Majors' estimated second-quarter earnings down from year ago

Second quarter earnings for major oil companies and refiners will prove much stronger than the lackluster first quarter but will still lag year-ago near-record levels, Lehman Bros. Inc. said.

By OGJ editors

HOUSTON, July 9 -- Second quarter earnings for major oil companies and refiners will prove much stronger than the lackluster first quarter but will still lag year-ago near-record levels, Lehman Bros. Inc. said. The majors will start reporting earnings in 3 weeks.

Lehman estimates that the 16 major oil companies and refiners that it monitors will earn an estimated $12.1 billion in the second quarter, down 40% from second quarter 2001, but an increase of 50% compared with the first quarter of 2002.

"Although the industry's second quarter outlook is far stronger than the dismal first quarter, we believe that current investor expectations are too high, and estimates will have to come down over the next several weeks to avoid any disappointments," analyst Paul Cheng said in a research note.

Fluid energy environment worldwide
The global energy environment has been extremely fluid, Cheng said. "Despite a relatively weak underlying balance of real demand and supply, oil prices have strengthened in April and May driven by several significant political events."

These events included Middle East tensions, an agreement by noil exporters outside the Organization of Petroleum Exporting Countries to extend their export cuts to the second quarter, Iraq's decision to suspend oil exports during April, and a brief disruption of Venezuelan oil operations, he said.

Crude oil prices averaged more than $26/bbl on a West Texas Intermediate spot market basis last quarter, or more than 20% higher than the prior first quarter level, he said. But oil prices started weakening toward the end of the quarter based upon economic concerns. Adding to the downward pressure, Iraqi oil exports resumed after the nation's voluntary April stoppage.

"That said, Baghdad appears to face an uphill battle to recapture its lost market share following this abrupt cessation and because of the unattractive retroactive pricing scheme mandated by the UN. At the same time, Russia and Norway announced the termination of their supply restraints under the OPEC-non-OPEC accord at the end of June. Venezuela has also once again become the market's wild card, as news emerged of increased deliveries after 4 months of tight discipline under OPEC's current minimal production targets, which added to the downward pressure," Cheng said.

Global refining market still depressed
Meanwhile, the global refining market remained depressed throughout the quarter. Margins fell sharply in April and May amid a combination of excess production, rising crude oil prices, and sluggish product demand, he said.

"Another contributor to the downward pressure in the US product market has been the record level of gasoline imports from Europe. Furthermore, although the US refining market has rebounded sharply from its lows in late May in response to a wave of run-cut announcements by the major industry players, the improvement came too little too late to have any meaningful impact on the quarter. In contrast, average US integrated marketing margins have increased sharply since early April and remain the only bright spot in the segment," he said.

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