High Oil Prices Make 1Q An Earnings Gusher For Oil Cos
By CHRISTINA CHEDDAR
NEW YORK -- Wall Street is expecting major integrated oil companies to report a gusher in the first quarter, and it has nothing to do with what's beneath the ground.
Company coffers will be overflowing with cash from higher crude oil prices. During the first quarter, crude oil prices reached 10-year highs, spiking at $34 a barrel, and averaging about $29.15 a barrel during the period, said CIBC World Markets analyst Bruce Lanni. A year ago, first-quarter crude oil prices averaged less than half that amount, about $13.15 a barrel, he said.
Natural gas prices, while largely overshadowed by the debate surrounding heating oil and gasoline prices, also posted solid gains throughout the period, and will be an important contributor to the bottom line.
Natural gas prices are expected to average $2.48 per million British thermal units in the first quarter, compared with an average of $1.68/MMBtu a year ago.
"There's really no words to describe how well the group will be doing this quarter," Lanni said. The difference will lead to performances that will render year-to-year comparisons nearly meaningless, he added.
When compared with the fourth quarter, earnings also will be impressive. Eugene Nowak, an analyst at ABN AMRO Inc., expects companies to report earnings that are 15% higher than those of the fourth quarter and almost triple those of the first quarter of 1999.
Deutsche Banc Alex. Brown analyst Michael Young thinks some companies such as Amerada Hess Corp. (AHC), Kerr-McGee Corp. (KMG) and Occidental Petroleum Corp. (OXY) could exceed consensus estimates by an average of 10% to 15%.
However, oil and gas production volumes are likely to be disappointing, particularly at Texaco Inc. (TX), USX-Marathon Group (MRO), Occidental and Amerada Hess, said Young. Still, the effects of the lackluster production will be offset by the benefits from higher crude prices and from a surge in refining and chemical margins late in the quarter.
Refining Margins Improved Late In First Quarter
In the fourth quarter, oil companies' exploration and production operations, otherwise know as the upstream business, were able to benefit from rapidly rising crude oil prices, but the crude oil price volatility hurt the companies' refining and marketing margins on the downstream side of their business offsetting the gains. Also, companies with petrochemicals units felt a blow from higher feed-stock costs.
However, in the first quarter, the oil companies are experiencing both high crude oil prices and a decline in prices from the spike, which tends to help refining margins and feed-stock costs because, as crude oil prices fall from their highs, a company is better able to pass along the higher raw material costs to their customers, as anyone who has purchased gasoline lately knows all too well.
As a result of falling crude prices and low inventories, the second quarter is likely to be "refining nirvana," said Wilmington Trust Corp. portfolio manager Gene Pisasale.
ING Barings LLC analyst Jeff Berg expects independent refiners with the largest first-quarter gains will have either less exposure to lower marketing margins, such as Valero Energy Corp. (VLO) and Sunoco Inc. (SUN), or have a high degree of refining exposure on the East Coast, where margins were very strong due to a regional heating oil shortage in late January and early February.
Berg expects Sunoco, of Philadelphia, to earn 65 cents a share, and Valero, of San Antonio, to earn 75 cents a share in the first quarter. Berg's estimates are far above those reported by First Call/Thomson Financial, which reported a consensus estimate for Sunoco of 52 cents a share and a 53-cents-a-share estimate for Valero. A year ago, Sunoco earned 13 cents a diluted share, excluding a gain, while Valero had a loss of 5 cents a diluted share, excluding a refinery inventory writedown.
Berg also expects an upside surprise from Ultramar Diamond Shamrock Corp. (UDS), of San Antonio. His 75-cents-a-share estimate for the company compares with First Call consensus estimate of 59 cents a share. A year ago, Ultramar reported first-quarter earnings of 18 cents a diluted share on items.
Berg's estimates reflect the particular margin strength during the week of the March 27 Organization of Petroleum Exporting Countries meeting.
Most analysts expect the latest OPEC agreement will keep crude oil prices trading between $20 to $25 a barrel, which compares with crude oil's historic trading average of $18 to $20 a barrel.
The higher trading band should keep oil companies reporting strong earnings throughout the year, but first-quarter results will most likely be the peak of the cycle, said Fahnestock & Co. analyst Fadel Gheit. He believes the new trading band will give the oil industry a new lease on life, because it will allow the companies to make investments over a longer period of time.
Crude oil prices have been working themselves into the low 20's in an orderly fashion, Nowak said. He also believes the new trading band will be good for the industry. Nowak expects the pricing level will allow upstream profits, good downstream margins and could allow the chemical business to pick-up a little steam.
Gheit expects Texaco, of White Plains, N.Y., to have the best first-quarter numbers, with a 450% improvement over last year. Gheit's earnings estimate of $1 a share compares with First Call's estimate of 97 cents, and the company's earnings last year of 18 cents a diluted share, before items.
Nowak expects Kerr-McGee to earn $1.95 a share. The analyst's view tops the First Call consensus of $1.83 a share. A year ago, Kerr-McGee earned a 9 cents a share from continuing operations, excluding charges.
Kerr-McGee Corp. (KMG) is highly leveraged to crude and natural gas prices, said Eugene Nowak, an analyst at ABN AMRO Inc. For example, each 10-cent increase per thousand cubic feet in natural gas prices adds 13 cents a share to the company's yearly earnings, he said.
Deutsche Banc's Young expects Amerada Hess to earn $2.40 a share, up from 79 cents a share, including gains, a year ago. Wall Street is expecting the New York company to earn $2.21 a share in the first quarter, according to a First Call survey.
Supermajor Exxon Mobil Corp. (XOM), of Irving, Texas, is expected to post first-quarter earnings of 90 cents a share, according to First Call. The period will be the merged company's first full quarter of operations.
First-quarter earnings for Los Angeles-based Occidental Petroleum are expected to rise to 65 cents a share from a loss of 20 cents a share from continuing operations a year ago, said Young. His estimate compares with consensus estimates of 62 cents a share reported by First Call.
Despite the bright outlook for first-quarter earnings and recent rises in share prices, analysts say the sector is still undervalued.
With the likelihood that the integrated oil companies could all slightly exceed Wall Street estimates by a few cents, the market hasn't fully paid-up, said Al Ashcroft, co-portfolio manager for ARK Funds.
-By Christina Cheddar, Dow Jones Newswires; 201-938-5166; christina.cheddar@dowjones.com
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The companies just want oil above $22 a barrel. That's all.
Jack |
