US integrated oil companies' earnings to rise in fourth quarter

By OGJ editors

HOUSTON, July 19 -- US integrated oil companies' second quarter earnings are expected to be down 37% from the second quarter 2001, reflecting weaker refining margins and lower oil and natural gas prices.

But the sector is expected to demonstrate drastic earnings momentum in the fourth quarter, said Matthew Warburton, an analyst with UBS Warburg LLC. USB Warburg covers eight US integrated oil companies.

"We currently expect aggregate adjusted net income for the US oil majors to decline year-over-year by 6% in (the third quarter) and then rise 56% in (the fourth quarter). Thereafter, given our oil and natural gas price forecasts, normalized refining, and marketing margins, and a further improvement in chemical fundamentals, we forecast y-o-y earnings to rise 19% in 2003 and fall 2% in 2004," Warburton said.

The US integrated sector appears to have "weathered the worst of the storm," he said, predicting second quarter 2002 results will mark the first period since the second quarter 2001 "where aggregate results have increased sequentially." This year, second quarter earnings are expected to be 78% higher than first quarter earnings.

Upstream
"Geopolitical tensions in the Middle East and Venezuela, short-term/localized squeezes, and the activity of non-commercial traders in the oil futures market distorted prices (in the second quarter 2002) while contributing to significant oil price volatility," Warburton said. "However, it was the underlying prospect of tightening physical crude markets that supported prices above $25/bbl (West Texas Intermediate) for the bulk of (second quarter 2002)."

Global inventories have remained stable, which is atypical for the second quarter when oil demand normally declines worldwide, he said.

Downstream
Crack speads remained under substantial pressure in the second quarter, causing refining margins to suffer, Warburton said.

"Weaker demand y-o-y for oil products and ample inventories prevented refiners from recovering rising crude oil costs, particularly for heavy, sour barrels. However, we believe that poorer refining results y-o-y and anemic growth in underlying refinery throughput will be partially offset by stronger marketing contributions in most regions," he said.

USB Warburg expects refining and marking earnings will be well below last year for the US integrated companies that it covers, with aggregate results falling by 70%. The comparison between second quarters for 2002 and 2001 is especially stark because the second quarter 2001 marked a peak in refining profitability over the last decade.

"Yet following the dismal environment in (first quarter 2002), during which seven of the eight US oil majors posted losses in their R&M divisions, (second quarter 2002) results are likely to show a recovery, supported mainly by better marketing margins, and to a lesser extent an upturn in refining," he said.

US refining margins remained well below midcycle in the latest quarter, reflecting the lingering problems of surplus product inventories in the Atlantic basin and reduced overall demand for petroleum products, he said.