Lagniappe

 

 

Steve Gelsi: Big Oil gets the wind knocked out of profits

Wall Street largely underestimated the profit dips by Exxon Mobil, Chevron, BP and ConocoPhillips this past quarter and if the price of oil continues to hold at record levels, the story could repeat itself in the coming months, industry analysts said Friday.

One would think that crude at $80, $90 or $100 a barrel would immediately fatten the pockets of Big Oil. But that hasn't been the case for a variety of reasons spelled out in their latest batch of quarterly updates.

The value of crude pumped out of the ground continues to jump for the exploration and production end of the business, but petroleum giants have reported snags tied to rising costs and production sharing agreements with host governments.

Another ongoing problem in the exploration game is rising reluctance by Russia, Venezuela, Mexican and other oil-rich nations to share their wealth with corporate outsiders, forcing them to search for fields in regions where oil is often harder and more expensive to extract.

The even bigger challenge this quarter -- and likely one they face again in the final three months of the year -- comes in the industry's downstream business of refining and marketing, where the price of gasoline and other refined products failed to keep pace with soaring crude prices after the end of the summer driving season.

Nationwide, gasoline prices haven't budged much past $2.80 a gallon, even as oil threatens to break the $100-per-barrel barrier.

Lynn Westfall, chief economist with Tesoro Corp., said Wall Street analysts overestimated earnings for several of the biggest oil companies partly because profits were squeezed by other factors in the refining business.

" There are some oddities in the business that come into play at high crude prices that analysts didn't realize," he said. "Analysts look at the difference between gas and crude prices, but there's a good 10% or 20% of products that don't follow crude."

He said refiners also sell coke as a filler for coal shipments and the price of that product has been flat, for example.

Thomas Coleman, energy analyst and senior vice president at Moody's, said Big Oil remains healthy despite near-term struggles.

" They really still have close to record earnings and cash flow positions, very strong balance sheets, a lot of free cash flow after their capital spending and large cash balances, so they're highly liquid and highly profitable," he said.

Gene Pisasale of PNC Capital Advisors said oil prices have jumped 40% in the past few weeks, promising more of a squeeze on profits in the fourth quarter.

" Traders and speculators are ruling the day on the price of oil," he said "Speculators are betting the dollar will get even weaker ... add in scares about Iran, pipelines in Iraq, hurricanes in Mexico."

Art Hogan, market strategist for Jefferies & Co., said the industry would be more comfortable if crude falls back to the $65 or $75 level, but he added that oil stocks have still put in a good year despite recent pullbacks. The companies are still making plenty of money, it's just that they face "very difficult comparisons" against banner reports a year ago, he said.

" You have to put it in perspective -- they have very strong year-ago comparison numbers to try to beat," Hogan said. "Exxon stock is down about 5.5% in the past five days, but it's still up 15% for the year. Conoco is up 20% for the year. As much as you might want to say it's over for these guys said profit for the three months ended Sept. 30 dropped to $3.7 billion, or $1.75 a share, from $5 billion, or $2.29 a share. Breaking out $400 million, or 19 cents a share, of charges associated with nonrecurring items, earnings in the latest period were $1.94 a share.

The figure fell well short of the forecast of $2.07 a share, according to a survey of analysts by Thomson Financial.

Exxon Mobil turned in its biggest profit drop in years with a 10% dip in earnings in a quarter that turned out worse than analysts expected.

ConocoPhillips fell short of Wall Street projects on a 5% drop in earnings.

BP earnings fell 29% in a quarter the oil giant characterized as "dreadful."

Steve Gelsi is a reporter for MarketWatch in New York. Petroleumworld not necessarily share these views.

Editor's Note: This commentary was originally published by MarketWatch, November 2, 2007. Petroleumworld reprint this article in the interest of our readers. Petroleumworld not necessarily share these views.

All comments posted and published on Petroleumworld, do not reflect either for or against the opinion expressed in the comment as an endorsement of Petroleumworld. All comments expressed are private comments and do not necessary reflect the view of this website. All comments are posted and published without liability to Petroleumworld.

Fair use Notice: This site contains copyrighted material the use of which has not always been specifically authorized by the copyright owner. We are making such material available in our efforts to advance understanding of issues of environmental and humanitarian significance. We believe this constitutes a 'fair use' of any such copyrighted material as provided for in section 107 of the US Copyright Law. In accordance with Title 17 U.S.C. Section 107. For more information go to: http://www.law.cornell.edu/uscode/17/107.shtml.

All works published by Petroleumworld are in accordance with Title 17 U.S.C. Section 107, this material is distributed without profit to those who have expressed a prior interest in receiving the included information for research and educational purposes. Petroleumworld has no affiliation whatsoever with the originator of this article nor is Petroleumworld endorsed or sponsored by the originator.

Petroleumworld encourages persons to reproduce, reprint, or broadcast Petroleumworld articles provided that any such reproduction identify the original source, http://www.petroleumworld.com or else and it is done within the fair use as provided for in section 107 of the US Copyright Law. If you wish to use copyrighted material from this site for purposes of your own that go beyond 'fair use', you must obtain permission from the copyright owner.

Internet web links to http://www.petroleumworld.com are appreciated

Petroleumworld News 11/06/07

Copyright© 2007 Steve Gelsi . All rights reserved.

Send this story to a friend

Your feedback is important to us!
We invite all our readers to share with us
their views and comments about this article.

Write to editor@petroleumworld.com

Any question or suggestions, please write to:
editor@petroleumworld.com

Best Viewed with IE 5.01+
Windows NT 4.0, '95, '98 and ME +/ 800x600 pixels