Low Oil Prices, Yet High Oil Profits (OXY, BP, VLO, COP)

October 28, 2008 by Douglas A. McIntyre

Oil_refinery_image_2Oil_well_logo_2_2This has been a very sketchy earnings season, and the crazy stock markets have offered very little help in being able to evaluate many companies.  But despite the massive drop in oil prices from over $140 per barrel down to almost $60 per barrel, we are seeing some rather impressive earnings from companies in the oil patch.  With the huge sell-offs seen in most major oil companies, refiners, and service providers may start to offer some stability where investors have seen nothing but volatility and instability. 

Occidental Petroleum (NYSE:OXY) today reported third quarter earningsof $2.271 billion (EPS of $2.78), up more than  70% from the year-agoperiod. Revenues were up to $7.06 billion. Analysts were anticipatingEPS of $2.71 and revenues of $6.49 billion. Worldwide production was up3% over the third quarter of 2007.

What really made the difference, though, was sky-high realized prices.Worldwide crude prices averaged $104.15/b, up more than 53% from theyear-ago price of $67.81. Domestic natural gas prices were up from$5.90/thousand cubic feet a year ago to $9.35 this year.  Occidental shares are up 4.5% at $44.02.

BP plc (NYSE:BP) also reported earnings this morning. The company’snumbers are huge: net profit of $8.05 billion on revenues of $103.2billion. EPS jumped to $0.534 from $0.213 a year ago. The earnings onBP’s depository shares (equal to six ordinary shares) equaled $3.21/ADS.  BP shares are up over 7% at $43.20.

BP’s refining and marketing operations posted a profit of $1.972billion, based entirely on remaining inventories. The refiningoperations posted an operating loss before taxes and interest of $823million, even though throughput was slightly higher this year. As crudeprices fall, it will put pressure on refining and marketing to live upto this performance.

We’ve already posted a report on earningsfrom Valero (NYSE:VLO), noting that EPS blew by analysts’ estimates.The falling price of crude certainly helps refiners increase margins,but the big gainer for refiners lies in distillate prices. Fuel oilprices are expected to remain high through the winter, and demand fordiesel, especially exports to Europe, should remain strong. Gasolineinventories are coming back into line with demand and that contributesto more stable margins.  Valero shares are up 6% at $16.02 today.

ConocoPhillips (NYSE:COP), which reported earnings last week, alsoshowed a sequential increase in refining profits, but a much lowerprofit year-over-year. Refinery utilization reached 87%, down from 93%in the previous quarter and from 94% in the same period a year ago.Realized margins were also lower due to reduced differentials for heavycrude and inventory issues. Where Valero was able to make itsinventories work in the company’s benefit, neither BP norConocoPhillips could achieve the same result.  ConocoPhillips shares are the laggard today, but shares are still up 1% at $46.20.

Sustained lower prices for crude oil will likely put pressure on profits forConocoPhillips, BP, and Occidental in the fourth quarter. Valero,however, should realize some benefit. This situation is a fullturnaround from the last few quarters. As usual, though, the price ofcrude will drive everything.  If the price of oil can find a stabletrading range rather than sharp directional moves where not evenindustry insiders know the rules, then oil stocks up and down will belooked at for earnings stability.

Paul Ausick
October 28, 2008