European Oil Giants Expect Q2 Earnings Sharply Down

Europe's two largest companies, oil giants BP and Royal Dutch/Shell, will report second quarter earnings this week down sharply from a year ago but showing a strong recovery from the first quarter.

Analysts say a firmer crude oil price, at an average $27.68 a barrel for Brent crude, will boost three months to June profits compared with the preceding quarter, when Brent averaged $21.42.

However, for year-on-year comparisons, the price of a barrel is for once not the key factor, having fallen only $2. Declines in natural gas prices and refining margins, especially in the United States and Britain, take over as the main year-on-year impact. BP, which reports today, is seen posting net profit adjusted to reflect current oil prices at between $1.93 and $2.47 billion, with consensus at about $2.18 billion.

This would be one of the largest year-on-year falls in the sector because of its high exposure to the US and UK natural gas prices and because of a particularly strong quarter it recorded a year ago in the United States downstream.

The company gave most of the key data for the quarter in a June trading statement, where it said all-important oil and gas output growth was on track for its five and a half percent target this year.

But analysts note that this includes the impact of a bigger stake in Russian affiliate Sidanko. They also said they would be looking closely at rising exploration expenses and other potential negatives on the upstream side -- including lower received prices and inventory effects.

"There were a number of factors in the quarter that suggest BP's upstream results will be depressed," said Jon Wright at

But BP's statement also pointed to improving refinery throughputs and better refining and marketing margins than in the first quarter, which should bode well for both companies.

Royal Dutch/Shell, which will report later in the week on Thursday, should fare better than BP in the quarter compared with a year ago, though its recovery from the first quarter will be less dramatic.

Analysts predict adjusted current cost net profit of $2.122-2.815 billion with a mean of $2.507 against $3.534 last year for the Anglo-Dutch group.

“There is a lot more uncertainty about Shell's numbers because it is a very different company compared with a year ago,” said Peter Hitchens, analyst at Cheuvreux.

For several years now Shell has been compared unfavourably with BP, which took its spot as world number two behind Exxon Mobil by making more aggressive, cost-saving buys in the depressed crude price years of 1998 and 1999.

But since last year, Shell has been catching up, albeit in a higher priced asset environment, acquiring a selection of downstream businesses in the United States and Germany along with the UK independent Enterprise Oil, whose results will be consolidated for the first time in the second quarter of 2002.

BP's results will also be closely watched for its quarterly dividend. Analysts are split fifty-fifty over whether it will maintain the 5.75 cents a share rate this time, or raise it to six cents.

Some believe that if investors are to have faith in its pledge to keep on increasing underlying earnings by ten percent then it must keep on raising the shareholder payout.

Royal Dutch is expected to pay out about 73 euro cents a share for the first half, with Shell paying about six pence, up from 5.7 pence last time.

©

&to=http://www.bp.com/' target=_blank>BP

&to=http://www2.shell.com/home/Framework' target=_blank>SHELL