Oil majors in for a tough year

LONDON – The major western oil companies will set new earnings records when they publish 2006 profits over the coming weeks, but they are also likely to indicate that profits have peaked and 2007 will be tougher, analysts forecast.

High oil prices and refining margins were well above historical averages last year, outweighing lower oil and gas production at most majors. Analysts polled by Reuters expect industry leader Exxon Mobil Corp.to post annual net profits of US$38 billion, beating a record US$36 billion in 2005.Record profits are also predicted for Royal Dutch Shell Plc, the second-largest western oil company by market capitalisation, at US$25 billion and for London-based BP Plc at more than US$22 billion.The profits exceed the gross domestic product of most developing nations, according to World Bank figures.By turnover, all three companies would rank among the top 50 economies in the world.Analysts and investors will be focussing on the fourth quarter, however, which is expected to paint a less robust picture of the industry’s health.”We expect the earnings momentum (in the fourth quarter) for the international oil companies to decline 22 per cent quarter-on-quarter, and year-on-year momentum (to be) down 12 per cent,” analysts at Credit Suisse said in a research note, putting most of the blame on falling crude prices.Brent oil prices averaged US$60 per barrel in the fourth quarter, down US$10 compared with the third, and have averaged less than US$55 per barrel so far in 2007.A Reuters poll of 34 analysts on Jan.15 gave an average forecast for Brent of US$61 per barrel for this year compared with around US$65 in 2006.Many analysts also predict lower refining margins in 2007.With the cost of finding and extracting oil soaring and oil-rich countries raising taxes, the pressure on profit margins is expected to intensify.Analysts say the oil majors will again struggle to replace all the oil they pumped in 2006 with new finds, leading to the erosion of some companies’ asset bases.With resource-holding governments increasingly opting to reserve the richest fields for national oil companies, western companies are struggling to access new opportunities.In recent years, reserve worries prompted companies such as ConocoPhillips and Chevron to buy rivals, and analysts predict more industry consolidation.”With little chance of a pullback in finding and development costs and few capital constraints, we see further support to M&A,” analysts at Citigroup said this week.As most oil companies’ share prices factor in long-term oil prices of only US$40 to US$45 per barrel, in some cases it is now cheaper to buy rivals than to drill, analysts said.Citigroup said US oil firms Noble Energy, Anadarko, Devon Energy and EOG Resources were especially attractive targets.A few analysts have even suggested there may be a return to the mega-mergers that transformed the industry in the late 1990s.Nampa-ReutersAnalysts polled by Reuters expect industry leader Exxon Mobil Corp.to post annual net profits of US$38 billion, beating a record US$36 billion in 2005.Record profits are also predicted for Royal Dutch Shell Plc, the second-largest western oil company by market capitalisation, at US$25 billion and for London-based BP Plc at more than US$22 billion.The profits exceed the gross domestic product of most developing nations, according to World Bank figures.By turnover, all three companies would rank among the top 50 economies in the world.Analysts and investors will be focussing on the fourth quarter, however, which is expected to paint a less robust picture of the industry’s health.”We expect the earnings momentum (in the fourth quarter) for the international oil companies to decline 22 per cent quarter-on-quarter, and year-on-year momentum (to be) down 12 per cent,” analysts at Credit Suisse said in a research note, putting most of the blame on falling crude prices.Brent oil prices averaged US$60 per barrel in the fourth quarter, down US$10 compared with the third, and have averaged less than US$55 per barrel so far in 2007.A Reuters poll of 34 analysts on Jan.15 gave an average forecast for Brent of US$61 per barrel for this year compared with around US$65 in 2006.Many analysts also predict lower refining margins in 2007.With the cost of finding and extracting oil soaring and oil-rich countries raising taxes, the pressure on profit margins is expected to intensify.Analysts say the oil majors will again struggle to replace all the oil they pumped in 2006 with new finds, leading to the erosion of some companies’ asset bases.With resource-holding governments increasingly opting to reserve the richest fields for national oil companies, western companies are struggling to access new opportunities.In recent years, reserve worries prompted companies such as ConocoPhillips and Chevron to buy rivals, and analysts predict more industry consolidation.”With little chance of a pullback in finding and development costs and few capital constraints, we see further support to M&A,” analysts at Citigroup said this week.As most oil companies’ share prices factor in long-term oil prices of only US$40 to US$45 per barrel, in some cases it is now cheaper to buy rivals than to drill, analysts said.Citigroup said US oil firms Noble Energy, Anadarko, Devon Energy and EOG Resources were especially attractive targets.A few analysts have even suggested there may be a return to the mega-mergers that transformed the industry in the late 1990s.Nampa-Reuters