Oil firms Shell and BP have made better than expected first-quarter profits thanks to the rising price of oil, which is close to USD 120 a barrel.
Amid the tide of red ink flowing from many of the world's largest banks these days, big profits seem out of fashion. On Tuesday alone, Deutsche Bank announced its first quarterly loss in five years, while HBOS, the U.K.'s biggest mortgage lender, said it would replenish its depleted coffers with an $8 billion share sale. Both firms announced billions of dollars of fresh write-downs.
But you just can't keep Big Oil down. Trouncing analysts' expectations Tuesday, BP and Royal Dutch Shell, Europe's largest oil companies, delivered record profits for the first quarter of 2008. Anglo-Dutch firm Shell netted $7.78 billion in the first three months of this year, up 12% over the same period in 2007. Profits at rival BP, meanwhile, swelled by almost half to $6.59 billion. Shares in each firm climbed almost 5% on the news.
At the heart of that growth for both companies were bumper profits from exploration and production units. Those at Shell's climbed 52% to more than $5 billion, and BP's did even better. But given the surging price of a barrel of oil, both businesses must share the plaudits with the markets. A spiraling dollar and jitters over supply have helped drive oil prices up almost a quarter this year, reaching a fresh record of almost $120 on Monday. An end Tuesday to the two-day strike over pensions by refinery workers in Scotland — which had earlier halted much of the North Sea's oil production and wreaked havoc with gas supplies in Scotland — won't do a nervous market any harm. But there's little sign of oil prices easing significantly in the short-term; Chakib Khelil, president of OPEC, the oil producers' cartel, admitted Monday he couldn't rule out prices hitting $200.
That's good news for shareholders in the likes of BP and Shell. But results like these can rankle consumers caught up in a cooling economy as gas prices at the pump steadily rise. Little wonder that results like these aren't trumpeted these days, but rather carefully explained. Record profit announcements from major energy firms are nothing new; those inflated oil prices have triggered a string of them in recent months. But the slowdown currently underway in the U.K., for instance, "puts a bigger onus on these companies to explain lucidly what exactly that means," says Simon Webley, research director at the Institute of Business Ethics in London, which counts both BP and Shell as supporters. Petrol retailing, for instance, accounts for "very little of their profits," he says, "mainly because of the huge tax take from that. They will also have to point out the prices of investing in new resources is very capital intensive."
Sure enough, Royal Dutch Shell Chief Executive Jeroen van der Veer limited himself to calling the results a "competitive set of earnings." And he was quick to point out that "Shell has the largest capital spending program in our industry today, to ... play our part in ensuring that energy markets remain well supplied." That slight air of defensiveness is easy to understand. Where corporate profits are concerned, "everybody thinks it goes into the pockets of senior people," says Webley. "That is far from the case." The suggestion is that Shell and BP's profits will be plowed back into exploration rather than into, say, London's real estate market, which has been goosed up for years by bonuses from the now hurting financial sector. It's an important distinction, but it may not be enough to placate everyone.