BP and Shell are set to unveil a drop of more than half in their third-quarter profits this week, raising new questions about their ability to retain dividends and avoid further job losses.
BP will report its latest financial figures on Tuesday and the consensus from analysts is that profits will fall by more than 60% to $1.2bn (£780m). Shell will publish its results two days later, when its earnings could be halved.
The plunge in profits is a direct result of the collapse in oil prices since the same period last year, with North Sea Brent blend averaging around $50 a barrel in the last quarter, compared with $102 during the same period in 2014.
“This is going to be one of the worst quarters in years,” said Fadel Gheit, an oil and gas analyst with Oppenheimer brokerage in New York.
“Oil companies are being forced into a situation where they will have to borrow to pay dividends and that cannot be sustained forever. Hard choices are going to have to be made,” he said.
The reduction in oil prices, triggered by a combination of factors including increased global supplies and lower than expected economic growth and energy demand, has already hit oil company share prices hard.
Some analysts believe prices could go even lower before they start to recover.
BP’s stock market valuation is down by almost 6% this year, following a 22% fall over the previous 12 months. Shell shares are down by more than 17% in 2015, also hit by concern over its proposed £55bn takeover of its rival BG.
Even normally steady performers such as ExxonMobil in the US has seen their value on Wall Street slump by 11% over the last 10 months, while many of the smaller independent oil firms have moved into a financial loss.
BP and Shell will try to put a positive gloss on the latest figures, with the former reiterating that earlier moves to sell assets and focus on value over volume have left it in better shape than many rivals to survive the downturn.
Bob Dudley, BP’s chief executive, will also been keen to trumpet the fact that the future looks much brighter now that the company has finally settled its long-running US court case over the Deepwater Horizon explosion and oil spill five years ago.
A record £12bn fine has settled all US federal, state and local claims over the Gulf of Mexico disaster, with payments spread over 18 years, working out at £700m a year.
Shell has recently carried out its own cost reductions by trimming jobs in Aberdeen and by mothballing its drilling operations off Alaska for the foreseeable future. Speculation continues, however, about dividend cuts.
The International Energy Agency believes that higher Opec production and a continued slowdown in world economic growth means that the price of oil will remain low throughout 2016.
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