Exxon, Chevron May Post Record Net; Shares Fall as Oil Declines

By Joe Carroll

Oct. 21 (Bloomberg) -- Even the $70-a-barrel plunge in the price of crude can't stop Exxon Mobil Corp., Chevron Corp. and ConocoPhillips from posting record profits.

The biggest U.S. oil companies will report third-quarter gains of at least 25 percent after New York crude futures rose to an all-time high above $147 in July, according to analyst estimates compiled by Bloomberg. Profits will stay near or above historic highs in the fourth quarter, leading to their best year ever, estimates show, because oil prices are almost double the average for the previous seven years.

While oil lost half its value in the past 14 weeks, prices are still about 10 times as high as Exxon Mobil needs to break even. Crude on the New York Mercantile Exchange traded 57 percent higher than a year earlier in the third quarter, more than making up for declining production and hurricanes that toppled derricks in the Gulf of Mexico in September. Oil stocks are taking their worst battering in at least two decades as the global economic slowdown diminishes fuel demand.

``Even with lower oil prices, these companies still make a lot of money,'' said David Foley, who helps oversee $3 billion, including shares of Exxon Mobil, Chevron and ConocoPhillips, at Estabrook Capital Management in New York. ``Investors are focused on what's going to happen later this year and next year with the economy and oil demand.''

Exxon Mobil, Chevron and ConocoPhillips will net a combined $22.9 billion in the third quarter and $88.6 billion this year, a 24 percent increase from 2007, according to analyst estimates. That would be larger than the combined economic output of Ecuador, Lebanon and Costa Rica.

Shares Slump

Unprecedented profits haven't translated into higher share prices because an economic slowdown could slash demand for crude-based fuels in the U.S. and China, the world's largest energy markets, said Justin Perucki, a senior equity analyst at Morningstar Inc. in Chicago.

The Organization of Petroleum Exporting Countries, concerned about the weakest growth in demand since 1993, will meet in an emergency session this week to discuss reducing output for the first time in almost two years. Members may cut daily production by as much as 2 million barrels, President Chakib Khelil said on Oct. 19.

Irving, Texas-based Exxon Mobil dropped 20 percent this year on the New York Stock Exchange, heading for its worst performance since 1981. Chevron, based in San Ramon, California, fell 25 percent, which would be its biggest yearly decline since 2002. Houston-based ConocoPhillips is down 35 percent. The last time it had a bigger one-year drop was 1985.

Profits Seen Rising

ConocoPhillips has the lowest ratio of market value to proved reserves among the largest U.S. oil producers, at $8.03 per barrel, according to data compiled by Bloomberg. Chevron is second lowest at $12.84 per barrel of proved reserves. Exxon's $17.70 per barrel ratio is second highest among U.S. peers. Only El Dorado, Arkansas-based Murphy Oil Corp. is higher, trading at $33.11 per barrel of reserves.

ConocoPhillips is scheduled to release third-quarter results tomorrow. The company is expected to report net income of $4.6 billion, which would be a 25 percent increase from a year earlier and a third-quarter record, based on the average estimate from four analysts surveyed by Bloomberg.

Exxon Mobil, which will report on Oct. 30, is expected to post a 27 percent gain in net income to $11.9 billion. That would be the highest ever for the company, which already has earned 15 of the 17 biggest quarterly profits in U.S. corporate history, according to data compiled by Bloomberg.

Chevron Estimates

Chevron probably will post the largest increase of the three with a 73 percent gain to $6.43 billion, according to the estimates. The statement is scheduled for Oct. 31.

The companies rely on oil and natural-gas sales for about 75 percent of their profits, public filings showed. The rest comes from refining, marketing and chemicals.

Global oil demand will increase by 0.5 percent in the current quarter, half the rate previously expected, the International Energy Agency said in an Oct. 10 report. The Paris-based agency also cut its demand forecast for the first three months of 2009 to 0.6 percent.

The U.S. economy probably will shrink by 0.8 percent during the current quarter and exhibit zero growth in the first three months of 2009, according to average estimates from 53 economists surveyed by Bloomberg.

Economy Slows

``Oil demand is driven by economic activity,'' said Morningstar's Perucki, who has ``buy'' ratings on Exxon Mobil, Chevron and ConocoPhillips. ``For that reason, a company like Exxon Mobil is a fairly good proxy for worldwide economic demand.''

U.S. oil futures fell by almost half since touching an all- time high of $147.27 a barrel on July 11 and closed at $74.25 yesterday. Since the beginning of September, the futures averaged less than $96 a barrel.

``They're better off with oil at $90 than $145 because it leaves more demand intact,'' Foley said.

Tina Vital, an equity analyst at Standard & Poor's in New York and former Exxon Mobil refinery engineer, said the three companies are largely insulated from the global credit crunch because they have low production costs and ample cash to fund exploration.

Cash Rich

Exxon Mobil, Chevron and ConocoPhillips had combined cash reserves of $47.9 billion at the end of June. Exxon Mobil had $39 billion, more than the $31 billion held by Warren Buffett's Berkshire Hathaway Inc. and Microsoft Corp.'s $10 billion as of June 30, public filings showed.

Racking up record profits when industries such as banking and auto manufacturing wallow in the worst losses in a generation may spur calls in Washington for increased taxes on oil producers, said Robert Hansen, senior associate dean of the Tuck School of Business at Dartmouth College in Hanover, New Hampshire.

``Government budgets need revenue and that means the big pockets of profit of the oil industry are going to be targeted,'' Hansen said.

To contact the reporter on this story: Joe Carroll in Chicago at jcarroll8@bloomberg.net.