BP Q3 profits halve while Shell sees benefits of BG acquisition

Added 1st November 2016

Shares in BP fell by 3.8% to 465.6p mid-morning on Tuesday, as shares in rival Royal Dutch Shell soared upward by 3.5% to 2188.1p.

BP Q3 profits halve while Shell sees benefits of BG acquisition

BP’s underlying profits over the quarter of $933m were significantly lower than the $1.8bn generated the year prior but still topped analysts’ low expectations of $720m.

The British oil titan blamed its shortcomings over the quarter on weaker oil prices and a challenging margin environment, in conjunction with the negative impact from one-off and non-cash items as part of its upstream activities.

That said, BP chief financial officer Brian Gilvary said the group was beginning to see the benefits of its cost cutting efforts. Cash costs over the past four quarters came in at $6.1bn lower than in 2014 and appear in line with the group’s goal to get costs under $7bn by 2017. BP anticipates total organic capital expenditure for 2016 to undercut its original figure of $17-19bn at $16bn.

And the group confirmed its dividend of 10c per share would remain unchanged.

Considering BP’s decision to maintain its dividend and its robust cash flow levels of $4.8bn (before pre-tax Gulf of Mexico payments) over the quarter, The Share Centre investment research analyst Ian Forrest thinks investors in the British oil company aren’t as badly off as they could be. 

“These are good results from BP as they show continued success with the strategy of adjusting the group to the lower oil price environment while keeping dividend payments steady,” said Forrest. “We continue to recommend the stock as a Buy for contrarian investors willing to take on an intermediate level of risk while looking for capital growth and income. The uncertainty over the future price of oil increases the risk for all oil companies so investors may wish to drip feed into the stock.”

Despite the case for BP’s silver lining, the market’s response to Shell’s Q3 results spoke volumes about its strides over the period. Not only was it the top riser of the FTSE 100, at the time of writing, shares in the Anglo-Dutch oil giant were the highest they have been in close to a month.

The group posted a third-quarter profit of $2.79bn, up 17% from the year before, bolstered by its acquisition of BG Group.

While Shell CEO Ben van Beurden said “lower oil prices continue to be a significant challenge across the business,” as does an “uncertain outlook,” he emphasised underlying operational costs are set to decrease and cash flow would continue to be boosted by future projects. Shell projects it is on track to save $9bn in annual operating costs in 2016. 

Brewin Dolphin equity analyst Iain Armstrong understood the market's preference for Shell, citing major differences in the performances of the two oil companies. 

"I think the reaction after BP’s press conference was a little disappointing because initially the numbers looked better than expected due to the tax credit; whereas Shell had brilliant numbers even with a lower tax credit," he said.

"One of the big differences between BP and Shell today is that BP’s production volume was down 5.9% and 2% in underlying terms, while Shell’s was up 15%. In an environment of lower oil prices, you probably need to have some volume growth. One other thing that was slightly disappointing is the fact the restructuring with Rosneft is going on longer than expected. The cumulative $2bn cost of that effort offsets the fact that capex is going to be lower than expected."

However, there are some positive takewaways from BP's third quarter numbers, according to Armstrong.

"Looking forward to 2020, 90% of projects that are a part of BP’s 2020 plan are ready at the final investment decision stage," he indicated. "They have executed four projects this year, have a fifth lined up and are looking to start another eight next year. That is why the stock has steadied a bit. 

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