Mon, Apr 29, 2002 page17

• Q1 profit for Shell and BP may drop

  PETROLEUM Despite high oil prices, the two largest producers in Europe are likely to report at least a 50 percent decline in profit this week following a slump in demand

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  Royal Dutch/Shell Group and BP Plc, Europe's two biggest oil companies, will report first-quarter profit fell at least 50 percent because of lower prices and the worst slump in oil-refining in a decade, analysts said.

  London-based BP will probably report tomorrow that profit slid to US$1.46 billion, down 61 percent, while Shell two days later will post earnings of US$1.75 billion, a drop of 55 percent, according to the average estimate of five analysts in a survey.

  Exxon Mobil Corp on Tuesday reported a 58 percent decline in earnings in the period, when oil prices in London on average were about a fifth lower than a year ago. Profit from making fuels collapsed as the fifth-warmest US winter on record lowered demand for heating oil, while air travel and jet fuel use slowed following the Sept. 11 attacks.

  

  A passenger aircraft is silhouetted by a full moon as it takes off from London's Heathrow airport Saturday. A sharp decline in customers following the Sept. 11 attacks in the US caused a slump in demand for jet fuel, hurting profits at oil companies.

  PHOTO: AP

  "People look at the oil price [about US$26 a barrel] and think the oil industry must be doing really well, but absolutely not," said Steve Thornber, who manages PD1 billion (US$1.5 billion) in UK equities at Threadneedle Asset Management Ltd, including Shell and BP shares. "The rest of the business is really struggling."

  Exxon, BP and Shell's bigger rival, reported first-quarter earnings fell to US$2.09 billion. Its unit that makes and sells gasoline and other fuels posted a US$28 million loss, compared with a US$1 billion profit in the year-earlier period.

  BP shares have risen 5.8 percent this year, while Exxon and Shell's London shares have gained about 2 percent. BP plans to increase oil and gas production more quickly than Shell and Exxon.

  Earlier this month, BP said its results will reflect the worst refining and marketing environment since the early 1990s.

  Refining margins in Europe reached the lowest level in more than a decade, Shell said.

  "It was absolutely diabolical -- the lowest level certainly for 15 years and maybe further back," said Adrian Loader, head of Shell's fuels business in Europe, at an energy conference in Paris on Thursday.

  BP will likely post a bigger quarterly decline than Shell because of its greater exposure to the US, analysts said. US natural gas accounts for about 20 percent of BP's production, more than the proportion at Shell.

  US natural gas prices averaged US$2.49 per million British thermal units on the New York Mercantile Exchange during the quarter, down 60 percent from US$6.24 last year.

  ``BP's results will fall further compared to this time last year because they were more exposed to the high refining margins and gas prices we saw last year,'' said Jon Rigby, an analyst at BNP Paribas. He expects a 60 percent drop in profit at BP and a 51 percent decline at Shell.

  This time, BP's results reflect a UK accounting rule change which will increase the company's tax rate to about 35 percent to 36 percent in the future, up from 26 percent last year, the company has said. BP restated earlier results to reflect the adjustment.

  Investors will scrutinize the companies' progress on expansion in oil and gas production. BP has targeted an average annual increase of 5.5 percent, more than the 3 percent growth at Exxon and Shell.

  "The prime challenge is to deliver the growth," said Peter Davies, BP's chief economist. "We delivered 5.5 percent for 2001 and are confident of repeating this in 2002."

  BP has said production in the quarter will probably be in line with year-ago levels, falling short of some analysts' forecasts and increasing the challenge for the company later in the year.

  Shell, based in London and The Hague, probably won't show any expansion in oil and gas output in the first quarter, according to Commerzbank Securities. Last September, Shell disappointed investors by reducing its average annual growth target to 3 percent through 2005, down from 5 percent.

  The analysts surveyed expected BP to post so-called replacement cost profit -- before special items and amortization -- of between US$1.28 billion and US$1.55 billion. Profit before one- time items at Shell, which doesn't release earnings outlooks, is forecast between US$1.28 billion and US$1.98 billion.

  BP releases its earnings report tomorrow at 10am London time. Shell follows at the same time two days later.
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