Earnings for the majors are expected to fall 25% in the third quarter, both year-over-year and sequentially, pushed by weaker oil and natural gas prices, a pull-back in domestic refining margins from “super-normal levels,” weaker Asian downstream profits and continued pressure on chemicals, according to analysts with Deutsche Banc Alex. Brown. Analysts also see a 2% drop from a year ago in third quarter U.S. natural gas production for the majors overall.

The analysts group noted that their view on natural gas “is that things are not likely to improve much upon the current $2.50/Mcf near term, given super-high inventory levels.” However, they noted that three to six months from now, a “powerful supply response to the drilling slowdown will materialize and…prices could rise sharply by the second half of 2002.”

The analysts group noted that “after two straight years of positive momentum, earnings peaked in the first quarter of 2001 and look likely to trend down” through the second quarter of 2002. Companies likely to report the weakest earnings in the third quarter of 2001 are those with the “greatest exposure to U.S. upstream and downstream,” including Chevron, Texaco, Phillips and Conoco. “Despite some earlier profit warnings, earnings may still come in at the low end of expectations for the group.”

Deutsche Brown’s “neutral” buy on the majors was placed because of “our outlook for limited near-term upside in oil and natural gas prices, negative earnings momentum and downward revisions to Street estimates for the fourth quarter and 2002.”They said they expect oil prices to slide more into next year because of weak demand, “significant” non-OPEC volume growth, rising storage and lower OPEC utilization rates. “Until the macro trends turn positive, it appears too early to overweight the group.”

Defensive plays were listed as ExxonMobil and TotalFinaElf, and the group noted that ExxonMobil’s diversified business mix “provides especially resilient earnings and over delivery, versus expectations on the production growth front.” TotalFinaElf “boasts the best combination of cost savings and volume growth (10% in 2002) to offset the impact of declining oil prices.”

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