Majors' Earnings Up, But Falling Prices Could Hurt 3Q

Higher commodity prices and greater production lifted several of the majors as they released second quarter earnings last week. Exxon Mobil Corp. and Chevron Corp., the number one and two energy companies in the world, posted uneven profits, with Exxon up a modest 5% in both natural gas and refining operations earnings, while Chevron's jumped 21%. Meanwhile, the rest of the leader board, including Conoco Inc., USX-Marathon, Texaco and Phillips Petroleum, all posted sky-high earnings for the quarter, but are heeding analysts' warnings that going forward, it will be difficult to continue soaring if oil and natural gas prices remain depressed.

Exxon Mobil: The number one major's profit from operations rose to $4.38 billion, or 64 cents a share, up from $4.15 billion, or 60 cents in the second quarter of 2000, with per-share numbers adjusted for a stock split announced in June. Revenue also was up about 1% over second quarter 2000, standing at $56.5 billion from $56 billion. Exxon was expected to earn 66 cents a share on average, according to First Call/Thomson Financial, with estimates ranging between 56 cents and 73 cents.

Like other energy companies this quarter, Exxon Mobil's profit came from commodities pricing in gasoline and heating oil, up 35% from a year earlier. Natural gas prices also sent profit up 20%. Chairman Lee R. Raymond said natural gas prices and refining margins were "very strong" early in the second quarter, but had declined by June. He also pointed to capital and exploration expenses, which jumped 17% to $2.83 billion from $2.42 billion a year earlier. Exxon Mobil also spent $1.52 billion to buy back about 34.8 million shares, and it split its stock 2-for-1 in June.

Chevron: San Francisco-based Chevron saw its earnings jump almost 19%, actually surpassing analysts' figures, as it profited from gasoline prices that climbed above $2 in California. It earned $1.32 billion, or $2.05 a share, in the second quarter, compared with $1.12 billion, or $1.71 per share for second quarter 2000. Excluding one-time charges, Chevron earned $1.38 billion, or $2.15 per share, a 21% increase from a year ago. First Call had predicted earnings to be $2.06 per share.

Chevron CEO David O'Reilly attributed the earnings growth to refining and gasoline operations, and said the company also profited from rising natural gas prices. Chevron's average price for natural gas in the second quarter was up 65% to $5.52/Mcf, compared with $3.35/Mcf for the second quarter of 2000.

Texaco: White Plains, NY-based Texaco, the number three energy major, achieved record second quarter income that exceeded analysts' expectations, reporting Wednesday that it had income of $817 million, or $1.50 per share, compared with $614 million, or $1.17 per share, for the second quarter of 2000. Net income for the period was $784 million, or $1.44 per share. First Call/Thomson Financial had forecast earnings between 99 cents and $1.41 a share, with an average of $1.27.

CEO Glenn Tilton said the company continues to strengthen its upstream portfolio, and also reported "significant improvement" in the company's global gas, power and energy technology segment. "Our U.S. natural gas trading business posted strong results as it continued to capitalize on significantly increased trading volumes through the delivery of structured, customer-based services." Commenting on the merger with Chevron Corp. (see NGI, Oct. 23, 2000), Tilton said that while Texaco remains focused on its strategies and operations, "we continue to make progress in our merger...and expect to complete the merger within the 12-month time frame."

Conoco Inc.: The fourth largest U.S. energy company exceeded analysts' projections, mostly because of higher energy prices during the period. Houston-based Conoco, which acquired Calgary's Gulf Canada Resources Ltd. in the quarter, saw earnings rise almost 32%.

Strong refining margins and natural gas prices, along with higher production, led to an outstanding quarter for Conoco. Net income before special items for the quarter was $606 million, or 95 cents a share, 32% better than second quarter 2000's $460 million, or 73 cents per share. Net income increased to $552 million, or 87 cents a share, up 21% from $456 million, or 72 cents per share for the same period last year. Revenue was up 10%, totaling $10.4 billion, up from $9.5 billion last year.

The Gulf Canada accusation increased Conoco's worldwide reserves by 40% and production by 32%, including syncrude, and propelled Southeast Asia into core area status. The Conoco board also has approved a plan to convert Conoco's two classes of common stock into a new, single class of common stock. If approved by shareholders, the action "will reduce shareholder confusion and increase liquidity in our common stock, which we believe should translate into stronger investor interest," Dunham said.

In the third quarter, Conoco expects production to be up about 35%, although Dunham warned that earnings "are not expected to be as strong, as prices and margins have retreated in recent weeks."

Phillips: The fifth largest major said its second quarter profits were up more than expected, jumping 37% on crude oil, natural gas and gasoline commodity pricing. Phillips, in the process of acquiring Tosco Corp., said income excluding special items was up to $601 million, or $2.33 a share, compared with $439 million, or $1.72 a share for the second quarter of 2000. However, revenues were lower, falling to $5 billion from $5.4 billion a year ago.

CEO Jim Mulva credited increased crude oil production, higher U.S. natural. gas prices and "significantly improved refining, marketing and transportation results," which showed a 19% increase over a year ago, for the stellar performance. Exploration and production earnings also rose, mostly because of high commodities prices. However, production alone jumped 21% in the quarter over a year ago. He said daily production on a boe basis increased to 823,000, up 21% over the same period a year ago. The increase mostly was attributed to higher crude oil production in Alaska, however; overall, U.S. crude production was up 61%, with non-U.S. production only up 2%. E&P net operating income was $504 million, up from $396 million from a year earlier.

USX-Marathon: USX-Marathon surpassed its earnings estimates with income up 59% to $582 million, or $1.88 per diluted share, mostly because of higher profits from upstream commodities prices. Worldwide exploration and production income was up to $459 million from $356 million for the same period in 2000. Revenues were up as well, standing at $9.2 billion from $8.7 billion a year ago.

The company overhauled its business during the quarter, which included reducing its upstream workforce by 24% from 1999 levels. It also is selling most of its Canadian oil assets to focus on gas exploration and production in western Canada and offshore Nova Scotia. The corporate structure also has been revamped, as parent USX Corp. has separated its energy and steel businesses to build each independently and to solidify its oft-criticized stock structure.

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