UK Oil Companies Show Record Profits

Financial Times | October 5 2005

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UK corporate profitability has risen to its highest level for five years as oil companies enjoy record earnings in the North Sea and manufacturers show early signs of recovery.

After adjusting for depreciation, British non-financial companies made a 13.7 per cent rate of return on capital employed in the second quarter of this year - the highest level since 2000 - up from 13.3 per cent in the first quarter, official figures show.

The upbeat sentiment has been reflected in the performance of the FTSE. The blue chip index has risen 14 per cent so far this year and on Monday closed above 5,500 for the first time in four years. The mid cap FTSE 250 is at an all-time high.

Profitability, combined with the lower cost of debt, has also boosted hopes of further mergers and acquisitions in London before the end of the year.

But investment growth in the UK and in other industrial ised economies remains sluggish. In the UK, the value of business investment increased by 4.1 per cent in the year to the second quarter, a touch slower than the economy as a whole.

In the eurozone, the Organisation for Economic Co-operation and Development expects investment to increase by only 2 per cent and even in the strongly growing US economy, it expects investment growth to slow from a 9 per cent rate in 2004 to 5.8 per cent in 2005.

Companies operating in the North Sea increased their return on capital from 30.6 per cent at the start of the year to 33.7 per cent between April and June.

Their booming returns contrasted with the manufacturing sector, which enjoyed a rise in profitability from 6 per cent in the first quarter to 7.5 per cent in the second. But it has struggled to achieve rates of return above 10 per cent since 2000.

Roger Bootle of Deloitte, the accountants, said high oil prices were increasing caution in the economy by raising costs and damping revenue growth.

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