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Another Gusher Expected in 4Q, Year-End E&P Profits

The earnings season has officially kicked off, and the gusher of profits expected to be unveiled in 4Q2005 and year-end announcements by the majors and independents is expected to overwhelm any losses from last year's hurricanes, industry experts said last week. On the pages detailing high profits, however, will be the challenges of finding new oil and natural gas, and the expectation by shareholders that the good times will continue to roll.

Several of the majors and independents unveiled their earnings last week, including Chevron Corp., ConocoPhillips, Marathon Oil Corp., Kerr-McGee Corp. and Pogo Producing Co. (see related story). Last year was very good for the energy industry, with oil and natural gas stocks gaining around 32% on the Dow Jones Oil & Gas Index, seven times higher than the U.S. Total Market Index, and more than double the return of any other industry-specific index.

"All these companies will make more money than they have made in any quarter in their history," said Oppenheimer & Co. analyst Fadel Gheit, reflecting on the expected earnings reports. The producers are "working very hard at improving their public image" because of unfavorable opinion polls and unflattering portrayals in the media, but "the companies should not be ashamed of their profits. There is no such thing as obscene profit if you earn it."

Gheit expects 4Q earnings to be about 25% higher for the majors, 50% higher for refiners, and a whopping 86% higher for producers focusing on exploration and production.

In a note to clients, Friedman Billings Ramsey analyst Jacques Rousseau said he expects 4Q2005 earnings to be 5% higher sequentially than 3Q results -- despite the hurricanes. Rousseau said his earnings estimates were hiked after the cost of crude oil jumped in the last two weeks of December.

It's not oil prices, but rather natural gas price hikes that will help a lot of Canadian and U.S.-based producers, said FirstEnergy Capital energy analyst Martin Molyneaux.

"The real big win is on gas, for sure," said Molyneaux. "It's the first time ever where we've seen a single quarter where (the market price) averaged double digits. And I think that's going to be the big shocker when people start seeing the press releases rolling out here in a couple weeks' time.

"The capital expenditure programs are up over last year, but the cash flows are up even more."

Energy analyst John Gerdes, who covers 12 of the largest U.S.-based independents, is expecting a 31% sequential increase over 3Q2005 in earnings and a 21% increase in cash flow per share, primarily because of the 52% increase in New York Mercantile Exchange gas prices. "Versus a year ago, 4Q2005 earnings per share should improve 73% and cash flow per share should increase 43%, primarily due to 24% higher Nymex oil prices and 82% higher Nymex natural gas prices," Gerdes said in a note to clients.

Criticized for reported high profits following Hurricanes Katrina and Rita last year and threatened by possible windfall profits taxes by Congress, many of the larger producers are expected to downplay their earnings' announcements.

Earlier this month, ExxonMobil's Ken Cohen, vice president for public affairs, presided over an unusual hour-long news conference via the Internet in what some said was a way to bolster the company's image.

"Many people say that the energy industry is reaping unfair profits and that consumers are paying the price," Cohen said. He acknowledged that the oil company's 4Q results could trigger public outrage. "But one has to have a point of reference. The reason that energy industry earnings are so high is that our business is immense."

ExxonMobil, said Cohen, supplies only 2% of the world's energy and about 3% of its oil. "While ExxonMobil is big, we do play a relatively small role in providing energy to the world." Cohen stressed the producers were not to blame for the high gasoline, natural gas and heating oil prices.

"Oil and gasoline are global commodities and are subject to price swings in the same way as agricultural products, minerals and steel, and it's a very competitive market," he said. Profits in the oil and gas industry, said Cohen, amounted to 8.2 cents for every dollar of sales in 3Q2005, which was well below the earnings levels of pharmaceutical, semiconductor and consumer services companies.

The outcome of the public relations blitz will take a few weeks to be evident. When ExxonMobil reports earnings on Monday (Jan. 30), analysts polled by Thomson First Call expect the company to post year-end 2005 operating profit of about $5.14/share, or $32 billion, which would be 30% higher than its record 2004 results of $3.97/share. Final quarter profits are expected to be $1.44/share, which would surpass 4Q2004's operating profit of $1.32.

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