It is always wise to shatter investor illusions before you deliver your results, rather than afterwards.
And the markets were certainly under no illusions about the prospects for oil majors BP (LSE: BP) (NYSE: BP.US) and Royal Dutch Shell (LSE: RDSB) (NYSE: RDS-B.US).
When the market price for your primary product has halved in a matter of months, all you can do is hope for the best.
And this week, both companies delivered far better first-quarter results than investorsexpected.
Shell saw net income fall by a whopping56% in the first quarter butits share price nevertheless rose 1% as a result.BP reported a hefty57% drop in pre-tax revenues and its share price hopped 1.5% in consequence.
Investorexpectations were low and both companies easily exceeded them. BP and Shell may find it difficult to pull the same trick twice.
Profits Crash, Share Prices Rise
A doubling in profits at its downstream business helped BP keep its head above water.That partlyoffset collapsing profits in its upstream business, down from $4.40bn to just 0.6bn year-on-year.
BPs management has fought a successful rearguard action by improving refining margins, boosting petrochemicals profits and cutting back on capex. A 10% hike in this dividend helped maintain investor spirits.
Shell pursueda similar strategy, cutting capex and basking inthe relative success of its refinery division, and holding its generous dividend.
Both companies know they can only hold the fort for so long, until the seventh cavalry comes to their rescue in the shape of a rebound in the oil price.
As investment falls awayin the face of cheap oil, investors are calculating that production will inevitably follow, andwill have taken heart from Brent crude recently rising above $65 a barrel.
Dead Cats And Wild Cats
This looks more like a dead cat bounce to me. US shale productioncosts are falling faster than prices, and wildcat drillersare flexible enough to hike production in response to higher prices.
Iranian oil will leak back into the market over the next year. Renewables are getting cheaper, andenjoyinga further boost from dramatic improvements in battery life. The US looks set to be a major player in liquefied natural gas (LNG) exports. Opec has been weakened. Oil inventories remain near their all-time highs. Global growth is slowing.
Investors are unlikely to turn against BP and Shell while their respective dividends of 5.07% and 5.45% remain secure.
So this week, markets were forgiving. Next time, they may take a less lenient view.
BP and Shell aren’t the only FTSE 100 giants paying juicy dividends.The FTSE 100 is packed with top stockspaying as much as 5% or 6% a year.
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Harvey Jones has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.