View from City Road: Oil giants swap brickbats for bouquets

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The Independent Online
Not so long ago same-day results from Britain's two oil majors were a simple matter of brickbats for British Petroleum and bouquets for its twice-bigger rival, Shell. But something rather odd happened yesterday. Interim results from the duo were greeted by a 3p jump in BP's share price and an 81 2 p drop for Shell.

While BP in the past year grappled with deep-seated financial problems, billion-pound write-offs, halved dividends and palace coups, Shell looked such a haven of cool efficiency that comparisons - always a mite tricky - became almost laughable.

But the first-half figures to 30 June suggest that the world's biggest oil company may have temporarily lost its poise. Underlying net profits at pounds 1.6bn, which were affected by pounds 183m restructuring charges and a pounds 141m currency loss, were significantly adrift from market expectations, sparking a wave of downgradings.

This is the second time this year that Shell has sprung an unpleasant surprise on shareholders. Back in January, the group was forced to take a pounds 140m hit after the discovery of massive and unauthorised currency speculation at its Japanese associate.

In contrast, BP's results were better than expected and provided further evidence of an improving trend. A year after the upheavals that followed the departure of Robert Horton as chairman and chief executive, BP is near its target of pounds 500m replacement cost profits per quarter.

And whereas Shell has been slower to cut costs BP has, of necessity, been forced to take a much deeper stab at its overheads. That said, both companies have substantially improved results from their refining and marketing operations - which indicates that the benefits of cost cutting here were retained with the businesses rather than frittered away under competitive pressure to customers.

The opposite appears to be the case with chemicals where BP and Shell recorded much deeper losses though the latter's were worsened by a pounds 112m restructuring charge. However, Shell is in a league of its own when it comes to financial might. Against BP's 90 per cent gearing - which has remained static despite a dollars 1.1bn repayment of dollar debt in the first half - Shell's is in single digits.

Despite a weak oil price, both are likely to benefit from a lower cost base and a gradual improvement in the world economy. Their shares, which are trading on a prospective earnings multiple of 18 times, will mark time in the short term, but the dividend yield is better than the market average. Buy BP for its recovery and Shell for its long-term value.