Oxy Cashes In on Oil Price Spike

In the first of a series of oil industry reports likely to rekindle consumer charges of profiteering, Occidental Petroleum Corp. said Wednesday that its profit surged to a record high.

Occidental, the Westwood-based oil and chemical producer, said the operating profit for its second quarter rose to $343 million compared with only $4 million in the year-ago period. Sales nearly doubled from $1.6 billion to $3.1 billion.

Oxy’s announcement will be followed next week by the earnings reports of nearly every major oil company. Analysts expect that industry giants Exxon Mobil Corp., Texaco Inc. and Chevron Corp. all will announce that their profits have more than doubled compared with the same period a year ago.

Earnings at El Segundo-based Unocal Corp. are estimated to jump fivefold, and at Conoco Inc. profit should quadruple. Phillips Petroleum Co. is looking at a tripling of its earnings.

“You have heard of the tax revolt--now you are going to hear of a gas revolt,” said Jamie Court, advocacy director for the Foundation for Taxpayer and Consumer Rights in Santa Monica. Court is a member of California Atty. Gen. Bill Lockyer’s Gas Pricing Task Force.

The energy industry’s huge profit gains are the result of soaring prices for crude oil and natural gas. U.S. crude oil futures are up 60% from a year ago to more than $31 a barrel. Those increases are flowing directly to energy companies’ bottom lines.

“We not only recorded the highest quarterly earnings in our history, but we also had our best performance for a six-month period,” said Ray Irani, Oxy’s chairman and chief executive. “The key drivers behind this strong performance were robust oil and gas prices.”

Oxy’s announcement follows by just one day a report by AAA, the automobile association, that the national average for a gallon of self-serve regular gasoline this week was $1.577, up 40.3 cents from a year ago. California has the highest average in the continental U.S., $1.76.

“In California we have six refiners controlling more than 90% of the gas supply and more than half of the retail gas stations,” consumer advocate Court said. “That is a recipe for mega-profits.”

Court said he believes the latest profit numbers will lead to renewed calls for action in the state Legislature. Such measures could include forcing oil companies to divest gas stations or freeing station owners from exclusive purchasing contracts with the branded refiners.

John Felmy, an economist with the American Petroleum Institute trade group in Washington, D.C., said the focus by consumer advocates on the profit gains by oil companies in the first half of this year is misleading because the numbers contrast with what he called a “dismal” period for the industry a year earlier.

Felmy noted that the profit margin--earnings as a percentage of sales--for the industry was only 5.9% in the first quarter, or less than half the margin of the banking, telecommunications and media industries.

“You have to remember that although we are a mature industry, we continue to experience strong growth,” Felmy said. “When you sell 300 billion gallons of petroleum products in this country, even if you have a low profit margin, that volume of sales translates into a lot of dollars.”

Despite soaring sales and profits this year, the energy industry’s stocks have failed to keep pace. Even after its rosy announcement Wednesday, Occidental’s stock fell 31 cents to close at $20.06 on the New York Stock Exchange.

Shares of both Chevron and Texaco have fallen 4% this year. Exxon Mobil’s shares are off 1%, and Unocal is down 6%.

“Most of us expected these stocks to rise more than they have,” said Kate Warne, analyst with Edward Jones & Co. in St. Louis.

Certainly the lack of investor appetite for oil stocks derives in part from the current attention by Wall Street lavished on technology and other industries with more appeal than stodgy oil, Warne said. And there’s also a political component to oil’s lack of favor: Few industries are as sensitive to domestic and international political pressures.

What’s more, many investors and analysts simply don’t believe the good times will last for energy earnings. Indeed, analysts on average expect Occidental and Texaco to earn less in 2001 than in 2000.

Yet Warne believes this may be a case where Wall Street simply has missed the boat. “Looking at the performance of these stocks, the market is saying that oil will fall back to the $20-a-barrel price,” Warne said. “But the market has been consistently wrong at judging when the price of oil will fall.”

Within the energy sector, investors this year have mostly been drawn to oil exploration and production companies that supply the refiners and their networks of gas stations.

Shares of Houston-based explorer and producer Apache Corp. have risen 44% this year to $53.19 Wednesday. Anadarko Petroleum Corp. shares have jumped 42% to $48.19. And shares of EOG Resources Inc. have soared 77% to $30.94.

One reason these companies have fared better on Wall Street is because they all have substantial natural gas holdings and the market seems more comfortable with the long-term outlook for natural gas domestically. Natural gas prices have risen to their highest level in more than 10 years.

And as energy producers, rather than refining and marketing companies, they don’t have to deal with the most difficult portion of the oil business--selling gasoline at the pump.

“By far that is the worst part of the business,” said Fadel Gheit, senior energy analyst at Fahnestock & Co. in New York.

“But these companies are basically commodity plays,” Gheit said. While that means they benefit as energy prices rise, “If oil prices fall, they will get clobbered.”

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Demand for gasoline has slipped, the oil industry says. C4

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Crude Oil Prices Have Surged ...

Near-term crude oil futures in New York, monthly closes and latest, per barrel:

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Wednesday: $31.42 a barrel

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... Lifting Energy Company Earnings ...

Earnings per share recorded by major energy companies in 1999, and analysts’ consensus estimates for results in 2000 and 2001:

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... but the Stocks Have Stalled

Reflecting investors’ doubts about how long high oil and natural gas prices will last, shares of many major international and domestic oil companies are no higher today than they were in early 1999. Monthly closes and latest for key Standard & Poor’s oil stock indexes:

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International oil stock index, Wednesday: 933.40

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U.S. oil stock index: 828.80

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Source: Bloomberg News