Big Oil set to reap benefits of high prices

news.ft.com By Sheila McNulty Published: January 29 2003 0:31 | Last Updated: January 29 2003 0:31

Analysts expect strong fourth-quarter results from US integrated oil companies this week, in spite of uncertainties for the sector created by troubles in both Iraq and Venezuela.

Matthew Warburton, of UBS Warburg, expects significant improvements on both a sequential and year-on-year basis for the first time since the first quarter of 2001, noting the continuing strength in crude oil and natural gas prices, as well as the recovery in the chemicals business. These positives are to be offset partially by declines in refining and marketing margins.

Nonetheless, UBS forecasts net income for the US integrated oil companies to increase 59 per cent in the fourth quarter, over the period last year, to $6.2bn.

Mr Warburton says the sector could benefit from the crises in Venezuela and Iraq worsening, but he notes the sector is trading at a 23-year high. Combine that with oil prices above $30, the expectation of war in the Middle East and the equity market near its lowest level since 1997, and he sees little to drive "a sector outperformance".

In fact, some of the integrated companies, such as ConocoPhillips, are negatively exposed to Venezuela. Bruce Lanni, senior analyst at AG Edwards, says the strike there should have only a minimal impact on fourth-quarter production volumes and profits for ConocoPhillips, the third-largest US oil and gas company. But if the crisis persists, ConocoPhillips' exposure in the first quarter of 2003 could hit earnings.

The crisis is affecting ConocoPhillips through reduced runs associated with Venezuelan crude at its refineries, he says. The company will be affected in the fourth quarter by downtime related to a power failure at the Humber refinery in the UK.

In addition, Mr Lanni says, a fourth-quarter charge of up to $1.3bn is expected to cover the costs of divesting a large portion of its 2,500 retail sites - part of broader moves to unload non-core assets.

Bruce Schwartz at Standard & Poor's says ConocoPhillips is highly leveraged for its current A- credit rating, citing only $7.5bn to $8bn of normalised operating cashflow and $28bn of debt and debt-like obligations. He says S&P would look favourably on the completion of its plans to divest up to $4bn of non-core assets.

Mr Schwartz considers ChevronTexaco, the second-biggest US integrated group, one of the strongest companies in the oil and gas industry, with an AA credit rating.

Nonetheless, Deutsche Bank says ChevronTexaco also faces production risks related to Venezuela, as restoring oil production and refining after the crisis will be slow. Deutsche Bank predicts that, even if the strike ended now, there would be production shortfalls for those exposed through to at least the end of the first quarter of 2003 and implications for inventories in the second quarter.

That is expected to be offset, however, by upstream profits - forecast to be up more than 200 per cent, due to robust commodity prices and the realisation of synergies stemming from the 2001 merger of Chevron and Texaco, according to Mr Lanni.

Mr Schwartz says, when weighed against estimated annual merger synergies of $2.2bn, ChevronTexaco's missteps with non-core investments and political risk events, such as its Kazakhst an dispute, are unfortunate, but immaterial.

Write-downs associated with ChevronTexaco's investment in Dynegy should be minor, Mr Lanni says, compared with the $1.5bn write-down taken in the third quarter of 2002.

ExxonMobil, the biggest US oil and gas company, maintains an AAA credit rating, and Mr Schwartz says it remains the "pre-eminent company in the oil and gas industry". Its financial profile is outstanding, he says, with little net debt.

Mr Lanni says ExxonMobil's sharply higher upstream earnings are expected to more than offset weaker refining and marketing profits versus levels a year ago. And refining margins are improving.

Deutsche Bank notes that ExxonMobil's much improved downstream and chemicals businesses have only ever operated in a low margin environment and could provide the earnings upside into 20 03.