The full effect of this year’s rising oil price was on full show in third-quarter results for UK-listed oil giants Royal Dutch Shell (RDSB) and BP (BP.), even as Brent crude has slipped 13 per cent in the last month.
On a headline basis, BP put in the more impressive showing of the two, beating market expectations by a third to record $3.8bn (£2.9bn) in underlying replacement cost profits, the group’s standard measure of earnings. That figure, powered by strong contributions from upstream operations and BP’s stake in Rosneft, was the group’s best quarterly result in more than five years, and 36 per cent up on the second quarter.
Panmure Gordon analyst Colin Smith suggested that around $400m of the unexpected profitability came from a lower tax charge of 36 per cent, which was below BP’s previous guidance. That boon, together with the assumption that “oil prices remain firm in the recent trading range”, means BP now expects to pay for the entire $10.5bn acquisition of a US onshore portfolio from BHP Billiton (BLT) in cash. Previously, the group had said a deferred $5.2bn tranche would be funded by issuing shares.
With that dilutive threat now apparently abated, BP will be counting on an improvement in cash generation, which dropped 3.4 per cent quarter-on-quarter to $6.1bn. As such, the BHP acquisition is likely to push gearing above its target range, though BP says a “divestment programme of $5-6 billion” linked to the deal will eventually be used to pay down net debt.
Though its rise in earnings was less impressive, Shell appears to be converting cash more successfully than recent form. Operating cash flow surged 59 per cent to $12.1bn on the second quarter, despite a $2.6bn negative working capital movement. That was enough to cover the cash dividend, interest payments, share buybacks, and a further, albeit modest $1.7bn reduction in net debt to $60.5bn – or 30 per cent of equity.
Free cash continues to be directed to financial engineering. Having completed the first $2bn tranche of its $25bn share buy-back programme, Shell used its third-quarter results to announce a further $2.5bn share purchase programme by January.
Though the results were broadly positive, the Anglo-Dutch group’s share price (along with BP’s) fell 3 per cent on their publication, as a rise in inventories and mounting concerns over the strength of the US dollar sparked a drop in crude prices.
