Oil Firms Tread Cautiously in Current Profit Reports : Consumers: In the gulf crisis pinch companies fear making too much money more than they fear losing it.
As motorists grouse about rising gasoline prices and legislators call for windfall-profits taxes, the only thing an oil company fears more than a financial loss is a financial gain that looks too good.
By that standard, the oil industry can breathe easy. Third quarter earnings reports, many released last week, show a mixed bag of profit increases and declines.
Los Angeles-based Unocal Corp. reported its earnings up 53% to $121 million, but Exxon Corp., the nation’s largest oil company, said its net income for the third quarter was flat at $1.08 billion. Earlier, Mobil Corp. and Shell Oil Co. reported earnings sharply down.
Consumers, facing gasoline pump prices up to $1.40 a gallon, may well ask where the money went.
Although prices for gasoline and other refined products went up sharply, crude oil prices rose even faster. Oil companies generally used restraint on price hikes at the pump, heeding President Bush’s calls for moderation. The net result was that the companies’ third-quarter earnings reports did not balloon out of proportion.
There also was a dramatic variation in earnings depending on a particular oil company’s mix of businesses. Those that rely more on refining and selling gasoline and other products profited less than those that simply pump crude oil out of the ground.
More fundamentally, oil industry profits have grown less during the current oil crisis than they did in the oil shocks of the 1970s. That’s because changes in industry accounting practices since then have lessened upward earnings jumps during periods of high oil prices.
In all of this, the industry has apparently learned an important public relations lesson from those earlier crises, when huge profits generated public outrage, oil price controls and windfall profits taxes.
This time around, analysts say, oil companies have been quick to underscore the fact that their profits grew most strongly in segments of their businesses not related to consumers--such as crude oil production, where price hikes stem from movements in world oil markets or foreign supplies or just about anything but the oil companies themselves.
“If you go ahead and make certain parties feel as though you have tried to price-gouge, I think you’re inviting government intervention in your business,” said Thomas Lewis, an energy analyst with Duff & Phelps Inc. in Chicago. “That’s what the oil companies want to stay away from.”
In the last few weeks, the oil industry has gone to great lengths to explain how its earnings were affected by the Middle East crisis, highlighting the steep profit declines in sectors of its business aimed at consumers.
Amerada Hess Corp., which reported a five-fold increase in its net income, even took the unusual step of breaking out profits that it earned from trading on the petroleum futures market, showing that most of its gains did not come at the expense of motorists.
“If there was a concern, it was that the results would not necessarily be understood, regardless of whether they were up or down,” said William Taylor, a spokesman for the American Petroleum Institute, the industry’s main trade group based in Washington. “Much of the to-do about gouging the consumer has been . . . politically motivated or emotionally motivated, rather than factual.”
Earnings reports for the quarter that ended Sept. 30 are being closely watched, because they are the first to reveal the financial effects on the oil industry of the Persian Gulf crisis that began with Iraq’s invasion of Kuwait Aug. 2.
The reports are already bringing criticism. “The ones I’ve seen are not so much mixed as ranging between good returns and embarrassingly good returns,” said Sen. Joseph I. Lieberman (D-Conn.), an industry critic who has called for windfall profits taxes and is a member of a Senate committee that launched hearings last week into oil company prices and profits.
Whether earnings are good or bad has depended on the balance of businesses within a given oil company. A company is generally involved in one or more of three basic businesses: so-called “upstream” operations, including exploration and production of oil; “downstream” operations, such as the refining and marketing of gasoline or other products, and petrochemicals, such as raw materials for plastic products.
The sharp rise in crude oil prices, from about $21 a barrel before the Aug. 2 invasion to as much as $40 a barrel, boosted profits for upstream operations. Exxon’s upstream profits were up a whopping 40.3% in the quarter.
Refining and marketing operations, which had to pay higher prices for crude oil, saw their profits squeezed if they could not pass those prices onto customers. Several oil executives--noting they had complied early in the crisis with President Bush’s request that they hold down gasoline prices--have said recently that downstream prices rose about half as fast as crude oil prices during the quarter.
Similarly, chemical operations also saw profit margins narrow as the cost of their own raw materials went up. The chemicals business, moreover, has been in a slump unrelated to the Middle East crisis.
Companies such as Atlantic Richfield Co. and Texaco Inc. that are well “integrated”-- with a good balance of exploration and production operations, on the one hand, and refining and marketing on the other--did relatively well in the third quarter. Falling profits downstream were offset by rising profits upstream.
Arco saw profits rise 22% in the third quarter; Texaco profits shot up 25%.
Companies that depend on upstream operations for much of their earnings did even better: Oryx Energy Co. of Dallas reported profits up more than sevenfold.
Profits suffered, though, if companies were more dependent on refining operations or had to buy crude oil on the open market. Mobil, a major refiner which also has a large chemical operation, saw profits plunge 29%. Shell, the nation’s largest marketer of gasoline, saw earnings fall 33%.
On the downstream side, oil companies may be able to make up for profits sacrificed in the last three months, industry critics argue.
If, as expected, crude oil prices fall sometime later, companies might be able to keep gasoline or refined product prices high, thereby increasing their profit margins in those areas.
That would enable companies to recoup profits lost during the third quarter, said Edwin Rothschild, director of energy policy for Citizen Action, a consumer advocacy group in Washington.
Of course, the oil companies could also drop gasoline prices and forgo those potential profits. But history has shown that gasoline and refined product prices tend to fall more slowly than crude oil prices.
Either way, oil company profits will not have mushroomed in any one quarter--perhaps dampening public criticism, Rothschild says.
“There’s no question that they are more politically astute and much smarter this time around,” Rothschild said.
Generally speaking, profits appear lower now than they did in earlier oil crises in part because of changes in the arcane world of industry accounting.
After the oil shocks of the 1970s, most oil companies changed accounting systems from ones that looked at the price of stockpiled oil when it was originally purchased to ones that reflect the cost of replenishing the stockpiles. This had the effect of lessening earnings volatility and of reducing profits on company books during periods when crude oil prices rise sharply--as they are now.
Industry officials and analysts say the changes were meant to stabilize industry earnings and to reflect more accurately the physical costs of buying and refining crude oil. But some critics charge that the changes camouflage profits in refining and marketing operations during periods of rapid price hikes--something industry spokesman Taylor denied.
Taylor also cautioned against reading too much into any single quarter’s earnings. The oil industry is cyclic, he said, and earnings can fluctuate strongly from one quarter to the next.
In any case, most analysts agree that oil companies were scrupulously careful not to report any unusual costs during the third quarter that might be interpreted as attempts to hide profits.
Some analysts had predicted unusual charges this quarter, but few have shown up in quarterly reports. “There’s not a lot of masking going on there,” said James L. Van Alen, an energy analyst with Janney Montgomery Scott in Philadelphia.
