second half, and for earnings growth, oil will be ``one of the worst sectors, purely because of the oil price decline.''

Shell, based in The Hague, may say income excluding one- time items and gains or losses from inventories rose to $7.22 billion last quarter, from $6.13 billion in the same period a year ago, based on the median estimate of 10 analysts compiled by Bloomberg. Shell reported $11.56 billion second-quarter net income on July 31.

U.S. Earnings

London-based BP's profit, calculated by the same measure, probably jumped to $6.82 billion from $4.21 billion, the survey showed. BP posted record net income of $9.47 billion on July 29.

Adam Newton, a Shell spokesman in The Hague, and Robert Wine, a London-based BP spokesman, declined to comment. Shell fell 70 pence, or 4.8 percent, to 1,402 pence in London trading as of 10:17 a.m. local time, while BP declined 26 pence, or 5.9 percent, to 414 pence.

Shell and BP will report after ConocoPhillips, the third- largest U.S. oil company, which on Oct. 22 said third-quarter net income climbed 41 percent to $5.19 billion after gains in energy prices made up for lower production.

Exxon Mobil Corp. and Chevron Corp. may post record profits when they report on Oct. 30 and the following day, according to analyst estimates compiled by Bloomberg.

Hurricane Impact

Both Shell and BP suffered from lower output in the Gulf of Mexico because of Hurricanes Ike and Gustav, which swept through the region in August and September. Shell's gross production fell to a low of about 32,000 barrels of oil equivalent a day, down from peak output of about 500,000 barrels. BP halted a 475,000-barrel-a day refinery for about three weeks on Sept. 11 because of hurricane Ike.

Shell shares fell 22 percent and BP dropped 20 percent in the third quarter, less than the 24 percent plunge of the 40- member Dow Jones Europe Stoxx Oil & Gas Index. Equity prices fell because of the lower price and financial institutions' credit-related losses and writedowns, which topped $650 billion in the worst financial crisis since the Great Depression.

Companies ``will be cautioning on future profits,'' Alan Beaney, head of investments at Principal Investment Management in Sevenoaks, England, which manages $2 billion, said Oct. 22. They can't ``be ultra-positive in the current environment.''

Spending Plans

A decade ago oil companies cut investments after the crude price fell as low as $10.72 a barrel on Dec. 10, 1998. That led to restrained supply capacity, which boosted prices for oil to a record $147.27 on July 11 this year because of higher energy demand, driven by economic expansion in China and India.

``One of the most important things is what the majors say about capital expenditure plans,'' Andy Lynch, who oversees $2.9 billion at Schroder Investment Management Ltd. in London, said in an Oct. 22 interview. ``With a bit of luck, they'll be more pragmatic about it this time'' and ``will keep on spending on projects'' to ensure oil supply in the future when energy demand growth accelerates, he said.

Companies have boosted spending in recent years as they have struggled to find new resources to replace the oil and natural gas they sell, as governments restrict access to fields and demand a greater share of profit. Oil producers spent $309 billion on exploration and development last year, a 20 percent increase from 2006, according to a study released last month by IHS Herold Inc. and Harrison Lovegrove & Co.

Oil Sands

Shell, BP and other producers may slash investment in hard- to-exploit fields, such as oil sands in Canada, which are costly and need higher oil prices to make them economically viable, Beaney and Parker said. Companies may also cut spending on alternative energy projects to focus on delivering hydrocarbon fuels to the markets.

``Investment in alternative energy becomes less attractive'' at current oil prices, Credit Suisse's Parker said. ``The breakeven for tar sands in Canada is around $60 to $65 a barrel,'' making profitability ``very marginal, whereas just four, five months ago it looked very attractive indeed.''

BP pledged in February to boost output 13 percent in the next five years to 4.3 million barrels of oil equivalent a day. The company is budgeting an average oil price of $60 a barrel to keep production above 4 million barrels a day through 2020.

BP will report third-quarter earnings on Oct. 28, followed by Shell on Oct. 30.

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