May 19, 2008 at 1:38 pm #3623
Oil Producers Mask Decade’s Worst S&P 500 Profit Drop (Update1)
2008-05-19 05:11 (New York)
By Michael Tsang and Darren Boey
May 19, 2008 (Bloomberg) — Take away Exxon Mobil Corp., Chevron
Corp. and ConocoPhillips and profits at U.S. companies are the
worst in at least a decade.
Without the $70 billion that oil producers earned in the
last two quarters, profits at companies in the Standard & Poor’s
500 Index tumbled 26 percent and 30.2 percent, the biggest
decreases for any quarter since Bloomberg started compiling data
in 1998. Energy companies made up almost half the income growth
reported by S&P 500 companies in the first three months of 2008
as oil prices surged past $100 per barrel, the data show.
The results leave the benchmark for American equities
vulnerable to declines as oil companies’ costs balloon and
production slips, according to Bank of America Corp., Charles
Schwab Corp. and Allianz Global Investors. The industry is
getting less profit from a barrel of oil than at any time since
2005, just as the rest of the U.S. economy is sputtering. Still,
energy shares posted the S&P 500’s steepest gains in the past
year, bloating their representation to 15 percent of the index.
“It’s kind of a Catch-22,” said Joseph Quinlan, 49, New
York-based chief market strategist for the investment management
unit at Bank of America, which oversees $643 billion in client
assets. “The better energy does, the weaker the rest of the S&P.
It masks some of the weakness.”
Energy companies in the S&P 500 reported an average 25.9
percent gain in first-quarter profit, the biggest of the index’s
10 industry groups, data compiled by Bloomberg show. For the
broader market, earnings declined by 18.3 percent, based on the
441 companies in the S&P 500 that already announced results.
The drop increases by 7.7 percentage points when profits for
energy producers are stripped out, according to Bloomberg data,
making the contribution of oil companies the biggest in at least
10 years. Even after taking out financial firms and consumer
companies that reported lower earnings, oil profits accounted for
almost half of the overall gain of 11.02 percent for the S&P 500,
Bloomberg data show.
June futures on the S&P 500 retreated 0.2 percent to
1,423.50 at 10 a.m. in London.
The divergence in the earnings of oil companies from the
rest of corporate America indicates that the S&P 500’s two-month,
12 percent rally may not be sustainable, according to Neil Dwane,
who oversees about $139 billion as chief investment officer for
Europe at Allianz Global Investors’ RCM unit in Frankfurt.
U.S. economic growth ground to a halt in the second quarter,
according to economists’ estimates compiled by Bloomberg. The
last time the U.S. gross domestic product didn’t increase was in
2001, during the last recession.
`Saved The Market’
“The oil sector saved the market,” said Dwane. “Ex-oil,
the numbers show falling earnings and with data highlighting a
U.S. recession, we can expect more earnings downgrades.”
Energy companies globally are spending a record $369 billion
on exploration and production in 2008, Lehman Brothers Holdings
Inc. estimates. The cost to find and develop a barrel of oil
quadrupled to $18 last year from $4 in 2000.
Even so, output from outside the 13 members of the
Organization of Petroleum Exporting Countries will meet only
about 20 percent of the growth in world demand in the next four
years, according to the International Energy Agency in Paris.
Earnings at energy producers are lagging behind the rise in
oil prices as a result. Analysts estimate that oil companies in
the S&P 500 will earn an adjusted $55.67 per share, or 44 percent
of a barrel of oil that closed at a record $126.29 last week.
That’s the smallest margin since September 2005 and about
half the profit U.S. energy producers extracted from crude when
it traded below $50 a barrel in January 2007.
Exxon, Chevron and ConocoPhillips, the three largest U.S.
producers, all produced less oil in the first quarter. Chevron,
whose reserves fell to the lowest in almost a decade last year,
will spend more than $400 million a week this year to find
reserves and tap discoveries.
Exxon, located in Irving, Texas, has climbed 12 percent
since the S&P 500’s low on March 10. San Ramon, California-based
Chevron has gained 18 percent, while ConocoPhillips, located in
Houston, had advanced 19 percent.
Threadneedle Asset Management Ltd.’s Dominic Rossi says that
betting against energy stocks is a losing proposition because oil
prices will stay above $100 a barrel.
Oil will rise to between $150 and $200 per barrel in two
years as supply increases fail to keep pace with demand from
developing countries, Arjun N. Murti, an analyst at Goldman Sachs
Group Inc. in New York, wrote in a report May 5. The analyst
first wrote of a “super spike” in oil prices on March 30, 2005,
when oil closed at $53.99 a barrel. At the time, Murti predicted
crude may climb as high as $105 in the next several years.
Murti was proven correct as oil prices touched $100 for the
first time in January. Investors who failed to take heed missed
out on a more than doubling of oil prices and a 97 percent climb
in energy stocks in the S&P 500.
