Updates from Royal Dutch Shell (RDSB) and BP (BP.) on third quarter trading receive a very different response from the market.
Shell's shares rise 3.5% to £21.89 as it beats earnings forecasts by a large margin.
The oil major posts underlying net income of $2.8bn versus consensus at $1.96bn, up 18% year-on-year.
‘Shell is making much faster progress integrating its acquisition of BG than anyone hoped; while BP's 5.9% year-on-year drop in production output does raise some concerns about the company's long-term, underlying growth prospects,' comments Russ Mould, investment director at AJ Bell.
DIVIDENDS KEEP COMING
Investors will be pleased that Shell will continue to pay a dividend, despite concerns that its earnings have been strong enough to warrant the cash payout.
‘The maintained dividend will help reaffirm the market's faith that both companies' dividend yields' are reliable, at least for now. Based on consensus analyst forecasts, BP offers a yield of 6.8% for 2016 and Shell north of 7%,' adds Mould.
‘However, there is no room for complacency. Oil firms will have stay lean and mean, especially as analysts are watching their debt positions. BP's net debt is now $32.4 billion, Shell's $77.8 billion, way higher than the start of 2015 on both counts.'
BAD DAY FOR BP
BP falls 1.8% to 475p as its third quarter income dives 50% and reduced expenditure starts to have a negative effect on its business.
Underlying production is down 2% year-on-year to 2.11 million barrels per day with oil production down 7% year-on-year.
ETX Capital markets analyst Neil Wilson notes: ‘BP is on track to rebalance its organic cash flow next year at $50 to $55 a barrel, but at an average of $46 a barrel in the quarter just gone, it still needs the market to pep up a little.
‘Cutting costs has its own price and for BP it also means lower capital expenditure, which has knock-on effects for earnings and output potential going forward.’
IMPORTANT NEWS AROUND THE CORNER
Investors in both companies will need to pencil 30 November into their diaries as this is the date oil cartel OPEC is due to hold its next meeting and iron out the details of an output cut agreed in late September.
Wilson adds: ‘The meeting of OPEC later this month will be key - failure to agree a cut could rock the market and send oil prices lower, which will further hit the likes of BP and Shell.
'They may have to cut costs even more, or they may even have to slice a little from those prized dividends.’
