Momentum Could Fade in the Wake of Crude’s Steep Price Decline
The oil-profit gusher continued Tuesday with Westwood-based Occidental Petroleum posting a 72% boost in earnings for the third quarter on higher production and oil prices that nearly touched $150 a barrel. Oil giant BP reported an 83% jump in net income.
In spite of the earnings that one oil critic referred to as "outlandish," the challenge for Occidental and BP is maintaining momentum in a market that has changed so much that the quarter "feels like distant history," as Byron Grote, BP’s chief financial officer, put it. Still, both companies said they expected to do well despite sharply lower energy prices.
Crude oil for December delivery fell 49 cents to $62.73 a barrel Tuesday on the New York Mercantile Exchange, unable to rally even though the Dow Jones industrial average soared almost 900 points. Oil futures have fallen more than 50% from July’s peak.
"It was a great quarter for Occidental and BP thanks to high energy prices, but that is over in terms of earnings going forward. It’s a new game now," said Fadel Gheit, senior energy analyst at Oppenheimer & Co.
Gheit said Occidental and BP should benefit from their conservative outlooks at the expense of more aggressive rivals that based their long-term plans on oil staying at least in the $80- to $100-a-barrel range. "Both have relatively low cost structures and low production costs," Gheit said.
Analyst Phil Weiss of Argus Research said that better-managed oil companies such as Occidental and BP tend to crunch their numbers based on exceedingly conservative estimates of how the oil market was going to perform. He said that didn’t change even if oil surged to record levels. Occidental uses a price below $60 a barrel and BP does projections on oil as low as $40 a barrel.
Occidental Chief Executive Ray Irani said as much during the earnings conference call with analysts: "We feel quite comfortable that at $57 a barrel we’ll still have free cash flow."
Another round of record oil company profits has inflamed critics.
Speaking specifically about BP, Santa Monica-based Consumer Watchdog said the British company "rode the wave of the crude oil price spike to a staggering profit jump in the third quarter of 2008. It is a stark reminder of the damage inflicted by energy costs on a world economy that was heading into recession."
Last week, ConocoPhillips said third-quarter earnings rose 41% to $5.2 billion. Hefty profits are expected Thursday from Exxon Mobil Corp. and Friday from Chevron Corp.
Occidental’s net income for the three months ended Sept. 30 climbed to $2.3 billion, or $2.78 a share, from $1.3 billion, or $1.58, a year earlier, easily beating the average $2.71 a share estimated by analysts polled by Thomson Reuters. Sales rose 46% to $7.1 billion.
Its oil and natural gas output rose 3.2% to the equivalent of 588,000 barrels of crude a day, lead by improvements in Qatar, Oman and the U.S.
BP’s net profit advanced to just under $8.1 billion, or 43 cents a share, from $4.41 billion, or 23 cents, a year earlier. Revenue rose 45% to $103.2 billion.
Occidental shares gained $7.62, or 18%, to $49.70, while BP rose $6.37, or 16%, to $46.52.
Contact the author at: [email protected]