IN THE NEWS / Big Oil Set For Lousy Quarter, Ponders Recovery
Big oil is set for a miserable third quarter, but that should come as
no surprise since oil has tumbled by nearly 30 percent in the last
year to an average spot price of $14.00 a barrel for the West Texas
Intermediate blend.
To make matters worse, analysts say there will be little help from
U.S. refining operations, which had been responsible for some positive
earnings surprises in the first two quarters of this year.
''U.S. refining and marketing margins have not fully benefited from
lower crude oil prices. We expect a sizable negative year-over-year
comparison in the U.S. R&M sector,'' said Eugene Nowak, analyst at ABN
AMRO Inc.
Analysts say earnings for the world's biggest oil companies will fall
some 50 percent from a year ago, and the main question facing the
industry is not just how bad this quarter will be, but whether a
recovery in oil prices is sustainable.
That is the rub.
Some analysts say that 2.6 million barrels per day of output cuts from
the world's leading oil producers will eat into glutted inventories
and put a floor under oil prices, creating a floor for prices.
Others say that a looming global recession will damage demand so much
that oil prices will not recover.
''While operating earnings per share for the U.S. major oil group are
expected to be very disappointing in third quarter 1998 (down an
average of 57 percent from a year ago), it seems likely that earnings
will pick-up going forward,'' said Adam Sieminski, analyst at BT Alex
Brown.
Among the companies best situated to deal with the third quarter
malaise are the biggest of the international integrated oils such as
Exxon Corp (NYSE:XON - news) and Mobil Corp (NYSE:MOB).
Analysts are projecting earnings per share of $0.57 for Exxon versus
$0.73 a year ago and $0.61 for Mobil, down from $1.11, according to
First Call.
Mobil should also benefit from continued savings in its European
refining and marketing venture with British Petroleum Co Plc (UK &
Ireland: BP.L) which aims to generate $170 million annual pretax
savings in 1999.
Sieminski says that Chevron Corp (NYSE:CHV) will show a smaller
decline than most because of the weakness of West Coast gasoline
markets in the year ago quarter.
Analysts are looking for $0.63 from Chevron versus $1.11.
The worst performers will be those companies which have the highest
exposure to the fall in crude oil prices, such as Unocal Corp
(NYSE:UCL) and ARCO (NYSE:ARC).
ARCO will show some of the worst comparisons among big companies
because of the sale of ARCO Chemical and dilution from the acquisition
of Union Texas Petroleum Holdings.
Michael Mayer of Schroder & Co is looking for $0.15 per share from
ARCO, compared with a consensus of $0.20 according to First Call and
an adjusted $1.32 per share a year ago.
Unocal recently issued a profit warning saying that because of oil
price weakness and higher expenses, it may earn less that $0.10 per
share in the third quarter, compared with early expectations of
$0.20 per share and year-ago comparisons of an adjusted $0.38 in the
third quarter and $0.26 in the second.
Since then, the average estimate on First Call has dropped to $0.07,
with the range as low as as $0.04.
Given the fact that oil companies envision such a bad quarter, there
are expected to be few earnings surprises on the downside, although
James Falvey at Dresdner Kleinwort Benson warns that Phillips
Petroleum Co (NYSE:P) may disappoint due to lower than expected
production.
''There are concerns about Phillips production profile,'' said Falvey.
Phillips, which is forecast to earn $0.36 per share in the third
quarter, down from $0.94 a year ago, said late last week that oil and
natural gas production from its key Ekosfisk II field in the Norwegian
North Sea was down 10 percent and 40 percent respectively in the third
quarter.
Elsewhere, Nowak at ABN AMRO Inc says that Kerr-McGee Corp (NYSE:KMG)
may do better than expected if foreign exchange losses due to the
strength of sterling are less than anticipated.
He said estimates of the foreign exchange impact were now $5.0
million, or $0.10-$0.11 per share, down from $9.0 million or $0.19
per share.
He is looking for Kerr-McGee to earn $0.12 a share, down from $0.71 a
year ago.
Texaco Inc (NYSE:TX) will also see a negative foreign exchange impact
from the pound, and analysts are looking for earnings per share of
$0.43, down from $0.91 a year ago.
Still, Texaco may see some of the benefits of its U.S. refining
ventures with Shell Oil Co.
Looking forward, Mayer at Schroder is maintaining 125 percent of
market weight for major oils as he believes 80-85 percent compliance
with cuts announced by the Organization of the Petroleum Exporting
Countries will result in a 1.5 million barrels per day reduction in
inventories in the fourth quarter and 0.5-1.0 million bpd in the first
quarter of 1998.
''This will eliminate over 75 percent of the inventory surplus that
has built up over the past year, and lead to higher oil prices and
continued outperformance by the group,'' Mayer said.
Nowak at ABN AMRO is forecasting a 35 percent fall in industry
earnings in 1998, but says they will rebound by 25 percent or more in
1999 as crude oil prices improve by $1.65-$2.00 per barrel
Michael Young at Deutsche Bank Securities is bearish.
He sees world oil demand dropping by 200,000-500,000 barrels per day
in 1999, adding to the already poor industry fundamentals, and sees
earnings power eroding further as refining and marketing margins come
under pressure.
''What really matters, in our view, is that the earnings environment
for the integrated oil industry does not get any better in 1999. We
continue to forecast that integrated oil company earnings will be down
30 percent versus current consensus expectations,'' he said.
Company Q3 1998 Est Q3 1997 Actual
Amerada Hess (NYSE:AHC) -$0.25 (loss) $0.13
Amoco Corp (NYSE:AM) $0.33 $0.65
ARCO (NYSE:ARC) $0.20 $1.57
Chevron (NYSE:CHV) $0.63 $1.11
Exxon (NYSE:XON) $0.57 $0.73
Kerr-McGee (NYSE:KMG) $0.16 $0.83
Mobil (NYSE:MOB) $0.61 $1.11
Occidental (NYSE:OXY) $0.00 $0.57
Pennzoil (NYSE:PZL)
Phillips Petroleum(NYSE:P) $0.36 $0.94
Texaco (NYSE:TX) $0.43 $0.91
Unocal (NYSE:UCL) $0.07 $0.38
USX-Marathon (NYSE:MRO) $0.37 $0.58 |
