'Feast of riches' may be over for oil companies
April 18th, 2007 by 
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HOUSTON: Oil companies are scheduled to report fourth-quarter earnings in a few weeks, and Wall Street analysts are already saying the results will disappoint many investors.
Most energy companies’ stock prices rose steadily in the past few years as oil prices more than doubled since the beginning of the decade, reaching more than $78 a barrel in July.
But with oil prices plummeting, several Wall Street analysts have predicted that large integrated companies, refiners and smaller independent companies will report significant declines in profit next month.
In early Friday trading, crude oil for February delivery rose 82 cents to $52.70 a barrel in electronic trading on the New York Mercantile Exchange after falling $2.14 to $51.88 on Thursday.
“It’s not going to be very pretty,” said Fadel Gheit, senior energy industry analyst at Oppenheimer. “There will be no more record earnings.”
The predictions of disappointing earnings are based on the fact that the average spot price for benchmark crude fell to $60.06 in the fourth quarter of 2006 from $70.56 in the third quarter. And that slide came as OPEC announced two production cuts in two months at the end of last year.
“Everyone is looking for the bottom,” said Michael Rose, director of the energy trading desk at Angus Jackson in Fort Lauderdale, Florida. “But where is the bottom? Is it $50 a barrel, $40, $30? Nobody knows.”
Muhammad bin Dhaen al-Hamli, energy minister of the United Arab Emirates and president of the Organization of Petroleum Exporting Countries, said OPEC would move to prop up prices if necessary, according to the Emirates News Agency. “OPEC will act to stabilize the market if needed,” the news agency quoted him as saying.
But few American analysts seemed to take his implied warning of possible future production cuts very seriously.
“We’re looking at inventories that are very full,” Rose said. “Even if we have a cold snap, we have the reserves.”
Most analysts say oil prices have declined in part because of unusually mild winter weather until recently in much of the United States and Europe and because of conservation efforts by business and consumers.
Even as OPEC scrambles to defend prices by trying to curtail production, most analysts say they believe that the cartel’s effect will be limited. With oil prices having fallen about 10 percent in the past few weeks, several companies have already alerted investors that their feast of riches is over, at least for now.
ConocoPhilips said last week that its refining and marketing margins could drop in the fourth quarter by as much as 25 percent.
Chevron said this week that its average selling price for crude oil had dropped to $52.26 from $63.98 in the third quarter.
BP has reported that its fourth- quarter daily oil production declined in the most recent quarter to 3.82 million barrels from 4.02 million barrels. Part of BP’s problems come from its inability so far to start production at the Thunder Horse platform in the Gulf of Mexico, which was damaged by hurricanes in 2005.
Most of the big producers have been hurt by increased labor and service costs and by declines in oil and natural gas output in mature fields in North America and the North Sea. Many companies urgently need to modernize and otherwise reinvest in pipeline networks and refineries. Meanwhile, the companies’ increasing dependence on finding reserves in unstable areas like Venezuela and Nigeria creates higher security costs.
In recent years, many of those problems were negated by the rising commodity prices of oil and gas and by share buybacks that increased the value of their stock.
Analysts are divided on whether the expected tail-off in energy earnings will be temporary or more lasting. And while they acknowledge that oil prices are basically unpredictable, they say there is little sign of an immediate rebound because U.S. inventories of crude oil are 7 percent higher than the five- year average of 315 million barrels reported by the U.S. Energy Department.
“I think this is a seasonal pullback,” said Nicole Decker of Bear Stearns, who predicts a rebound in the spring.
She said the current drop had pushed oil prices down to levels roughly equivalent to those a year earlier.
Gheit, the Oppenheimer analyst, said he expected further pressure on oil prices. “I see prices drifting lower, barring international crises,” he said, then quickly added, “I would not rule out $80 oil if we invade Iran.”
Gheit said he expected to see the largest earnings declines among independent companies and petroleum refiners because of lower refining margins. He said the refiners like Tesoro, Sunoco and Valero and Frontier could report some of the sharpest drops in earnings.
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