US oil industry profits expected to fall sharply

For the second straight quarter, ExxonMobil, Royal Dutch Shell and most of the world's largest oil companies are poised to report quarterly earnings that pale in comparison to a year ago, when results were buoyed by crude prices that topped out near $ 150 a barrel.
The April-June results may be somewhat better than first-quarter earnings, which were the lowest in several years, but declines of 50 % or more from a year ago are likely to be the norm.

That's what happens when oil prices plunge more than 60 % and slumping demand for gasoline cuts into refining profits. Natural gas prices have fallen sharply too as the world grapples with a severe recession that's crushed energy consumption.
"Prices have come down so dramatically since the second quarter of last year, I think you can expect (earnings comparisons) to be off maybe 60 % on average," said Brian Youngberg, an analyst at Edward Jones.

To understand how earnings can fall so much in a year, look no further than what majors like Chevron are getting for the oil and natural gas they're pumping. During the first two months of the second quarter, Chevron said the price it received for crude averaged $ 48.79 a barrel, up from $ 36.85 in the first three months of 2009 but not even close to the $ 113.97 a barrel it averaged in the year-ago quarter.
Natural gas prices for the first two months of the second quarter averaged $ 3.26 for 1,000 cf. That's below the $ 4.14 it realized in the first quarter and well off the $ 9.84 it got a year ago.

In addition, Chevron, the No. 2 US oil company behind ExxonMobil, said second-quarter earnings would be hit hard by lower results at its refining arm. In particular, the company said refining margins were far lower than those of a year ago.
Refining margins reflect the difference between the cost of crude and what the company makes on refined products such as gasoline. Those margins have been squeezed by rising crude prices, which are up about 20 % since the end of the first quarter, and weak demand for all types of fuel.
"Second-quarter numbers for refiners will be ugly, and the third quarter, at this rate, will be uglier still," Credit Suisse said in a recent report.

A benefit for consumers has been lower gasoline and other fuel bills. On average, pump prices are roughly 40 % lower than they were a year ago, when gasoline topped $ 4 a gallon.
On a per-share basis, Wall Street analysts polled by Thomson Reuters expect Exxon, the world's largest publicly traded oil company, to post second-quarter earnings of $ 1.06 a share, 53 % below year-ago results. But that would be an improvement from the 92 cents it earned in the first quarter, Exxon's lowest profit in more than five years. The same analysts expect Chevron's per-share profit to tumble 64 % from a year ago, and ConocoPhillips' overall results to fall 76 %.

In the face of lower commodity prices and earnings, many producers are scaling back spending on capital projects and looking for other ways to trim costs. The American Petroleum Institute said that drilling for oil and natural gas in the second quarter dipped to the lowest level in five years.
Investors will be watching closely in the coming weeks for evidence that companies are finding ways to cut expenses. They'll also be keeping a close eye on oil and gas production, which makes up the bulk of profits.

Marathon Oil said that daily oil and natural gas production available for sale during the second quarter is expected to be about 411,000 barrels of oil equivalent, ahead of prior guidance between 385,000 and 405,000 boe.
"Declining production has been an ongoing problem for a lot of these companies," Youngberg said. "It's closely watched. It gives everyone a gauge of the direction the company is going."