Hefty Profits Leave Big Test for Oxy, BP
Momentum Could Fade in the Wake of Crude’s Steep Price Decline
October 29, 2008
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.
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