Shell and BP profits to crash on cheaper oil

LONDON (Reuters) - Royal Dutch Shell Plc (RDSa.L) and BP Plc (BP.L) are expected to report 70 percent profit declines next week on lower oil prices, and some analysts expect even worse to come in future quarters.

A Reuters poll of seven analysts gave an average forecast of $2.62 billion for Shell's first-quarter current cost of supply (CCS) net income, excluding one-off factors.

The world's second-largest non-government controlled oil company by market value had "clean" CCS profits of $7.85 billion in the same period last year.

London-based BP, Europe's second-largest oil company, is expected to report a replacement cost (RC) net profit, excluding one-offs, of $2.28 billion, compared with $6.49 billion last year.

RC and CCS are profit measures which strip out unrealized gains or losses related to changes in the value of fuel inventories, which analysts feel do not impact the companies' finances.

The profit falls will be echoed across the sector, analysts say, as a collapse in the Brent crude price to around $44/bbl from $97/bbl a year earlier eats into earnings.

Investors are concerned the plunge may lead to cuts in the oil majors' generous dividends, for many shareholders the key reason to own oil stocks.

MORE PAIN

Oil prices have recovered to trade above $50/bbl in April but investment bank Goldman Sachs says the pain is not yet over for the sector.

"(This) is not trough earnings for the sector, on our estimates," the bank said in a research note predicting hits from low natural gas prices in future months.

The results will reflect a halving of U.S. gas prices in the period compared with 2008, but European gas prices, while being tied to oil prices, lag changes in benchmarks like Brent.

BP and Shell's core upstream oil and gas production units will lead the profit collapse, mainly due to lower oil prices, but Shell is also forecast to suffer from a 3.8 percent fall in production to 3.39 million barrels of oil equivalent per day (boepd).

Across Europe, large oil companies will likely record a 3.6 percent contraction in production, Jason Kenney, oil analyst at ING said.

However, BP said last week its production was just above 4 million boepd in the quarter, representing a rise of 2.5 percent on the year.

BP and Shell are expected to have diverging performance in their downstream, refining and marketing operations.

BP will benefit from the recovery to full operations of U.S. facilities including the Texas City refinery, and a strong rise in refining margins in the United States, where its portfolio is focused.

Shell's larger refining portfolio has a stronger weighting toward Europe and Asia where margins fell compared with the same period in 2009.

(Editing by David Holmes)