Big oil's #75bn bonanza

Crisis prices for motorists mean bigger dividends and share buybacks for investors

Special report: the petrol war

Terry Macalister and Charlotte Denny Tuesday October 3, 2000

The world's top 10 oil companies, including BP and Shell, will generate nearly $111bn (#75bn) cash this year on the back of booming crude prices, according to financial experts. This embarrassing accumulation of wealth against the backdrop of a fuel crisis could lead to calls from motoring organisations for windfall taxes to be levied on the oil groups. The lobby would seek sympathy from the government, which also feels the oil companies let it down during the crisis. The industry is expected to reduce the size of its money mountain through increased capital expenditure, higher dividends and share buybacks.

Investors could get $82.5bn (#56bn) through share buybacks from the 10 largest companies over five years to 2004, according to research by UBS Warburg. The biggest lump of this, #27.8bn, would be offloaded by the world's largest oil group, ExxonMobil, with #10bn by Royal Dutch Shell, and #11.2bn by BP.

These estimates, confirmed privately to the Guardian as "realistic" by oil company executives, are based on a conservative outlook of world oil prices. The share buybacks could be much larger if crude prices remain strong.

UBS Warburg has based its predictions on the assumption that the key Brent blend price will drop from an average of $29 per barrel this year to $17 per barrel between 2003 and 2004. However, it is not just the price of crude that has created the "spare" cash. Income growth from cost savings, half of which were generated through an unprecedented level of mergers and acquisitions, have also contributed.

The top 10 oil companies, which also include TotalFina of France and Conoco of the US, were 17 separate groups before they amalgamated under pricing pressure in 1998.

Yesterday there were signs that corporate restructuring is continuing in this sector with Gulf Canada unveiling an #800m takeover of rival Crestar Energy.

The top 10 oil companies are also benefiting from higher gas prices, better refining margins and improved conditions in the chemical sector where trading has been tough in recent years.

UBS Warburg believes this year will prove to be "as good as it gets" for the big oil firms, who will spend more of their surplus cash in future on expanding chosen areas such as gas and power projects.

Global crude prices could peak over the coming months when they reach $40 or even $50, but experts believe that growing production output will gradually hammer down long term prices.

The price of Brent rose again to over $30 yesterday, amid news of renewed tensions between Iraq and Kuwait, and signs that the EU countries were putting aside plans to tap into strategic reserves.

Kuwait has accused Iraq of stealing oil from a pipeline laid during Baghdad's occupation of the country ten years ago. Deputy prime minister Mohammed Sharar said yesterday that Kuwait had satellite pictures and field evidence to back up its claims.

Brent crude for November delivery moved up $1 to $30.84, while US light crude futures were up 96 cents at $31.71. EU governments failed to agree to sell off strategic reserves last Friday, after Germany expressed doubts about the plan.

A final agreement is not expected until the EU leaders' summit in Biarritz, in two weeks time. In the meantime hopes that Europe will follow the US lead and tap its reserves are fading. fading

http://www.guardianunlimited.co.uk/business/story/0,3604,376538,00.html

-- Martin Thompson (mthom1927@aol.com), October 02, 2000