Oil Firms’ Profits Expected to Fall Short

U.S. oil companies, after posting dismal returns in the first quarter, are expected to report stronger profits this time around, thanks to a recovery in crude oil and natural gas prices. But poor returns from the refining and marketing side of the business are expected to keep second-quarter profits well below those seen last year.

Wall Street analysts estimate that big oil companies will report a 17% drop in profits from last year’s second quarter, on average, according to First Call, which tracks earnings forecasts.

However, analysts say the worst appears to be behind an industry battered in recent quarters by some of the lowest crude prices in 20 years. While sending shares in oil companies into the basement, the collapse in crude prices also helped spark a rush of takeovers, including Exxon Corp.’s $80-billion deal to acquire Mobil Corp.

“Anybody who bought oil stocks at the beginning of the year is already doing very well,” said Holly Gustafson of Deutsche Banc Alex. Brown. “I don’t think that a soft landing in the second quarter is going to deter anyone.”

The recovery in oil prices could pay off big later in the year, when oil companies’ earnings start to beat year-ago levels, said ABN Amro analyst Gene Nowak.

And mutual funds investing in energy stocks have further to rise if oil prices hold near current levels as oil companies begin to expand exploration, fund managers and analysts said.

Oil shares, battered in 1998, have soared this year on the strength of a 66% rally in the price of crude oil as world producers trimmed production to remove excess supplies.

“It’s not the end of the game for the oil sector, but we’re 75% through the process,” said Courtney Smith, chief strategist for Orbitex Group of Funds.

Higher oil prices are likely to encourage more drilling, good news for funds that have invested in oil exploration and services companies. Such stocks have further to climb, even if prices don’t rise much from today’s $20-a-barrel level, fund managers said, because companies are only starting to consider broader exploration activities.

The oil and gas drilling, and oil well and equipment service sectors are the two best-performing industry groups in the S&P; 500-stock index so far this year, returning about 55% and 52% respectively. Those same categories were the worst in 1998, with losses of 58% and 42%.

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Patchy Earnings

Despite a surge in oil prices, many major U.S. oil companies are expected to report second-quarter earnings below the year-earlier period. Consensus estimates for the quarter, based on a survey of analysts, and reporter earnings for the 1998 period:

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Company Wed. 2nd-qtr. EPS 2nd-qtr. (ticker symbol) close consensus 1998 Amerada Hess (AHC) $60.75 $0.16 -$0.24 ARCO (ARC) 91.88 0.86 0.67 Burlington Resources (BR) 41.56 0.09 0.13 Chevron (CHV) 96.31 0.70 0.80 Conoco (COC) 27.25 0.16 0.33 Exxon (XON) 78.44 0.50 0.65 Kerr-McGee (KMG) 53.69 0.52 0.30 Mobil (MOB) 101.69 0.73 0.81 Occidental (OXY) 20.50 -0.04 0.12 Phillips Petroleum (P) 52.00 0.41 0.58 Texaco (TX) 67.63 0.50 0.60 Unocal (UCL) 42.44 0.07 0.26 USX-Marathon (MRO) 32.81 0.37 0.56

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Sources: First Call, Bloomberg News