A Look At The Global Energy Industry As They Suffer Weaker Q3 Earnings

Royal Dutch Shell

Royal Dutch Shell (RDS-A) (RDS-B) remains behind the curve in its re-organisation efforts, relative to British Petroleum. The energy producer’s management have acknowledged more work is required and is to cut a further 5,000 jobs globally in an effort to re-align the business to better meet the operational challenges into the global economic recovery.

Royal Dutch Shell’s third quarter 2009 earnings, on a current cost of supplies (CCS) basis, were $2.99 billion compared to $10.9bn a year ago. Basic CCS eps (earnings per share) decreased by 72% versus the same quarter a year ago. Cash flow from operating activities also slumped 42% in Q3 2009 relative to Q3 2008 from $12.6bn to $7.35bn.

Upstream earnings were particularly weak at $1.54bn (Q3/09) compared to $8.65bn (Q3/08) reflecting lower oil and gas prices. Q3/09 production was 2,926 thousand boe/d (barrels of oil equivalent a day) compared to 2,931 thousand boe/d a year ago. Crude oil production was down 2% and natural gas production increased by 3% compared to the third quarter 2008.

Shell’s Chief Executive Officer Peter Voser commented “Our third quarter results were affected by the weak global economy. Upstream and Downstream profitability has been sharply reduced compared to year-ago levels. We see some indications that energy demand and pricing are improving, but the outlook remains very uncertain, and we are not expecting a quick recovery. Despite Shell’s good operating performance in this difficult environment, we have embarked on an ambitious programme of stringent measures to further improve our performance.”

Despite the challenges ahead Shell remains committed to distributing a good proportion of its profits to shareholders and total dividends paid during the third quarter 2009 were $2.7 billion.

British Petroleum

Despite the sharp fall in Q3 earnings investors were greatly encouraged by BP’s (BP) quarterly report and shares in the energy group rallied strongly after the latest data was released. One of the most eye catching elements of the report was the progress made in cost-cutting with expenditure $3.0bn lower than a year ago. BP has now increased its cost cutting target to $4bn annualised. The firm reduced headcount by 3,000 last year and is set to cut another 5,000 jobs by the end of 2009.

Profits fell to $4.98bn for the July-September period compared to $10.03bn a year earlier using the industry standard replacement cost profit calculation. Analysts has expected an even larger decline in profitability.

Net cash provided by operating activities for the quarter and nine months were $8.1 billion and $20.4 billion compared with $14.9 billion and $32.5 billion respectively a year ago.

When excluding non-operating items and accounting costs, BP’s overall underlying profits of $4.67bn noticeably bettered the City’s consensus for a figure of around $3.2bn. The quarterly dividend was also held at 14 cents a share.

During the quarter BP announced a giant discovery at the Tiber prospect in the deepwater US Gulf of Mexico. BP is the operator and also holds a 62% interest in the find. Also, on 1 October, Sonangol and BP announced the Tebe oil discovery in the ultra-deepwater Block 31, offshore Angola, (BP 26.67% and operator). This is the nineteenth discovery made by BP in the area.

BP, like all producers, has suffered from oil price volatility with last year’s bubble peak in prices of $147 per barrel distorting like for like comparisions.

BP shares remain favoured relative to Shell for most buy and hold investors requiring exposure to the sector and the firms’ relative progress in 2009 should maintain that trend. For day traders neither stock particularly excites as crude oil futures naturally offer a purer exposure to the sector, and the oil price, without the added hassle of company specific analysis.

BG Group

BG Group continued the Q3 energy sector theme articulated by both BP and Royal Dutch Shell.

Total operating profit including share of pre-tax operating results from joint ventures and associates fell 38% from £1.38bn (Q3/08) to £0.856bn (Q3/09). Earnings per share, excluding disposals, certain re-measurements and impairments, fell 39% from 23.2p to 14.1p over the same time scale.

Production for the quarter, at 56.6 mmboe (Million Barrels of Oil Equivalent), was up 5% on Q3 2008. This was around 2 mmboe below BG’s prediction for the quarter, predominantly due to a delay in the start-up of the Hasdrubal facility in Tunisia. Hasdrubal is expected to commence operations by 30 November and the impact of this delay on planned fourth quarter production is expected to be 1.2 mmboe. The average realised gas price per produced therm in the UK fell by 4.8 pence to 30.8 pence and International gas realisations fell by 7.8 pence to 16.0 pence per produced therm both principally due to the impact of lower commodity market prices.

Looking forward BG’s production is to be boosted following the exploration and appraisal success in the Santos Basin pre-salt. In September, BG Group announced that the Guará discovery (BM-S-9, BG Group 30%) is estimated to contain recoverable volumes of 1.1 to 2.0 billion boe. Also on BM-S-9, BG Group announced a new discovery known as Abaré West, which proved the presence of an accumulation of oil and natural gas. The well will be fully analysed and the forward plan for this discovery will be incorporated into one of the two evaluation plans for BM-S-9 approved by ANP. Abaré West is the fourth consecutive BM-S-9 discovery following Carioca, Guará and Iguaçu.

BG Group’s Chief Executive, Frank Chapman commented: “These results demonstrate once again the strength of BG Group’s integrated gas business and this, together with current production levels around 700 000 barrels per day, up 12% on Q4 2008, provides us with confidence in the outlook for the Group’s performance. BG Group has assembled an array of material, long-life projects, and we are now entering a period where we can look forward to these projects driving exceptional growth to the end of the next decade.”

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