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BLOOMBERG: BP, European Energy Stocks May Regain Lead on Earnings Outlook: “Shell's fourth-quarter net income probably more than doubled to $4.91 billion, according to the median estimate of seven analysts surveyed by Bloomberg News.” ( 31 Jan 05


Jan. 31 (Bloomberg) -- European energy stocks have reemerged as market leaders in 2005. Earnings reports from the region's largest companies, including Royal Dutch/Shell Group and BP Plc, may be a catalyst for further



The Dow Jones Stoxx 600 Oil & Gas Index has climbed 4.1 percent this year,the third-best performance among 18 industry groups in the Stoxx 600, a regional benchmark. The energy index dropped last quarter for the first time in more than a year.


``Investors were too quick to sell oil shares,'' said Jane Coffey, head of equities at Royal London Asset Management in London, which oversees about $40 billion and owns BP shares. The stocks ``will outperform the market.''


Shell, Europe's second-largest publicly traded oil company, on Feb. 3 will become the first of Europe's top three energy producers to report quarterly earnings.


The three companies, Shell, BP and Total SA, boosted profits by an average of 78 percent in dollar terms last year, according to Lehman Brothers Holdings Inc. estimates. Earnings surged as oil rose to a record $55.67 a barrel in New York in October before sliding 22 percent through year-end.


The oil and gas index rose 1.8 percent last week and was the best performer in the Stoxx 600. The broader measure gained 0.7 percent, bringing its advance this year to 1.6 percent. The Stoxx 50 and the Euro Stoxx 50, a measure of the 12 countries sharing the euro, gained 0.9 percent and 0.5 percent for the week, respectively.


`Through the Roof'


Energy shares account for 10.6 percent of the Stoxx 600's value, or weighting, the second-biggest group behind banks. The group's index lost 1.1 percent in last year's fourth quarter as oil peaked and then retreated.


Ajay Kapur, global equity strategist at Citigroup Inc., and Philip Isherwood, global sector strategist at Dresdner Kleinwort Wasserstein, recommended in the past 10 days that investors keep more energy shares in their portfolios than benchmarks suggest.


``I've been bullish on oil stocks for some time as earnings are going through the roof,'' said Chris Tinker, an equity strategist at ICAP Plc in London. ``They are the play in European markets.''


Merrill Lynch & Co., citing higher oil prices, increased this year's profit estimates for the industry by an average of 11 percent on Jan. 24. Crude-oil futures have risen 8.6 percent this year, reaching an eight-week high of $49.75 on Jan. 25, as production cuts and freezing temperatures in the U.S. and Europe heightened concern about supply shortfalls.


Projected Decline


Last month, the Organization of Petroleum Exporting Countries agreed to reduce production by 4 percent. OPEC, whose 11 member countries supply more than a third of the world's oil, met yesterday in Vienna and left the output targets unchanged.


Oil's surge in 2004 led to 28 percent earnings growth on average for the Stoxx 600 energy companies, according to analyst estimates compiled by FactSet JCF Group, a London-based research firm. The increase was in line with an estimated 27 percent expansion for all of the benchmark's members.


At the start of the year, analysts expected oil producers' profit to decline 10 percent. The average estimate for earnings per share is 35 percent higher than it was at the start of last year, according to FactSet JCF. For the Stoxx 600, it is only about 7 percent higher.


Analysts are again forecasting lower earnings for the group this year, FactSet JCF's statistics show. They expect a decline of 3.2 percent on average, contrasting with an 11 percent increase for the Stoxx 600.


Risk of Losses


``Even if oil were to come down to about $40 a barrel, that would still mean energy companies will beat earnings expectations,'' Coffey said. ``Investors and analysts have remained skeptical for some time that oil prices would

remain high, and they've been proven wrong.''


Shell's fourth-quarter net income probably more than doubled to $4.91 billion, according to the median estimate of seven analysts surveyed by Bloomberg News. London-based BP, Europe's largest oil company, reports on Feb. 8. Paris-based Total, the third-bigger, reports on Feb. 17.


The current oil price is 53 percent above the average of $31 in the past five years. Merrill Lynch last week raised its forecast for the average price in New York trading this year by 14 percent, to $41.


Volatility of oil prices makes some investors unwilling to bet energy stocks will outperform the market this year.


``There's probably a much higher possibility that you'll lose money'' by owning the industry than make money, said Tim Harris, director of equity market strategy at JPMorgan Private Bank in London.


Rising Costs


Harris said his firm reduced holdings of oil shares about three months ago. His team uses analysts' estimates for average oil prices of $35 to $40 a barrel this year.


Declines in the dollar, used in the oil market, against European currencies may limit earnings growth. The U.S. currency has dropped 4.3 percent against the euro and 3.4 percent against the British pound in the past year.


BP's shares fell 1.2 percent on Oct. 26 after the company reported a 53 percent increase in third-quarter profit. A weaker dollar, along with higher prices for supplies such as steel, led BP to boost projected capital spending for 2005.


Energy stocks may still draw investors because they are among Europe's least expensive relative to earnings. The Stoxx 600 Oil & Gas Index is valued at about 13 times average profit estimates for this year, less than the Stoxx 600's multiple of more than 16 times.


At current oil prices, shares of energy companies are attractive, said Bob Parker, deputy chairman of Credit Suisse Asset Management in London.


``Oil companies will generate a very significant earnings growth,'' said Parker, who helps oversee $335 billion, including shares of BP and Total. ``Oil could easily average $45 to $50 a barrel in a three-year term. Stock

valuations are cheap.''


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