Chevron hits snag, posts dip in profit: Company says high crude prices cut into third-quarter earnings

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Contra Costa Times (California)

Flat gasoline prices and record-high costs for refinery crude oil jolted Chevron Corp.’s earnings, causing the East Bay energy giant to report on Friday its first slump in third-quarter profits in five years.

Some analysts suggested San Ramon-based Chevron is not efficient enough in how it operates its U.S. refineries, including the company’s factory in Richmond. The analysts said frequent outages and other malfunctions sometimes hobble Chevron refineries and may have contributed to the company’s third-quarter struggles.

Chevron earned $3.72 billion, or $1.75 a share, during the July-September quarter. That was down 26 percent from the $5.02 billion that Chevron earned in its third quarter of 2006.

Chevron‘s shares fell 56 cents, or 0.6 percent, to finish at $88.48.

Why the slump? Chevron had to pay more for sharply rising prices for crude oil it uses to make refined products such as gasoline. At the same time, prices for gasoline didn’t rise nearly as briskly.

“Earnings declined due mainly to weak refining and marketing conditions in the United States,” David O’Reilly, Chevron‘s chairman and chief executive, said in a prepared release.

Earlier this year, Chevron harvested a bumper crop of profits from its refinery and marketing operations. Until August, for every dollar rise in the per-barrel price of crude oil, gasoline prices went up about 3 cents, said David James, senior vice president with James Investment Research. After August, the pattern was broken, he said.

“A big disconnect has occurred,” James said. “There has been a huge rise in the price of oil, but not a corresponding rise in the price of gasoline.”

This supply-cost problem was particularly acute on the West Coast, Chevron officials said.

“The cost of bringing crude from long distances to our California refineries was expensive,” said Donald Campbell, a Chevron spokesman. “Gasoline prices didn’t move enough in the quarter to help us make enough money to overcome what we paid for crude oil.”

In the third quarter of 2007, Chevron‘s domestic refinery operations lost $110 million. But for the same quarter the year before, the refineries powered to a profit of $831 million. That means the U.S. refineries went from a profit of $9.2 million a day a year ago to a loss of $1.2 million a day this summer.

“It was a tough quarter,” Campbell said. “But we’re working through this.”

Despite the profit erosion, a consumer group claimed Chevron remains a remarkable profit machine. The Foundation for Taxpayers & Consumer Rights said Chevron is still on pace to vault to a record annual profit.

“No one outside Wall Street can weep for Chevron or any of the other major oil companies,” said Judy Dugan, the consumer group’s research director.

Some analysts say Chevron has inflicted wounds on itself because its refineries are plagued by breakdowns.
Chevron has experienced weak reliability on a chronic basis,” said Mark Gilman, an oil and gas analyst with Benchmark Co. LLC. “Chevron‘s operating reliability for their U.S. refineries has been unsatisfactory.”

Chevron does have some problems with operating its refineries, but I would not say that is management’s fault,” James said. “We have not built a new refinery in the United States in quite some time. Oil companies have to run some refineries full out until they can’t go any more.”

Executives at Chevron countered that it has curbed breakdowns.

“Incidents per quarter to our largest operated refineries have fallen more than 50 percent since 2005,” Mike Wirth, a Chevron executive vice president, said during a conference call Friday with analysts. The company suffered 27 such incidents per quarter in 2005, 16 a quarter in 2006 and 11 per quarter in 2007.

Chevron is launching upgrades at all its U.S. refineries, including Richmond. At the West Contra Costa refinery, Chevron will replace a hydrogen plant, install a new gasoline reformer unit and add a co-generation plant.

“Richmond will operate more reliably, we will be more energy-efficient, and we will be able to produce more California-grade gasoline,” said Camille Priselac, a Chevron spokeswoman.
George Avalos covers jobs, economic development, commercial real estate, finance and petroleum. Reach him at 925-977-8477 or [email protected]

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