Quarterly forecast for Big Oil: sunny and profitable

Stable oil prices and increased production at the end of last year bode well for Big Oil profits as the major companies begin fourth-quarter financial reporting this month.

The price of oil is the single largest driver for oil company revenue, and U.S. benchmark West Texas Intermediate ended the year at $91.82, just pennies below its $92.19 price at the end of September.

Most companies also will benefit from increased production compared with the third quarter, when hurricanes in the Gulf of Mexico and storms in the North Sea forced many facilities offline.

“The companies that had expected volume increases in the third quarter will end up seeing them show up in the fourth quarter,” said James Sullivan, a senior analyst with Alembic Global Advisors.

Royal Dutch Shell, Chevron Corp., ConocoPhillips, Exxon Mobil Corp., and BP report fourth-quarter earnings later this month or in early February.

Analysts predict that Shell, based in the Netherlands with U.S. headquarters in Houston, will report strong fourth- quarter results, driven by ramped-up operations at its Pearl gas-to-liquids plant in Qatar.

Higher production also should also help Shell’s cash position, said Brian Youngberg, an analyst with Edward Jones. Shell had been borrowing to help pay dividends, but operational cash flows now should cover dividends and capital expenditures, Youngberg said.

Chevron, too, looks to be a top performer. In an interim update Jan. 10, the San Ramon, Calif.-based company said it expects fourth-quarter earnings to be “notably higher” than third-quarter profit.

It will benefit from increased oil and gas production, said John White, an analyst with Triple Double Advisors in Houston – although he cautioned that fluctuations in quarterly production don’t much affect annual earnings for the oil giants.

“This group is characterized by being challenged to grow production, because they are so big,” White said. “When you are making millions of barrels a day, what project can you go after that will really have an impact? That list is pretty short.”

Irving-based Exxon Mobil has an additional obstacle to increasing production because of its acquisition of XTO Energy in 2010 – a gamble that made Exxon Mobil the nation’s largest natural gas producer.

“They have held back some of their gas volumes, given where pricing is,” Youngberg said.

U.S. natural gas has dropped from around $4.70 per million British thermal units when the Exxon Mobil-XTO deal closed in mid-2010 to $3.35 at the end of 2012 – a volatile year in which the price started at $2.99 and dipped under $2 for a few days in April.

Natural gas prices soared as high as $15 in 2005, before the boom in production from shale plays boosted supplies and sent the price down.

The integrated companies that handle oil and gas from production to final market – Chevron, Shell, Exxon Mobil and BP – are enjoying benefits in their refining businesses because of a wide spread between prices for West Texas Intermediate and international benchmark Brent crude.

Brent crude hovered around $110 most of the fourth quarter, $20 above the U.S. benchmark.

“The spread allows them to capture more profit if located in regions where the discount is steep,” said Lysle Brinker, equity research director at IHS. “You can buy your barrels of oil at a deep discount, while world prices more or less influences the price for (refined) products.”

“The integrated business model has been challenged in recent years as to whether it is worthy, but these companies have displayed why they can succeed,” Brinker said. “The downstream divisions are performing better because of those spreads. What they lose in the upstream, they can sometimes make up for in the downstream.”

That doesn’t help Houston-based ConocoPhillips, which spun off its refining division last year into a new company called Phillips 66.

ConocoPhillips is moving forward with an asset divestiture program aimed at making it a leaner pure-play independent.

But Pavel Molchanov, an analyst with Raymond James, is skeptical of its strategy of funding growth and generous dividends for shareholders while continuing to sell assets.

“Conoco’s problem is that it is trying to have its cake and eat it too,” Molchanov said. “It’s not realistic for a company the size of Conoco to grow production 3 to 5 percent and sustainably pay out a dividend yield of 4.5 percent.”

By contrast, BP drew praise for its near-completion of a $38 billion asset divestment program, a year ahead of schedule and with competitive prices that have left it with its highest-producing assets.

But it still faces billions in liabilities for the 2010 Gulf of Mexico oil spill, despite a class action settlement of many civil cases filed by Gulf Coast residents, and pending resolution of federal criminal charges arising from the deadly blowout of its Macondo well.

“The plans that BP has in restructuring, the shrink-to-grow strategy – I like the strategy, but it will take more time before we see more evidence of its success,” said Phil Weiss, an analyst with Argus Research Group. “Macondo still hangs over their head.”