BP BP Plc

By Sarah Kent and Selina Williams 

LONDON-- Royal Dutch Shell PLC and BP PLC posted surprise improvements in third-quarter profits, joining other big oil companies in showing progress in efforts to adapt to a world of cheaper crude as prices rebounded from lows hit at the start of the year.

The industry has been hammered by a slump in oil prices over the past two years, forcing companies to slash jobs and spending while scrambling to bring down costs. The scars of the price decline were still evident in many companies' third-quarter earnings, but so were signs of adaptation.

Shell returned to profit, posting the equivalent of $1.4 billion net income in the third quarter of 2016, after reporting a net loss of $6.1 billion a year earlier. BP's net earnings of $1.7 billion were up from $1.2 billion a year earlier.

"We continue to make good progress in adapting to the challenging price and margin environment," said BP Chief Financial Officer Brian Gilvary.

The European companies' results were a positive signal in a mixed season of earnings. French oil giant Total SA last week said its third-quarter profit almost doubled from a year earlier to nearly $2 billion, a gain the company's chief executive, Patrick Pouyanne, attributed to deep cost cuts.

In the U.S., Exxon Mobil Corp. and Chevron Corp. last week said their profit fell in the third quarter compared with a year earlier, illustrating how the efforts to manage the price downturn are still work in progress.

Most big oil companies are continuing to work to bring down their costs in an uncertain price environment. Shell said next year it expects to spend $25 billion on finding and developing new oil and gas projects, at the lower end of a spending range it disclosed this year to investors. BP said it planned $1 billion less in capital spending in 2016, at $16 billion, than previously forecast. Exxon slashed its capital and exploration spending 45% in the third quarter from a year ago.

The cost cuts mean many big oil companies are close to generating enough cash to cover the investment budgets and dividend payments at the current oil price level, a crucial inflection point for investors anxious about the safety of their dividends.

Oil prices were generally lower in the third quarter of 2016 compared with the same time in 2015, averaging $45.86 a barrel for Brent crude, the international benchmark. The prices are down over 50% from the heights of $100 a barrel or more they traded at for much of 2011 to 2014. A global oversupply of oil has kept the market depressed.

BP and Shell's earnings were a respite after more than two years of ugly numbers. The figures underscore growing optimism among many industry executives that the worst of the price rout is coming to an end as supply and demand come back into balance.

But that recovery could still be on a knife edge as members of the Organization of the Petroleum Exporting Countries are struggling to hammer out a final plan for a modest output cut before a Nov. 30 meeting in Vienna. Their failure to agree is keeping a lid on oil prices that staged a modest recovery last month and optimism within the industry remains cautious.

The companies themselves remain cautious on their investment plans, anxious to stress efforts to focus on increasing value rather than returning to profligate spending.

"We're planning next year on $50 a barrel. We're planning the balance sheet for potentially even lower than that, and were building the portfolio to be robust at anything above $50 a barrel," Shell CFO Simon Henry said.

Write to Sarah Kent at sarah.kent@wsj.com and Selina Williams at selina.williams@wsj.com

(END) Dow Jones Newswires

November 01, 2016 07:53 ET (11:53 GMT)

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