Oil Earnings Expected to Soar in 4th Quarter : Energy: Chevron, despite a $220-million writeoff, is first to report a record profit. The news came as Middle East tensions pushed the price of crude up nearly $3 a barrel.
In the first concrete sign that oil industry profits will soar in the fourth quarter, Chevron Corp. Chairman Kenneth T. Derr said Monday that the San Francisco-based energy company will report record quarterly net earnings of about $700 million.
The news came as escalating Persian Gulf tensions sparked a surge in oil prices on Monday of nearly $3 a barrel, halting three straight days of declines.
Chevron’s expected earnings contrast with an $883-million loss in the same quarter a year earlier, which included $1.2 billion in one-time charges. And they are in keeping with analyst expectations that the industry’s total earnings will skyrocket 50% to 65% in the quarter because of high oil and natural gas prices resulting from the Middle East crisis.
“It’s going to be a great quarter,” said Frederick P. Leuffer Jr., an industry analyst with C. J. Lawrence, Morgan Grenfell Inc. in New York. “Those companies that are sensitive to crude oil (prices) and retail marketing will tend to do better, and companies like Chevron fall into that category.”
Fourth-quarter profits are also expected to more than double for Amerada Hess Corp., British Petroleum, Phillips Petroleum Co., Sun Co., Texaco Inc. and Unocal Corp. Chevron’s robust quarter will leave it with annual earnings of about $2.2 billion to $2.3 billion, the highest level in 10 years, company officials said.
On Monday, the high earnings projections brought cries of outrage from consumer advocates and industry critics, who pointed to them as evidence that the industry was profiteering in the Middle East crisis.
“In a word, they’re infuriating,” said Sen. Joseph I. Lieberman (D-Conn.), an outspoken critic of the oil industry. “It’s money out of our national hides at a very critical moment for our economy.”
Lieberman vowed to reintroduce windfall profits legislation that died in the last session of Congress. In the House, oil profits tax bills have been introduced by Rep. Benjamin Gilman (R-N.Y.) and Massachusetts Rep. Silvio Conte, the ranking Republican member of the Appropriations Committee.
In the third quarter, although crude oil and retail gasoline prices skyrocketed in the wake of Iraq’s Aug. 2 invasion of Kuwait, oil profits were mixed. But industry critics said at the time that the real effect of the crisis would show up in fourth-quarter earnings reports.
Ed Rothschild, director of energy policy for the consumer advocacy group Citizen Action in Washington, said the level of expected fourth-quarter profits only confirmed his expectation: that oil companies would hold down gasoline prices in the third quarter to avoid public outcry then make up the profits in the fourth quarter by keeping pump prices high as crude and wholesale costs fell.
“What we’re looking at here are not just enormous profits in the fourth quarter, but the growing profitability of refining and marketing and a sharp decline in competition” in the last decade, he said. “It means that companies can seize on an opportunity like the Exxon Valdez or the Iraqi invasion of Kuwait to drive up product prices, and hold them higher, even when the cost of crude oil comes down.”
Oil companies are sensitive to accusations of profiteering and fear a political backlash from their earnings reports. On Monday, Chevron released results of a public opinion survey showing that eight of 10 respondents believed that the oil industry was making excessive profits and taking unfair advantage of the crisis.
“None of these things is true,” Derr said in a statement. He pointed to an Energy Department investigation that found no evidence of gouging in the pricing of gasoline.
“Considering what’s at stake in the Middle East crisis, we’re deeply distressed by our survey,” he said. “We clearly need to do more to help provide accurate information to the public.”
Still, Chevron’s fourth-quarter earnings expectations exceeded even the rosy projections of most analysts. They are all the more impressive considering that they include an expected one-time charge of $220 million to reflect a writedown on the value of Chevron’s fertilizer business.
It’s unclear whether other oil companies can be expected to take large one-time charges against earnings in the fourth quarter, as they did last year to account for environmental and other expenses. Some analysts expect them to follow tradition by cleaning their financial houses in the last quarter--a step that also would blunt the appearance of a windfall. Other analysts doubt that will happen.
Oil companies normally announce their fourth-quarter and year-end results toward the end of January.
Chevron and the nation’s other major oil companies are expected to benefit from oil prices that reached a high of $41 a barrel in the quarter and natural gas prices that also edged up during the period. Gas prices reacted not only to war fears, but their customary tendency to rise during cold weather months, as demand increases for home heating.
Analysts said oil prices were on average about $6 to $7 a barrel higher in the fourth quarter than in the third quarter and $10 to $13 a barrel higher than in the fourth quarter of 1989. At the same time, profits from retail sales of gasoline and other refined products recovered from their razor-thin levels of the third quarter, when voluntary pricing restraint in response to President Bush’s call held profits down.
On Monday, the price of light, sweet crude oil for February delivery rebounded $2.75 to settle at $27.65 a barrel in trading on the New York Mercantile Exchange. After peaking at $41 in October, crude prices had fallen to $24.90 on Friday.
But gasoline prices have remained high, falling sharply only late in December. The national average price for a gallon of self-serve regular unleaded gasoline, the most popular grade, fell 1.5 cents to $1.267 a gallon as of last Thursday, the American Automobile Assn. reported. Unleaded gas was selling for $1.075 a gallon on Aug. 1.
The net effect of the price movements on earnings was higher profits for the oil companies both “upstream,” from oil and natural gas production, and “downstream,” primarily from the marketing of petroleum products. That is unusual: Typically, profits from one end of the business offset losses in the other end.
“We haven’t seen all of these things pulling together in a single quarter in over a year, and this time around, they were much stronger than they were in any recent quarter,” said Andrew Gray III, an industry analyst at Pershing & Co. in Jersey City, N.J.
Profit margins for refiners, however, are expected to be lower than in the third quarter because wholesale prices of gasoline and other products fell along with crude prices, analysts said. Declining margins on refining were blamed for Ashland Oil Inc.’s expected moderate loss from operations in its fiscal first quarter, ended Dec. 31, the company reported last month.
But the one truly bad business sector for major oil companies will remain chemicals.
Slack demand for commodity chemicals due to the impending recession and high costs for crude oil, natural gas and other feedstocks has squeezed chemical profits for most of 1990, and the fourth quarter proved no exception, analysts said.
The level of improvement in fourth-quarter profits will depend on an oil company’s mix of businesses. Those with an emphasis on oil production will see profits grow strongly. Los Angeles-based Unocal, for example, is expected to see profit skyrocket 500% in the quarter, according to an estimate by George F. Friesen, an oil industry analyst with Deutsche Bank Group in New York.
Companies that are strong in retailing will also see healthy profits. Phillips Petroleum should see profit up 229% and Los Angeles-based Atlantic Richfield Co. profit will rise 51%, according to estimates by analyst Eugene L. Nowak at Dean Witter Reynolds in New York.
Profit Projections Estimated fourth-quarter 1990 earnings for 12 major oil companies, excluding one-time charges, are expected to increase 69.9% oer those of the comparable quarter a year ago, mainly because of higher oil prices resulting from the Persian Gulf crisis. Estimated increases in fourth-quarter earnings Estimated Oil Company Profits Unocal: +500% Texaco: +110% Sun: +825% Shell Transport: +32.1% Royal Dutch: +32.5% Phillips: +264,9% Mobil: +41.7% Exxon: +41.2% Chevron: +19.1% British Petrolem: +111.7% Arco: +61.2% Amoco: +57.1% Source: Deutsche Bank Group
