Remember story of hare and tortoise

EARLIER this month BP overtook Royal Dutch Shell in market capitalisation for the first time in three years. It looks set to extend that lead this week, when it reports fourth quarter profits up 80 per cent to $4.7bn tomorrow. Still, long-term investors should remember Aesop’s fable the Tortoise and the Hare.

The truth is that the whole oil industry is suffering. Last week, Chevron announced profits down 37 per cent to $3bnb in the three months to the end of December. Margins have been squeezed mercilessly thanks to lower demand in the recession; BP estimates that oil firms make just $1.49 a barrel now, down from $5.19 a year ago.

BP’s profits are higher mainly due to swingeing cost-cuts totalling some $4bn, thanks to an efficiency drive that began before the slump and then accelerated in pace last year. It is also more exposed to fluctuations in an oil price that has more than doubled since a February low of $32 a barrel.

Shell’s recently installed chief executive Peter Voser has followed suit with cost-cutting that saw 5,000 job losses and a boardroom clear out. But he is unwilling to scrimp on exploration, announcing record capital expenditure of between $22bn and $23bn a year.

That will fund projects in Europe and Nigeria, helping Shell to up production, which fell to 3m barrels of oil equivalent per day (BOEPD) this year compared to 3.9m at BP. In time, Voser’s decision to bet the house on assets that will pump oil for the next four decades could pay off. After all, it’s the tortoise that wins the race.