Continued high oil prices are expected to boost fourth-quarter earnings of ExxonMobil Corp., Chevron Corp. and ConocoPhillips. However, profits of the three-largest U.S. oil companies by market value will be capped by sluggish results from their refining arms and depressed prices for natural gas.
The three oil giants will post billions more in profits than they did in the fourth quarter of 2010, thanks to higher oil prices. But their "downstream operations"—which purchase crude to process into petroleum products such as gasoline and diesel—are likely to report a significant drop in gains. While oil prices rose steadily during the quarter, fuel demand was flat, which eroded refining margins.
West Texas Intermediate—which is the U.S. crude benchmark that determines the price of the oil some large refineries process—rose 10.44% to an average of $93.99 a barrel in the three-month period ended Dec. 31, compared with the same quarter a year earlier.
Chevron warned investors Jan. 11 that its refining segment could post zero profit in the fourth quarter, compared with the prior quarter, when its refining operations posted $1.5 billion in profit. The San Ramon, Calif.-based company is scheduled to report earnings on Friday. ConocoPhillips precedes Chevron with an earnings report slated for Wednesday. Exxon is scheduled to release its earnings on Jan. 31.
Fourth-quarter results will be a reminder that higher oil prices can be a double-edged sword for major U.S. oil companies, said Stacey Hudson, an analyst with Raymond James. Soaring commodity prices can swell companies' exploration-and-production segment, but at the same time their huge refining arms can be hit. Exxon, Chevron and ConocoPhillips are some the largest refiners in the U.S.
Exxon, Chevron and ConocoPhillips's results are also expected to be hit by low natural-gas prices, which in the fourth quarter traded at an average of $3.50 per million British thermal units, below the $4/MMbtu it traded at in the same period of 2010.
Natural-gas prices have continued to fall as domestic supplies rise, driven by the development of shale resources across the U.S. The three companies have recently made large investments in shale natural-gas resources, betting that natural-gas prices will eventually rebound. Their earnings, however, haven't yet benefited from these investments, said Fadel Gheit, an analyst with Oppenheimer & Co. For example, Exxon paid $25 billion for natural-gas producer XTO Energy in 2010, but has seen its bottom line suffer because of persistently low natural-gas prices.
Other factors may also damp profits. UBS analyst William Featherston estimated that fourth-quarter production for Exxon, Chevron and ConocoPhillips will drop an average of 6% from the same quarter in 2010, mainly due to the lower productivity of aging fields.
ConocoPhillips's fourth-quarter production will be especially hit by the curtailment of its production in Libya due to political unrest, Mr. Featherston said.
Despite the drop in output,Exxon, Chevron and ConocoPhillips are expected to see their exploration-and-production segment boosted by a jump in the price of Brent crude, the European benchmark. These companies used Brent to price the bulk of their massive international production. In the fourth quarter, Brent climbed 28% to an average of $109.06 a barrel from the same quarter of 2010.
read more: Olympus Wealth Management
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