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Oil firms awash with cash

High prices and margins gifted oil and gas companies a spectacular 2004, earning more than they could comfortably spend. But not everyone was applauding, reports Cris Heaton

The latest round of record results had journalists scurrying to their thesauruses for previously unused superlatives. But not all of them were flattering, as perception outside the industry that oil companies were simply profiteering from high oil and gas prices led to calls for tougher taxation and encouraged governments to think about renegotiating contracts.

Many of the headlines were made by Royal Dutch Shell, which, despite its annus horribilis in 2004, posted the largest profit in UK corporate history – although the previous record-holder, banking behemoth HSBC, is expected to snatch the title back when it reports. However, as has been the case throughout the year, the figures were at least partly overshadowed by a further reserves downgrade (see box).

Calls for a windfall tax
Profits from Shell and BP prompted politicians and campaigning bodies to call for a windfall tax, similar to the £5.2bn ($9.8bn) hit imposed on the UK's privatised utility companies in 1997. But one prominent advocate admitted "it would be wrong to tax them for activities outside the UK and I'm not sure we could make it stick." As BP's chief executive, John Browne, points out, the UK accounts for a relatively small part of his company's operations. Pre-tax profits from UK operations were around $2.5bn in 2004, but tax paid in the UK, including that on profits remitted from around the world, amounted to $2bn.

Sensible thinking prevailed, with economic secretary John Healey confirming that "we have no plans to introduce a windfall tax on oil companies," much to the relief of many in the industry, including the UK Offshore Operators Association (UKOOA). The organisation is optimistic that North Sea activity is recovering after the damage done by a shock tax increase in 2002. Malcolm Webb, UKOOA's chief executive, commented that the industry needs a windfall tax "like it needs a hole in the head".

Nevertheless, it is true that oil companies remain awash with cash and can find few good opportunities to spend it. The cash-rich status of many firms has led to increased speculation that the industry will see a further wave of mergers, although continuing high oil prices have pushed-up valuations to such an extent that there are few attractive targets, say analysts. The US independents are once more the most likely sector for consolidation, following several deals last year, including Kerr-McGee's acquisition of Westport Resources. The lack of downstream positions in these companies reduces regulatory problems and makes them possible buys for the bigger operators, with many understood to be circling Unocal in particular.

Returns to shareholders
BP is certainly not eyeing any purchases, according to Browne. "We could use some of the excess free cash flow for material acquisitions if we saw opportunities that fitted our strategy," he says, "but we see no such opportunities at present." Instead, the company will accelerate the return of its surplus cash to shareholders, announcing a "significant, one-time step-change" in the dividend, from $0.071 to $0.085 a share for the fourth quarter.

Table 1: The majors – fourth quarter and full-year results

$bn

 

Q4 04

Q4 03

% chg

2004

2003

% chg

BP

Net income

3.03

2.25

35

14.09

10.47

35

of which:

E&P*

5.09

2.85

79

18.52

14.67

26

 

R&M*

1.58

0.32

393

4.72

2.32

104

 

Chemicals*

-1.27

0.04

-0.9

0.57

 

Revenue

80.66

59.66

35

294.85

236.05

25

ChevronTexaco

Net income

3.44

1.74

98

13.33

7.23

84

of which:

E&P

2.23

1.56

43

9.49

6.36

49

 

R&M

1.08

0.23

362

3.25

1.17

178

 

Chemicals

0.08

0

2,400

0.31

0.07

355

 

Revenue

42.69

30.35

41

155.3

121.28

28

ConocoPhillips

Net income

2.43

1.02

138

8.13

4.74

72

of which:

E&P

1.67

1.42

18

5.7

4.16

37

 

R&M

0.75

0.2

273

2.74

1.4

96

 

Chemicals

0.08

0.01

655

0.25

0.01

3,457

 

Revenue

40.1

26

54

136.9

105.1

30

ExxonMobil

Net income

8.42

6.65

27

25.33

21.51

18

of which:

E&P

4.89

3.27

49

16.68

14.5

15

 

R&M

2.34

0.74

218

5.71

3.52

62

 

Chemicals

1.25

0.48

162

3.43

1.43

139

 

Revenue

83.36

65.95

26

298.03

246.74

21

Royal Dutch Shell

Net income

5.13

1.69

204

17.59

12.79

38

of which:

E&P

2.58

2.05

26

9.66

9.11

6

 

R&M

2.3

0.24

873

6.53

3.15

107

 

Chemicals

-0.2

-0.35

0.93

-0.21

 

Revenue

76.42

49.61

54

265.19

198.36

34

Total (Euro bn)

Net income

3.24

1.59

104

9.61

7.03

37

of which:

E&P †

3.46

2.65

31

12.82

10.48

22

 

R&M †

1.19

0.4

198

3.22

1.97

63

 

Chemicals †

0.43

0.16

169

1.09

0.56

95

 

Revenue

34.83

27.53

27

122.7

104.65

17

               

*Replacement cost profit before interest and tax. †Operating income from business

segments adjusted for special items

 

Source: company reports

Shell also plans to increase pay-outs, announcing the resumption of its share buy-back plans earlier than expected – although its restructuring into a unified company, due to take place in July, will mean that most of the buy-backs will not be made until the second half of the year, say analysts. The company plans to purchase $3bn-5bn of shares as well as doling out $10bn in dividends, which Deutsche Bank describes as "competitive".

Petrochemicals gain
While the bulk of profits at the majors derived, as ever, from production, refining and marketing, the biggest improvements came from the petrochemicals operations. Profits far exceeded analysts' expectations – ExxonMobil delivered an all-round stellar performance, beating forecasts in all sectors, but petrochemicals earnings were 40% ahead of Deutsche Bank's forecasts. Improvements came both on improved volumes and higher margins, as firm economic growth in key markets allowed companies to more than pass on higher feedstock and energy costs.

This provided more hope that the chemicals industry may finally be exiting its prolonged and painful trough. Demand has been growing strongly in Asia – according to Singapore's economic development board, petrochemicals output in the country rose by 36% last year – and this expected to continue over the next few years, as evinced by the capacity expansions planned for the region. In Singapore, ExxonMobil is expanding its ethylene cracker and Shell plans to build a new ethylene and derivatives plant by 2009. Several projects in China are storming ahead, including the Shell/CNOOC Nanhai plant, which is on track for start-up by end 2005.

The picture in Europe remains gloomier. According to the European Chemical Industry Association, petrochemicals production rose by only 2.8% in 2004 and is expected to manage little better – 3.6% – this year. This may explain the European majors' enthusiasm to rid themselves of large swathes of their under-performing chemicals divisions. Shell says it has received a number for offers for Basell, its joint venture with BASF, and BP took a $1.1bn restructuring charge in petrochemicals as it continues with plans to dispose of its olefins and derivatives business, probably through an initial public offering late in 2005. The spun-off company will include its Grangemouth and Lavera refineries, after which the majority of BP's refining capacity will be in the US, where margins are much stronger – its 2004 global indicator margin for the US was $7.83 a barrel while Europe (excluding Grangemouth and Lavera) was $4.43/b.

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