BLOOMBERG: Exxon, Shell, BP Profits Probably Surged Amid Record Oil Prices: “Finding new reserves and raising production is increasingly difficult. Two-thirds of Shell's most prospective wells in 2004 were dry holes…”: “Shell, based in The Hague, said July 14 that costs to develop its Sakhalin field in Russia, the world's largest oil and gas project, may double to $20 billion…” Monday 25 July 2005

July 25 (Bloomberg) -- Exxon Mobil Corp., BP Plc and Royal Dutch Shell Plc the world's three biggest publicly traded oil companies, will probably report record second-quarter profits because of surging oil and gas prices, analyst surveys showed.

BP, based in London, tomorrow may say second-quarter earnings rose 44 percent to $5.6 billion, according to the median of estimate from six analysts surveyed by Bloomberg. Exxon Mobil may report on July 28 that profit rose to about $8 billion from $5.8 billion a year earlier, according to Credit Suisse. Shell, which reports on the same day, may say net income jumped 46 percent to $5.4 billion, the Bloomberg survey found.

Oil prices in the second quarter headed toward the July 7 record of $62.10 a barrel in New York, while BP told investors on July 5 that refining margins widened in the period, led by gains in Asian markets. The world's 70 biggest oil companies this year may report combined net income of $230 billion, Merrill Lynch & Co. forecast. The total is almost as big as Poland's economy.

``People are getting drunk on the high hydrocarbon-price environment,'' said Bertie Thomson, who helps oversee about $6 billion in European stocks at Aberdeen Asset Management Plc in London. ``They will be impressive numbers.''

Most of the increase in profit is coming from higher prices, rather than rising oil and gas production, according to Credit Suisse First Boston analysts including Edward Westlake.

``Volume growth continues to prove elusive,'' according to a July 20 report from the securities firm. Exxon Mobil shares this year have risen 16 percent in New York, while BP rallied 23 percent in London, where Shell Transport & Trading Co. shares have gained 19 percent. The Standard & Poor's 500-stock index is up 1.8 percent this year.

As profits surge, investors are calling for oil companies to buy back stock and increase dividends. Also, a round of acquisitions is sweeping the industry.

`Extra Cash'

Chevron Corp., the second-largest U.S.-based company, last week bid $17.1 billion for Unocal Corp., seeking to thwart a competing offer from Cnooc Ltd. of China. Morgan Stanley analysts including Neil Perry in London wrote this month they expect a ``further round of consolidation'' for the oil industry.

``The interesting thing for us is what management will do with the extra cash,'' said Thomson at Aberdeen.

Brent crude oil prices averaged $51.63 a barrel in the quarter, 46 percent more than the $35.32-a-barrel average a year earlier, BP reported earlier this month in a preview of the period for investors. New York oil prices gained 39 percent to average $53.08, BP said.

``Chronic industry underinvestment through the 1990s has resulted in a squeeze in available capacity in several key parts of the industry complex, supported by a recent strong pick-up in energy demand,'' said a July 18 note from Merrill, including analyst Mark Iannotti in London.

Prices to Stay High

Credit Suisse First Boston forecast oil prices, which were trading at about $58 a barrel last week, may fall to $50 a barrel in 2006, not as far as the $30 some oil companies are assuming.

``We do not envisage an oil price in the $30s this decade,'' Westlake's team wrote.

Finding new reserves and raising production is increasingly difficult. Two-thirds of Shell's most prospective wells in 2004 were dry holes, and oil output won't rise until 2007, Chief Executive Officer Jeroen van der Veer said in February.

Shell, based in The Hague, said July 14 that costs to develop its Sakhalin field in Russia, the world's largest oil and gas project, may double to $20 billion because of soaring metal prices, higher contractor fees and a declining U.S. dollar. The project is the centerpiece of the company's efforts to revive production and increase reserves by drilling new wells, rather than through acquisitions.

``The results are not set to be spectacular, with the upstream still reporting flat volume growth and higher costs,'' Angus McPhail, an analyst at ING Financial Markets in Edinburgh, said in a note dated July 21 and titled ``Still Unsure of Shell.'' McPhail rates Shell ``hold.''

BP Grows

Irving, Texas-based Exxon Mobil, which pumps more oil than every OPEC member except Saudi Arabia and Iran, this year may show little growth in production before it rises 5 percent in 2006 as supplies expand in Nigeria, Angola, Russia, Qatar and Azerbaijan, said Daniel Barcelo, an analyst at Banc of America Securities LLC in New York who rates Exxon Mobil shares neutral.

On July 5, BP said growth in second-quarter oil and gas production slowed to 3.5 percent amid higher taxes and restrictions on exports in Russia.

Output was 4.11 million barrels a day, the company said, compared with the 3.97 million barrels a day for the year-earlier period. The growth rate was less than a fourth of the 18 percent gain in the second quarter of last year, when Russian output rose faster.

Tilting Rig

The increase in Russian production and from other nations ``offset the declines in the U.S. and U.K.,'' said Neil McMahon, a London-based analyst at Sanford C. Bernstein & Co., in a research report dated July 21. McMahon rates BP stock ``outperform.''

Refinery shutdowns and ``weak gas marketing'' prompted Merrill's Iannotti, who rates BP ``neutral,'' to reduce his second- quarter profit forecast for the company to $5.67 billion from $5.73 billion, his note said.

BP last week righted its tilting $1 billion Thunder Horse platform in the Gulf of Mexico, after spending a week securing its hull in the wake of Hurricane Dennis. The company on July 12 said it found the structure, the world's largest rig of its kind, listing at about a 20 degree angle. The platform was scheduled to start output before the end of the year.

BP's global production was expected to rise to about 5 million barrels a day by 2008, the company forecast in February.

Thunder Horse

BP owns 75 percent of Thunder Horse, and Exxon Mobil the rest. Investors want more information tomorrow on whether any damage to Thunder Horse will hurt output expansion. Tony Shepard, an analyst at Charles Stanley & Co. Ltd. in London, said he hopes BP's production forecast ``hasn't been blown off course.''

BP officials have so far declined to comment on whether Thunder Horse production will be delayed.

Exxon Mobil has beaten analysts' forecasts in four of the past five quarters, while BP has surpassed expectations in three of the past five, according to Bloomberg data.

To contact the reporter on this story:

Mathew Carr in London at m.carr@bloomberg.net

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