“However, Shell’s shares are up 4% and BP’s down 2%. Shell is making much faster progress integrating its acquisition of BG than anyone hoped; while BP’s 5.9% year-on-year drop in production output does raise some concerns about the company’s long-term, underlying growth prospects (Shell came in flat excluding BG and up 25% including the purchase).
“Shell reported profits of $2.8 billion against a consensus estimate of $1.7 billion, while BP made $933 million against a forecast of $850 million.
“BP announced capital expenditure would come in below budget at $16 billion, down from the 2013 peak of $24.8 billion. For its part, Shell confirmed spending would come to $29 billion in 2016, down from $58 billion in 2013, and added investment would fall again to $25 billion in 2017.
“The improved profits and lower investment helped both firms announce that they would maintain their quarterly dividends, at $0.10 for BP and $0.47 for Shell.
“In sterling terms, these figures increase quarter-on-quarter owing to the plunge in the pound - BP paid its Q2 dividend at $1.32 to the pound (equivalent to 7.56p a share) and Shell at $1.3326 (for 35.27p a share).
“Using today’s rate of $1.22, BP will be due to pay 8.20p a share and Shell 38.52p for Q3.
“This shows how sterling’s slide has helped both stocks to trade near 52-week highs despite the uncertain economic and oil price environment.
“The maintained dividend will help reaffirm the market’s faith that both companies’ dividend yields’ are reliable, at least for now. Based on consensus analyst forecasts, BP offers a yield of 6.8% for 2016 and Shell north of 7%.
“However, there is no room for complacency. BP is working to a budget of $50-55 a barrel of oil, Shell more like $60 and the OPEC production cuts agreement looks far from assured – Brent crude has dipped below $48. All eyes are now on the meeting scheduled for 30 November in Vienna to see if a deal can be reached and then whether OPEC’s members will stick to it – history would suggest the odds are against it.
“That means the oil firms will have stay lean and mean, especially as analysts are watching their debt positions. BP’s net debt is now $32.4 billion, Shell’s $77.8 billion, way higher than the start of 2015 on both counts. At least both have net-debt-to-equity ratios below 30% and Shell is planning to sell assets so it can reduce borrowing, but no-one will want to see a another sustained dip in oil prices as that could leave both firms having to borrow more if they want to keep their dividends unchanged. That may work in the short term but can do damage to a company’s long-term position and growth prospect if debt inhibits investment for growth over time.”
Source: BP and Shell company accounts