Low oil prices weigh on Europe's oil companies
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 oil-producing nations such as Saudi Arabia and Russia maintained output amid slower-than-expected 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.