One year on from the peak in crude oil prices above $147 a barrel the West’s leading, household name oil companies are forecast to report a steep fall in profits, on the back of oil’s incredible fall from grace in terms of price.
U.K.-based oil companies continue to be buffeted by movement in the global economy and as a result analysts forecast their earnings to be dictated by macroeconomic forces. Put simply, their results are likely to be significantly down upon a year ago.
The world’s seven largest private sector oil companies all report earnings this week, with expectations rife of a steep fall in profits after seeing their revenues substantially squeezed during the period.
Investors will undoubtedly be focusing their attention upon the companies’ success in cutting costs, since the price began to fall. Any company’s failure to do so will undoubtedly bring into question their individual ability to sustain the investment for necessary growth.
“If things continue like this, it won’t be a question of selling a few old assets in the North Sea to help fund their capital programmes. It will be a question of getting out of the North Sea entirely,” an industry source commented.
Analysts have forecast that BP will make around $2.78 billion in adjusted operating profit for the full-year period, while Royal Dutch Shell is estimated to return in the region of $2.40 billion. Despite lower profits, analysts predict that safe dividends are not in any way under threat.
Oil prices rebounded significantly from the first to the second quarter, on growing optimism over imminent economic recovery – but this may not be enough to prevent shell from making job cuts. The average price of a barrel of Brent crude was almost a third higher in the second quarter compared with the first, although it remained at less than half the level of the record-breaking second quarter seen in 2008.
Another company announcing results is BG Group. Although it has a lower oil price exposure than both BP and Shell, the company is expected to see less from the resurgence in oil prices during the second quarter
Richard Griffiths, analyst at Evolution Securities, said: “Everyone knows it is going to be grim reading, so we will be looking at the outlook.
“Rising oil prices combined with a declining cost base means earnings momentum should start to turn in a positive direction,” he continued.
Refining margins across the board are currently depressed as demand for both oil products and petrochemicals are poor globally.