US integrated oil companies' 3Q earnings to decline 20% YOY

By OGJ editors

HOUSTON, Oct. 22 -- US integrated oil companies' third quarter adjusted net income will decline 20% vs. third quarter 2001 figures, reflecting weaker refining margins and limited exploration and production volume growth, an analyst forecast.

"Individually, we expect (third quarter) company earnings to fall 11-46% (year-on-year), with the larger declines for those companies more leveraged to refining margins," UBS Warburg LLC analyst Matthew Warburton in New York said in a research note.

On a more positive note, he anticipates a rebound in earnings momentum for the integrated sector, saying he expects the third quarter to be the last quarter of negative YOY earnings momentum.

"We currently expect aggregate adjusted net income for the US oil majors to increase by 79% (YOY) in (fourth quarter 2002), marking the first quarter with positive (YOY) momentum since (second quarter 2001)," Warburton said. The first quarter of 2002 experienced the most pronounced downturn across all industry segments.

"Given our oil and natural gas price forecasts, normalized (refining and marketing) margins, and a further improvement in chemical fundamentals, we forecast earnings to rise 22% (YOY) in 2003 and fall 7% in 2004," he said.

Upstream
West Texas Intermediate oil prices in the third quarter were the highest since the second quarter of 2001, reflecting both a tightening of petroleum markets and uncertainty regarding potential military action in Iraq, he said.

"Nonetheless, we expected adjusted E&P earnings to decline 1% vs. (third quarter 2001) to $5.1 billion due to lower international natural gas realizations, upward cost pressures, and the absence of Conoco (Inc.)'s earnings during July-August," Warburton said.

Conoco and Phillips Petroleum Co. completed a $15 billion merger during the quarter (OGJ Online, Aug. 30, 2002). ConocoPhillips will supply proforma operation and volumetric data for the third quarter 2002 but UBS Warburg does not expected any proforma financial data for that quarter.

"This will negatively bias financial comparisons for business segments and results for the sector as a whole," UBS Warburg said.

Refining and marketing
Refining markets stayed depressed during the third quarter and weakened in the US and Asia, Warburton said. He forecast that refining and marketing earnings for the third quarter will decline 67% YOY to $700 million.

"As experienced in (the first half), margins were hampered by limited growth in overall product demand and more than ample oil product inventories, which in turn prevented refiners from recovering rising crude oil costs," he said.

But, he believes refining margins and minimal growth in refinery runs will be partially supported by more stable retail marketing contributions across most regions.