UBS Warburg: US integrated earnings to show robust growth in first quarter

April 23, 2003
US integrated oil companies' upcoming first quarter results are expected to mark the highest level of improvement for the sector in 3 years, UBS Warburg LLC said.

By OGJ editors

HOUSTON, Apr. 23 -- US integrated oil companies' upcoming first quarter results are expected to mark the highest level of improvement for the sector in 3 years, UBS Warburg LLC said.

Analyst Matthew Warburton said the anticipated robust growth stemmed from significant increases in crude oil and natural gas prices as well as a substantial recovery in refining and marketing performance.

"We believe these factors should more than offset expectations for substantially weaker chemical earnings and poor US refining results experienced in January," he said in an Apr. 16 research note.

In its first quarter earnings preview, UBS Warburg forecast adjusted net income will increase 172% vs. first quarter 2002 to $8.8 billion for the eight US integrated oil companies in its coverage universe.

"We currently forecast a 46% year-over-year earnings increase in 2003. Thereafter, given our oil and natural gas price forecasts, normalized R&M margins, and a
recovery in chemical fundamentals, we forecast sector earnings to decline 12% in 2004 and 6% in 2005," Warburton said.

Upstream
Geopolitical tensions and market fundamentals strongly supported first quarter crude oil and natural gas prices, he said.

This included uncertainty before the military action against Iraq, a slow return of Venezuelan oil exports following the general strike, low US inventories, the interruption of Nigeria production in March, and colder than normal winter weather in Europe and North America.

"Although we estimate the sector's worldwide oil and gas production to decline by 4% (on a boe basis) year over year, this is expected to be more than offset by higher realizations, and we forecast the sector's first quarter 2003 (exploration and production) earnings to increase by 103% year over year ¿ to $8.4 billion," Warburton said.

Downstream
Tight US product inventories and a high level of seasonal refinery maintenance were among various factors driving a recovery in average first quarter 2003 refining margins across both the US and international markets, he said.

"In aggregate, we forecast the sector's first quarter 2003 R&M earnings to be $1.6 billion, reversing the $212 million loss sustained in first quarter 2002," Warburton said of the UBS forecast.

He expects a progressive recovery in refining margins through 2003.

"The near-term outlook for the US refiners is particularly favorable with finished product stocks near their multiyear lows and the expected continued strength of coking margins with the surplus of heavy crude volumes because of OPEC overproduction," he said of the Organization of Petroleum Exporting Countries.