Profitability of UK oil companies hits a record low

Posted on 15 Jan 2015 by The Manufacturer

The profitability of companies working on the UK’s offshore oil and gasfields reached a record low in the third quarter of 2014, official data show, as the effect of falling oil prices makes itself known.

While service companies were the most profitable since 1997, in contrast, profitability, as measured by the net rate of return, of all other non-financial corporates was at its highest level since 1998.

Offshore oil companies, which were already experiencing rising costs, were punished by the fall in oil prices at the end of the year, the Office for National Statistics said.

“For other companies who are likely to use oil as an input, the fall in price may have increased profitability by reducing costs,” said the ONS. “Transport and storage and wholesale — which constitute roughly a quarter of all services — are particularly affected.”

Britain’s service sector, which accounts for 68% of total profit, has had a stronger recovery than the rest of the UK economy. In the third quarter of 2014 output in the sector was 7.2% above the pre-crisis level, compared with 2.9% for gross domestic product.

“It’s a sign of a healthy economy” said Rain Newton-Smith, director of economics at the CBI, “especially in terms of investment potential. Our surveys have been showing strong intentions for some time, particularly in the service sector.”

“But it’s encouraging to see that the average last year for manufacturing was at its highest since 2004, which shows that efforts to rebalance the UK economy are making an impact.”

As real wages have fallen for seven consecutive years despite corporate profits setting new records, the release also confirms that investors and business owners have done better than workers in the recovery.

The profitability of UK continental-shelf companies — those involved in the exploration and extraction of oil and natural gas — fell 3.3 percentage points in the third quarter.

Overall the net rate of return for all non-financial companies increased to 12 per cent in the third quarter of 2014, up from 11.6% in the previous quarter.

The profitability of service companies increased 1.9 percentage points to a record of 16.8 per cent, and the net rate of return for manufacturing companies increased 0.1 percentage points to 10.9%.

The manufacturing sector passed its previous pre-crisis peak, and in the third quarter was the most profitable since the start of 2002.

Newton-Smith added: “This release only includes data for the third quarter of 2014 so oil companies’ profits look likely to fall further. But it’s not just the lower oil price, there are also lower oil reserves so companies will have to think quite hard about how they can extract oil more efficiently.”