Shell ... earnings seen taking a hit
Oil collapse to hit majors’ earnings, challenge austerity
LONDON, October 23, 2014
Falling oil prices and their impact on revenues will dominate European oil majors’ quarterly results next week, with investors eager to hear how companies plan to achieve ambitious cost-cutting plans in an increasingly tough environment.
Oil companies have seen billions wiped off their stock market values as crude prices dropped over the past four months by 25 per cent to a four-year low near $85 a barrel, due to slowing global demand particularly in China and ample supplies.
The trend is stacking pressure on the majors’ efforts to protect earnings by cutting investment and operating expenses. “The focus will really be on what managers are saying on how they are going to deal with the oil prices environment,” Morgan Stanley analyst Martijn Rats said.
Shares of BP, Royal Dutch Shell, Eni, Total and BG have dropped by 15 to 20 per cent since late June. Third-quarter profits are set to be down by around 10 to 25 per cent from last year and 13 per cent from the previous quarter, with the exception of Shell which is expected to see a year-on-year rise in profits, according to forecasts.
Refining is set to be an unusual bright spot after refining margins reached a two-year high this month at nearly $9 a barrel, mainly due to lower crude prices and plant outages. And a strengthening of the dollar by more than 6 per cent will also offset some of the oil price weakness.
Yet investors will be seeking clues on whether companies are set for more asset sales and efficiency cuts. “So far the pressure on oil prices has lasted for a relatively brief period, relative to the time scale that these companies think about,” Morgan Stanley’s Rats said.
“Having said that, they started moderating their ... (expenditure) plans already at the turn of the year, I would think they will reinforce their message that achieving lower costs and scrutinizing projects in greater detail is absolutely crucial.”
ASSET SALES
Morgan Stanley rated Shell and Total “overweight”, BP “underweight” and Eni and BG “equal weight”. Analyst at Bank of America Merrill Lynch (BAML) rated BP “buy” as they expect it to increase dividends and maintain share buybacks, despite weaker revenue from its 20 per cent stake in Russia’s Rosneft.
The bank also recommended buying BG, due to delivery of key projects, and Eni, due to a strong performance in refining, gas and power. BAML recommended Shell and Total shares as “neutral”.
Shell, Total and BP are trading at between 9.1 and 9.9 times forecast earnings, against a ratio of 10.7 for the STOXX Europe 600 Oil and Gas index, while Eni and BG are relatively expensive, trading at 13.7 and 14.6 times respectively.
Shell is in the midst of a push to shed $15 billion in assets this year. And BP has sold $40 billion of assets since the 2010 Gulf of Mexico spill and has announced an additional $10 billion by 2015. .
But after selling low-margin oil fields and downstream assets in recent years, some have been shifting focus to reducing operating costs. Shell and Chevron cut hundreds of jobs in their North Sea manpower and BP slashed 275 in Alaska earlier this year.
For BP, the prospect of long-term declines in oil prices and revenue is but the latest challenge this year, as its 20 per cent stake in Rosneft came under scrutiny due to western sanctions on Moscow, and as the scale of its fine over the 2010 Gulf of Mexico oil spill threatened to mushroom.
RAPID RECOVERY
BP’s Q3 underlying replacement profit is expected to reach $2.9 billion, according to Reuters SmartEstimate, down 21.5 per cent from a year earlier.
Shell’s expected net income is $5.49 billion, up 23 per cent from a year ago but down 10.4 per cent on the previous quarter. The Anglo- Dutch major has enjoyed a rapid recovery over the past year through asset disposals and the ramp up of production in the Gulf of Mexico.
At Total - where leadership successions will likely dominate the agenda after CEO Christophe de Margerie was killed in a jet crash in Russia - Q3 net income is forecast at $3.29 billion, down 10.6 per cent year-on-year.
Eni’s Q3 net income is forecast at $886.62 million, down 24.3 per cent from a year ago. And BG, which recently ended a long search for a new leader with the appointment of Statoil CEO Helge Lund - net income is forecast at $800.61 million, down 25 per cent from Q3 2013.
Eni, under CEO Claudio Descalzi, is keen to shift focus to its core business of finding oil and gas while carrying out a restructuring of its cash-burning downstream divisions.
In the short term, however, analysts expect oil companies to be able to deal with the slump by tapping into existing free cash flow in order to maintain operations, borrowing targets and dividends, a pillar for the sector’s shares.
With its strong organic cashflow, BAML even expects BP to raise its quarterly dividend from 9.75 cents per share to 10 cents. Yet its analysts also cite a rise in European energy bond yields as a sign of “increasing concerns about the sustainability of dividends in the energy sector – assuming oil prices remain lower for longer.” -- Reuters