“We can’t see oil falling below $100 from here,” said
Rossi, who manages the $756 million Threadneedle Global Equity
Fund in London. “It’s time investors accepted triple-digit oil
and started positioning portfolios accordingly.”
For Liz Ann Sonders, chief investment strategist at Charles
Schwab, the “real” price of oil should be closer to $80 a
barrel. The San Francisco-based firm, which oversees $1.4
trillion for clients, is “underweight” energy shares on
expectations that oil prices will retreat.
A 37 percent decline in crude oil to $80 would have a bigger
impact on the S&P 500’s performance than five years ago, when oil
and natural-gas companies only accounted for 5.8 percent of the
index’s value, according to Bloomberg data.
Half of the world’s 10 biggest companies by market
capitalization — Exxon, Beijing-based PetroChina Co., Moscow-
based OAO Gazprom, Rio de Janeiro-based Petroleo Brasileiro SA,
and Royal Dutch Shell Plc, located in The Hague — are now energy
companies, at a time when the marginal cost of producing a barrel
of oil is climbing.
“A lot of that margin which dropped to the bottom line,
that’s gone,’‘ Bank of America’s Quinlan said. “The easy money
is behind us, for both the oil companies and investors.”
–With reporting by Alexis Xydias, Adam Haigh and Grant Smith in
London, Jim Kennett in Houston, Wendy Soong in New York and David
Pierson in Skillman, New Jersey. Editors: Daniel Hauck, Chris
May 19, 2008 at 1:40 pm #6844
Here is great update on this years S&P 500 Index and what the numbers really say about oil companies.
The media has been beating up oil companies about “record earnings”, windfall profit and how much damage oil prices are doing to the world markets. One the reasons these idiots use total numbers instead of normal profit measures in percentages of “Return on Assets (ROA)” or “Return on Investments” (ROI) & others….. is that these don’t fit their story line.
Oil companies are paying 450% increase in the cost ($4-6/Bbl back up to +$18/Bbl) to find & develop a barrel of oil, the “record earnings” on a percentage basis are less the range of 7-10% returns that puts them barely above the 500 average of 5.7% and in the class of mature industries (no one wants to invest in long term).
About 5 oil companies made it into the Top 20 list on the Fortune 500 – on a Revenue ranking, and while 3 of them made it on Top 20 list on total $Profit basis, none of the oil companies show up on a Top 50 list of most profitable companies when it is based on Profit as a
%Revenue, %Shareholder equity/%Assets or other basis. The Top 20 Profitable companies list had on a % Revenue ranged from 20-40%, and Profits on a % Shareholder Equity ranged from 60-3,520% whereas the top 5 oil companies had 3.4-10.9% Revenue & 13.4-33.4% Shareholder Equity by comparison!
The reason for this is obvious the +$120/Bbl market value is driven by speculators and the “true” value based on Gas/Diesel price fundamentals of the market would on be $75-80/Bbl. This has the market over-weighed and on risk basis for investing in expensive long term projects to find or refine oil barrels. The proof of this is born by oil companies reducing exploration and buying less to refine despite record prices – that record gross profit number came from a record gross revenue number that also has record gross cost values that actually lower returns compared to markets where fundamentals are the drivers. As an additional penalty the Oil industry reserves / “assets” become artificially increased to artificial market value basis.
The recent find 500 Billion Sweet Conventional crude field in Montana/Wyoming, the large number of Canadian SAGD Bitumen upgrader projects coming online (with P/L into US also completing), Brazil new 8 & 33 Billion Heavy Crude fields, and existing California & Texas 450 Billion Bitumen fields all bode for unsupportable $100-200/bbl touted prices. Additionally the reversal of grain based Ethanol forced blending could be reversed based on worldwide negative impact on food cost – this could readily be offset by more profitable blending of Butane (+104 octane) and Lt Straight Run Gasoline/Condensate (large volumes but cheap cost) which are currently prevented by Ethanols high vapor pressure. If U.S. either reduces consumption or increases (thru large doubling capacity expansions coming online 2008-2012) gasoline production it would dramatically drop crude prices from countries like China, Africa & SAmerica that have to export gasoline because they are diesel economies (would reduce amount crude & price competition on current Conventional crude oil production).
The dramatic cost increase in the cost of finding & producing a barrel of oil mentioned in article comes from the large transition of going from Giant fields of low cost conventional oil reserves to smaller (large vs. giant) fields of high cost non-conventional heavy crude that also require substantial investments or joint ventures in refining that are often not cost linked. The reason for the sharp transition was the huge number of oil industry mergers where oil companies were “finding” additional reserves in their former competitors assets which they purchased at $6/Bbl even with refining assets valued at $0! The mergers to form giant worldwide and regional oil companies was driven by both a mature oil industry consolidating to reduce cost duplication but also by cheap oil reserve acquisition cost. A bonus was derived from picking up refining assets from 0-50% of replacement cost which was also a landfall in a world where Environmentalist have a worldwide block against developed countries putting in new assets.
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