Mobil, Conoco, Amoco 2nd-Qtr Earnings Sink, Yet Stocks Rise
Fairfax, Virginia, July 22 (Bloomberg) -- Investors brushed
off big drops in second-quarter earnings reported by Mobil Corp.,
Amoco Corp., and Conoco Inc., bidding up stocks of integrated
petroleum companies on optimism that oil prices will climb.
Amoco, the fifth-largest U.S. oil company, reported a worst-
than-expected 36 percent drop in earnings, while Mobil, the
second-largest, met expectations that its earnings would fall 25
percent. At Conoco, the oil arm of chemical giant DuPont Co.,
earnings fell 27 percent.
Investors bet oil companies hit bottom in the second
quarter, and sent the Standard & Poor's index of the six largest
U.S.-traded oil companies up 16.13, or 2 percent, to 812.33.
''It's not because earnings are strong. Investors are
anticipating that oil prices will rise in the second half of the
year,'' said Douglas Terreson, Houston-based analyst with Morgan
Stanley Dean Witter, who has an ''outperform'' rating on Amoco.
Oil prices have averaged 28 percent lower this year than
last, decimating the profits of companies that sell oil.
Yesterday, Exxon Corp., the largest U.S. oil company, yesterday
said second quarter earnings fell 18 percent while Texaco Inc.
said its profit fell 24 percent. On Monday, Occidental Petroleum
Corp. said earnings fell 66 percent.
Now some investors are betting the bad earnings news has
left stocks of integrated oil companies undervalued, Terreson
said.
Mobil surged 1 9/16 to 75 3/16 while Exxon rose 1 5/8 to 71
13/16. Texaco rose 2 1/16 to 60 3/4, adding to gains that came
yesterday after it reported earnings well above estimates. Amoco
rose 1/16 to 40 1/4.
Rosy Scenario
Oil prices would have to climb to boost industry earnings.
After more than a decade of firings and asset sales, oil
companies are near the limit of how much they can reduce expenses
and need to increase revenues, analysts say. So far, the markets
are showing few signs of an oil-price revival.
''People are saying the third quarter will average $15 a
barrel. Here we are 22 days in the quarter, and we've got a ways
to go to get there,'' said Mark Gilman, managing director and oil
analyst at Furman, Selz Llc., who has a ''sell'' recommendation
for most large oil companies.
Oil prices rose 11 cents to $14.16 on the New York Mercantile
Exchange today. That's lower than the average price of $14.67 a
barrel in the second quarter, the worst level for any quarter
since 1986. Investors are counting on OPEC cuts in output,
announced in June, and a revival of ailing Asian economies to
boost prices and demand.
Though key OPEC nations have always cheated on their quotas,
prices are so low that members face economic hardship and
possible political turmoil if they don't comply. Some analysts
expect production cuts to lift prices in the fourth quarter.
''We'll start to see an uptrend in oil company earnings as we
go into 1999, unless Asia continues to decline,'' said John
Segner, vice president and portfolio manager at Invesco Strategic
Energy Fund.
Integrated companies are more attractive to investors now
than companies that do nothing but sell oil, analysts said. The
big companies' often have refining and chemical units that can
see earnings climb when prices for oil, a raw material for their
products, fall.
''The investor psychology has been you're better off with
these guys if you're looking at being involved in oil,'' said
Norman Rosenberg, an analyst with S&P Equity Group who doesn't
expect to see oil prices above $16 by year end.
Amoco Corp.
Chicago-based Amoco earnings fell to $395 million, or 41
cents a share before a gain and a charge, from net income of $622
million, or 63 cents a share in the year-earlier quarter.
Earnings missed expectations by 5 cents, based on the
average estimate of analysts polled by First Call Corp.
Exxon and Texaco posted smaller declines than Amoco because
they have international refining and fuel sales operations that
Amoco lacks. Profit margins for refining surged during the
quarter, especially outside the U.S.. That eased the impact of
lower oil prices on Exxon and Texaco.
Amoco revenue fell 9.9 percent to $7.77 billion from $8.62
billion the year-earlier. Amoco said it received about $5 a
barrel less for crude oil than it got a year ago.
Amoco hinted it's not counting on higher prices to boost
earnings. Its chairman, H. Laurance Fuller, said in a statement
the company may have to further reduce costs and capital
spending.
The company already has cut back on spending for oil
exploration, and it's still implementing a cost-cutting program
that it started in 1994.
Amoco's net income during the second quarter was $287
million, or 30 cents a share, after a $214 charge for impairment
of the value of operations in Colombia, and a $106 million gain
related to tax adjustments for Canadian operations.
Amoco's overseas oil and gas production operations lost $35
million, compared with a profit of $67 million a year ago.
Mobil Corp.
Earnings for Mobil, based in Fairfax, Virginia, fell to $655
million, or 81 cents a diluted share, from $870 million, or
$1.07, in the year-earlier quarter. Mobil was expected to earn 80
cents a share, according to an analyst survey conducted by First
Call Corp.
Profit margins rose for Mobil's refining and fuel sales in
the U.S. and Europe, preventing it from posting a bigger decline.
It's percentage of revenue from refining is smaller than Exxon's,
however.
''Mobil has a hard time matching Exxon. Exxon is less
leveraged to the price of oil,'' said Albert Anton, a research
partner at Carl H. Pforzheimer & Co. in New York.
The second-largest U.S. oil company reported a charge of $13
million for start-up costs associated with the Mobil-British
Petroleum Co. European refining and fuel sales alliance,
resulting in net income of $642 million, or 79 cents a share
diluted.
Mobil's 1997 quarter included a charge of $20 million for
costs related to the BP alliance, bringing net income to $850
million, or $1.04.
Conoco Inc.
Houston-based Conoco Inc.'s second-quarter profit fell 27
percent to $180 million from $246 million in the year-ago
quarter. Second-quarter revenue fell 3 percent to $4.71 billion
from $4.86 billion.
While lower oil prices hurt Conoco's crude oil production
results, refining and sales profits rose 8 percent to $95
million, mainly because the company boosted refinery runs in
Europe.
DuPont said earlier this year it would gradually shed
Conoco, starting by selling a 20 percent stake to the public.
The sale of the initial stake is expected to bring in as
much as $3 billion, making it one of the largest initial public
offerings ever. Analysts value Conoco at $15 billion to $30
billion.
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