Oil majors explain profits plunge

A slump in oil prices and a plunge in profit from Rosneft wiped out a fifth of BP's profit in the third quarter. That was, however, pretty much as expected, and the reaction in the City has been broadly positive, although a big increase in the dividend has raised a few eyebrows.

Underlying replacement cost profit fell to $3 billion (£1.85 billion) from $3.7 billion a year ago, with the contribution from Moscow-backed Rosneft down from $808 million to just $110 million. BP blamed the depreciation of the rouble against the dollar, lower Urals oil prices and associated duty tax lag effects.

A substantial increase in operating cash flow to $9.4 billion from $6.3 billion puts the year-to-date figure at $25.5 billion. Confident of hitting cash flow targets for the full-year, and with annual capital expenditure now expected to be $1-2 billion less than planned, BP has raised the quarterly dividend by 5.3% to 10 cents.

"Growing underlying production of oil and gas and a good downstream performance generated strong cash flow in the third quarter, despite lower oil prices," said BP chief Bob Dudley. "This keeps us well on track to hit our targets for 2014."

But some question the wisdom of hiking the payout at such a difficult time for the oil giant. "An unnecessarily brave move whilst fighting fires in both Russia and America," says industry expert and blogger Malcolm Graham-Wood, referring to western sanctions against Russia over the war in Ukraine, and to the US where BP is still fighting claims relating to the fatal Gulf of Mexico oil spill in 2010.

So, the numbers look fine, and at 433p, BP shares trade on just 9 times forward earnings. But Graham-Wood has some concerns. "Overall the numbers are fine and with the divi up and the shares a pound a share off the high they can hardly be deemed to be expensive down here."

"The reason for the significant discount against most industry peers remains one of risk, BP is still in hot water in the USA and very cold water in Russia and until either of those changes a re-rating is unlikely, however one move from Exxon say, could change that in the blink of an eye."

BG

Falling oil prices hurt BG like all the other oil operators. Third-quarter net income of $759 million was down from $1.1 billion in 2013 and way short of consensus forecasts at $811 million. Much of the drop was driven by a 36% slump in upstream total operating profit to $746 million.

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Exploration & Production (E&P) output fell by 2% to 569,000 barrels of oil equivalent per day (boepd), with higher production in Brazil only partially offsetting a slowdown in Egypt. Thankfully, 2014 production guidance is kept at 590,000-630,000 boepd.

"A disappointing set of results albeit supported by encouragement on both project starts and ramps and capex," says Deutsche Bank.

True, they're not great, but new chief executive Helge Lund takes over in March next year and is bound to have drawn up plans for strategic change. BG needs to stay out of trouble until then, but the shares do seem magnetically drawn to that 1,000p level , and a bombed-out oil price does not help the cause.

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