The spectre of rising costs and an uncertain outlook is the cloud for the silver-lining of rising oil prices.
Life's a beach.
It has beautiful blue water, a gentle tropical breeze and oodles of cocktails. At least it has been if you run an oil company, because, as the price of oil has risen, your profits have spiralled up and up. You have a warm fuzzy feeling inside as a result.
Life certainly has been good to Royal Dutch Shell
(LSE: RDSB)
which released its third-quarter results today. Over the last few years, profits have boomed along with the price of oil.
Year | 2002 | 2003 | 2004 | 2005 |
|---|
Profits (£m) | 5,998 | 6,899 | 9,677 | 14,712 |
Average oil price ($/bbl) | 22.8 | 27.7 | 37.7 | 46.5 |
It's not only Shell that has benefited. In the 2005 annual report for BP
(LSE: BP.)
, Peter Sutherland, Chairman, admitted to his good fortune:
"During 2005, we have seen the price of crude oil rise to levels that only two or three years ago would not have seemed at all likely. As a result, and coupled with a sound operational performance implementing our long-term strategy, we have seen the group produce record results."
This year the average price of crude is even higher. In the most recent quarter, Shell realised average prices for $65.6/bbl as against $56.9/bbl for the same period last year. Earnings from exploration and production, rose from $3,278 million last year to $3,743 million in this one, if we exclude a one-off gain. Gas prices were also slightly stronger up to $4.77/scf from $4.59/scf for the same period last year.
Oil products earnings jumped to $2,160 million from $1,760 million a year ago, due in part to better use of refining capacity.
The most interesting bit of information in these results, however, is not about the price of oil, but about rising costs. "Our earnings have proven to be resilient in the face of rising industry costs and weakening refining margins," said Jeroen van der Veer, Chief Executive. Cost of sales increased to $70 billion from $61 billion in the same period last year.
These increased costs don't yet seem to be felt across the board and, in particular, are not mentioned in BP's third-quarter results which were released earlier this week. However, it makes sense that in an industry which has seen increased demand, input costs would rise.
The other bit of interesting information to emerge from the oil industry this week was at a press conference on Tuesday, where Lord Browne, the Chief Executive of BP, said "Overall the trading environment is now weaker than it has been for the last five quarters... The outlook is for a rather different set of market circumstances - a more difficult trading environment."
I think we should take these warnings at face value.
The market seems to have already priced the worries in. BP is on a prospective multiple of 9.7 and is yielding 3.6%. The figures for Royal Dutch Shell are 9.5 and 3.8% respectively.
At these levels, they look reasonable value, especially for a long-term hold.
> BP: Crisis? What Crisis? | Oil & Gas discussion board
