Low oil prices weigh on Europe’s oil com­pa­nies

Jamaica Gleaner - - BUSINESS - – AP

TWO OF Europe’s largest en­ergy com­pa­nies said Tues­day that low oil prices weighed on un­der­ly­ing earn­ings once again in the third quar­ter and pre­dicted that the price back­drop won’t be re­turn­ing to the heights seen as re­cently as 2014 any­time soon.

BP re­ported that its profit be­fore one-time items, and af­ter ad­just­ing for the cost of in­ven­to­ries, fell 48 per cent to US$933 mil­lion. Ri­val Royal Dutch Shell did re­port an 18 per cent in­crease in com­pa­ra­ble earn­ings to US$2.79 bil­lion, but that was largely due to pro­duc­tion stem­ming from its re­cent ac­qui­si­tion of BG Group.

Like all oil-pro­duc­ing com­pa­nies, BP and Shell have seen their earn­ings rav­aged over the past cou­ple of years by the sharp fall in oil prices.

Brent crude, the bench­mark for in­ter­na­tional oil, av­er­aged US$45.86 a bar­rel in the third quar­ter, down from US$50.47 in the same pe­riod last year. Oil, which traded above US$100 a bar­rel a lit­tle more than two years ago, plunged as ma­jor oil­pro­duc­ing na­tions such as Saudi Ara­bia and Rus­sia main­tained out­put amid slower-thanex­pected eco­nomic growth.

Both com­pa­nies pre­dicted a mod­est pickup in prices in light of re­cent gains. In re­cent months, oil prices have started to rise again, partly be­cause of a com­mit­ment by the Or­ga­ni­za­tion of the Petroleum Ex­port­ing Coun­tries, or OPEC, to push through a pro­duc­tion cut this month.

Shell fore­cast cash flow from new projects based on oil at US$60 a bar­rel. BP was more con­ser­va­tive, say­ing it was plan­ning for oil be­tween US$50 and US$55 a bar­rel next year.

The lower oil price en­vi­ron­ment of the past cou­ple of years has made it more dif­fi­cult for oil com­pa­nies to ex­tract profit from their drilling and that’s made life dif­fi­cult.

David Elmes of War­wick Busi­ness School’s Global En­ergy Re­search Net­work said bankers and port­fo­lio man­agers used to love oil com­pa­nies be­cause, over time, they could count on high re­wards in re­turn for tak­ing high risk. Now they are un­der pres­sure to de­liver.

“All of the oil and gas sec­tor is try­ing to work out what to do and how to do it in a low-price en­vi­ron­ment,” Elmes said. “What they’re try­ing to do is ad­just their spend­ing, cost and in­vest­ment ... . That’s quite a fun­da­men­tal change to a mar­ket that saw a lot more volatil­ity in the past.”

As a re­sult, there’s grow­ing pres­sure on oil com­pa­nies to con­tain costs.

BP said pro­duc­tion, ex­plo­ration and ad­min­is­tra­tive ex­penses fell 5.2 per cent to US$8.97 bil­lion in the third quar­ter, while cap­i­tal in­vest­ment dropped about 14 per cent to US$3.7 bil­lion.

“We con­tinue to make good progress in adapt­ing to the chal­leng­ing price and mar­gin en­vi­ron­ment,” said Brian Gil­vary, BP’s chief fi­nan­cial of­fi­cer.

Mean­while, Shell said op­er­at­ing ex­penses de­clined 5.6 per cent to US$10 bil­lion and cap­i­tal ex­pen­di­ture dropped 21 per cent to US$5.28 bil­lion.

Shell also ben­e­fited from its pur­chase of BG Group, which boosted pro­duc­tion of oil and nat­u­ral gas. Pro­duc­tion rose 25 per cent to the equiv­a­lent of 3.6 mil­lion bar­rels of oil a day, in­clud­ing 806,000 bar­rels a day from for­mer BG as­sets.

“Shell de­liv­ered bet­ter re­sults this quar­ter, re­flect­ing strong op­er­a­tional and cost per­for­mance,” Shell Chief Ex­ec­u­tive Ben van Beur­den said in a state­ment. “But lower oil prices con­tinue to be a sig­nif­i­cant chal­lenge across the busi­ness, and the out­look re­mains uncer­tain.”

Shell shares were cer­tainly more in favour than BP’s in the mar­kets fol­low­ing the re­sults. BP’s share price closed 4.5 per cent lower while Shell’s rose around four per cent.

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