EARNINGS PREVIEW: BP's Woes Set To Dominate UK Oil Sector 2Q

20th Jul 2010 10:28

By James Herron Of DOW JONES NEWSWIRES TAKING THE PULSE: Second quarter earnings in the U.K. oil sector will unsurprisingly be dominated by news about BP PLC's (BP) continuing response to the Gulf of Mexico oil spill. Although the company has, at least temporarily, capped the leaking well, many questions remain about how it will meet future costs from the spill, which assets it will sell to raise cash and how the disaster will affect BP's strategy in the long term. Analysts will also be looking to BG Group PLC (BG.LN) and Royal Dutch Shell PLC (RDSB.LN) for an indication of how changes in oil industry regulation in the wake of the spill might affect them. Both BG Group and Shell have large exposure to deep water oil drilling. COMPANIES TO WATCH: BP PLC (BP) -- July 27 MARKET EXPECTATIONS: BP's underlying earnings are expected to be strong, rising between 70% and 80% from year-ago levels. Although the market may take some comfort in BP's profits and strong cash flow, investors will really want to see greater clarity on the likely cost of the Gulf oil spill, how BP will pay it and when dividend payments might resume. Credit Suisse estimates that BP will book $2.8 billion of spill related costs in the quarter. NCB Stockbrokers analyst Peter Hutton said BP may make provisions for known future liabilities, bringing the total spill cost booked to $4.6 billion and wiping out the bulk of BP's operating profit. MAIN FOCUS: "We expect that BP will want to communicate strong messages about its balance sheet," said Hutton. BP's operating cash flow, its debt level and its access to short-term liquidity will be heavily scrutinized. BP may be asked for the first time to put a number on likely oil spill liabilities. The market will also be looking for clues about BP's plans to divest $10 billion of assets, although analysts and people familiar with the sale process said it may be too much to expect a firm deal to be announced so quickly. BG Group PLC (BG.LN) -- July 28 MARKET EXPECTATIONS: Continuing weakness in natural gas markets is expected to hit BG's all-important liquefied natural gas business, where earnings are seen flat or down slightly on a year ago. Citigroup sees BG's net profit rising just 10% year-on-year, mostly due to gas prices but also due to heavy field maintenance. MAIN FOCUS: Tremendous uncertainty still hangs over BG Group's operations in Kazakhstan. The company is facing numerous allegations, both criminal and regulatory, which analyst say are linked to the Kazakh state oil company's desire to take a stake in the Karachaganak project. BG has not faced any new charges recently, but Chevron Corp. (CVX), which operates the Tengiz project, recently came under similar attack. Royal Dutch Shell PLC (RDSB.LN) -- July 29 MARKET EXPECTATIONS: Shell's oil and gas output is expected to be higher than a year ago due to the startup of the Sakhalin-2 liquefied natural gas project and improved security in Nigeria. This improvement, combined with higher oil prices and better refining margins, should boost Shell's adjusted earnings by around a quarter compared with a year earlier, analysts said. "We expect a competent if unspectacular set of results from Shell," said Hutton. MAIN FOCUS: Analysts will be looking for signs that delivery of Shell's major gas projects in Qatar remain on track for the end of this year and early next year. An update on Shell's drilling plans offshore Alaska, which have been pushed back to 2011 in the wake of the Gulf of Mexico spill, would also be welcomed. Company websites: http://www.bp.com; http://www.bg-group.com; http://www.shell.com -By James Herron, Dow Jones Newswires; +44 (0)20 7842 9317; [email protected] (END) Dow Jones Newswires July 20, 2010 05:28 ET (09:28 GMT)