Oil Companies’ Earnings Surge, but Investors Still Wary

The nation’s largest oil companies on Monday reported sharply higher earnings for the third quarter, thanks to an oil price gusher that boosted profits from exploration and production. Those high oil prices, however, shrank income from gasoline and other competitive refined products.

Atlantic Richfield, Chevron and Exxon beat stock analysts’ earnings estimates; and Mobil and Texaco, though falling short of expectations, still posted earnings well above year-ago levels. Crude prices and oil company profits are expected to hold their own or rise slightly through the end of the year, analysts said.

But most oil stocks plunged Monday, reflecting continuing uncertainty about the direction of oil prices and whether the Organization of Petroleum Exporting Countries will keep its pledge to reduce production through March.

“This was the best quarter in two years, and still there were no takers,” said Fadel Gheit, senior energy analyst at Fahnestock & Co., a New York investment firm. “It’s unfortunate, but people are very jittery about the market.”

The companies all cited higher prices for crude oil and natural gas as the source of their renewed good fortune after one of the worst years in recent memory. Oil prices fell dramatically in 1998, hitting a 12-year low in December near $10 a barrel.

Prices began to rise in March when OPEC agreed to slice output, and they passed a psychological barrier of $25 a barrel late last month before falling back. Crude oil for December delivery slipped 10 cents Monday to $23.35 a barrel on the New York Mercantile Exchange.

Cost-cutting programs instituted across the industry also helped earnings, company executives said.

“Stronger commodity prices made the headlines this quarter,” said Mike R. Bowlin, chairman and chief executive of Los Angeles-based Arco, which is merging with BP Amoco. “However, our third-quarter results also demonstrate the strong benefits being realized from our accelerated cost-reduction program.”

Arco, the seventh-largest U.S. oil company in assets, posted a whopping 600% increase in earnings before special items to $511 million, or $1.55 per diluted share, from $73 million, or 22 cents a share, for the third quarter of 1998. Analysts on average had predicted earnings of $1.23 a share, according to a survey by First Call/Thomson Financial.

Arco, unlike most of the other oil companies, turned in strong results from its “downstream” operations--the part of the business in which crude is refined into gasoline and other products and then sold. Gasoline sales grew nearly 6%, product margins improved and costs were reduced, increasing earnings from refining and marketing operations by 69% to $182 million, the company said.

Mishaps at refineries owned by Chevron and Tosco Corp. helped push California gasoline prices up, improving profits for companies such as Arco that were operating normally.

San Francisco-based Chevron Corp., No. 3 in assets, saw operating earnings jump 82% to $702 million, or $1.07 a share, beating analyst estimates by 6 cents. Net income rose 26% to $582 million.

Chairman and Chief Executive Ken Derr said surging oil prices swelled exploration and production results but “squeezed margins in our refining and marketing sector.”

Derr also noted that cost cutting had reduced operating costs to below $5 a barrel, down 9% from a year ago, but that the company isn’t finished. Chevron is increasing the number of jobs to be eliminated to 3,100, up 400, he said.

Exxon of Irving, Texas, the nation’s largest oil company, posted a 7.1% earnings gain to $1.5 billion, or 61 cents a share. No. 2 Mobil Corp.’s earnings rose 42% to $705 million, or 87 cents a share; and No. 4 Texaco Inc. more than doubled its operating income to $453 million, or 83 cents a share.

Oil prices still have some mileage left in them, said Alan H. Struth, an economist at Honeywell Hi-Spec Solutions, a consulting firm in Houston, and the former chief economist at Phillips Petroleum Co.

“I’m still pretty optimistic,” Struth said, picking $28 as his top price “if OPEC holds the line and demand growth continues and we have a normal winter.”

But high prices become a cure for high prices, he said.

“When you get to those levels, the enticement to cheat by producers becomes too much to resist,” Struth said, and oil companies begin investing in new projects, which eventually increases supply.

“This sows the seeds for another cycle,” he said.

Oil company stocks, which have enjoyed a healthy run-up so far this year, slumped Monday on the New York Stock Exchange. Exxon’s shares fell $2.88 to close at $74 a share; Mobil dropped $4.94 to $97.06; Texaco $1 to $61.88; Chevron $3.75 to $90; and Arco $3.13 to $90.88.