LONDON – Two of Europe's largest energy companies said Tuesday that low oil prices weighed on underlying earnings once again in the third quarter and predicted that the price backdrop won't be returning to the heights seen as recently as 2014 anytime soon.
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BP reported that its profit before one-time items and after adjusting for the cost of inventories fell 48 percent to $933 million. Rival Royal Dutch Shell did report an 18 percent increase in comparable earnings to $2.79 billion but that was largely due to production stemming from its recent acquisition of BG Group.
Like all oil-producing companies, BP and Shell have seen their earnings ravaged over the past couple of years by the sharp fall in oil prices.
Brent crude, the benchmark for international oil, averaged $45.86 a barrel in the third quarter, down from $50.47 in the same period last year. Oil, which traded above $100 a barrel a little more than two years ago, plunged as major oil producing nations such as Saudi Arabia and Russia maintained output amid slower-than-expected economic growth.
Both companies predicted a modest pick-up in prices in light of recent gains. In recent months, oil prices have started to rise again, partly because of a commitment by the Organization of the Petroleum Exporting Countries, or OPEC, to push through a production cut this month.
Shell forecast cash flow from new projects based on oil at $60 a barrel. BP was more conservative, saying it was planning for oil between $50 and $55 a barrel next year.
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The lower oil price environment of the past couple of years has made it more difficult for oil companies to extract profit from their drilling and that's made life difficult.
David Elmes of Warwick Business School's Global Energy Research Network said bankers and portfolio managers used to love oil companies because, over time, they could count on high rewards in return for taking high risk. Now they are under pressure to deliver.
"All of the oil and gas sector is trying to work out what to do and how to do it in a low price environment," Elmes said. "What they're trying to do is adjust their spending, cost and investment. ... That's quite a fundamental change to a market that saw a lot more volatility in the past."
As a result, there's growing pressure on oil companies to contain costs.
BP said production, exploration and administrative expenses fell 5.2 percent to $8.97 billion in the third quarter, while capital investment dropped about 14 percent to $3.7 billion.
"We continue to make good progress in adapting to the challenging price and margin environment," said Brian Gilvary, BP's Chief Financial Officer.
Meanwhile, Shell said operating expenses declined 5.6 percent to $10 billion and capital expenditure dropped 21 percent to $5.28 billion.
Shell also benefited from its purchase of BG Group, which boosted production of oil and natural gas. Production rose 25 percent to the equivalent of 3.6 million barrels of oil a day, including 806,000 barrels a day from former BG assets.
"Shell delivered better results this quarter, reflecting strong operational and cost performance," Shell Chief Executive Ben van Beurden said in a statement. "But lower oil prices continue to be a significant challenge across the business, and the outlook remains uncertain."
Shell shares were certainly more in favor than BP's in the markets following the results. BP's share price closed 4.5 percent lower while Shell's rose around 4 percent.