In spite of falling production, The Wall Street Journal predicts tomorrow that oil companies will report record earnings for 2005. Lower production and costly drilling operations have been more than offset by an enormous rise in crude prices, leaving the industry's top 70 producers with a 26% net increase in earnings this year.
The report by Bhushan Bahree (with contributions by Russel Gold and Jeffrey Ball,) also claims that 2006 will likely see a plunge in profits. Though the industry is currently sitting on huge cash reserves, experts are predicting dips in oil profits for 2006, based on rising costs and an anticipation of lower prices per barrel.
Excerpts follow:
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High Energy Prices Drive Earnings,
But Some See Turn in 2006
By Bhushan Bahree
Staff Reporter, The Wall Street Journal
July 26, 2005
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In a report published last week, Merrill Lynch & Co. said the aggregate net income of the 70 largest companies in the sector is expected to rise 26% this year to $230 billion, on sales of $2.57 trillion, up nearly 10%. The reasons: high oil prices and fat refining margins, plus a pickup in oil-field services, particularly in rates for drilling rigs. The 70 companies are expected to return about $210 billion to shareholders this year through dividends and share buybacks, Merrill Lynch added.
But next year, the sector's net income is forecast to decline to $205 billion due to an expected easing of oil prices and slimmer margins on gasoline and other refined petroleum products. Increased spending on new oil and gas projects, now being ramped up to offset depletion of existing fields, is starting to take a toll. Shell recently announced that its giant gas development in Sakhalin, Russia, could cost as much as $20 billion, twice the original estimate. Merrill Lynch says that the cost of finding and developing oil rose 22% in 2004.
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Exxon is expected to report Thursday an approximately 40% increase in earnings over the year-earlier quarter, though its production is expected to stay basically flat, according to Deutsche Bank and Oppenheimer & Co.
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At Shell, despite an expected 3% fall in production, higher oil prices are expected to boost exploration and production profits by 43% in the second quarter and lift companywide earnings once again when the company reports on Thursday, Deutsche Bank estimates. France's Total SA is expected to report an increase in net income of 30% to 40% or more on Aug. 4. "If anything, it should be toward the upper end of that," said Lucas Herrmann, a Deutsche Bank analyst in London, citing output growth at the company and strong refining margins. Total is Europe's largest refiner of crude oil.
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Oil and natural-gas production is expected to fall 7% at Chevron, which will report Friday, as normal field declines and an absence of any large new projects take a toll. Production should get a boost later this year with the start-up of a large deepwater offshore West Africa project.
Still, Chevron is likely to report an 11% increase in earnings, says energy analyst Fadel Gheit at Oppenheimer, because of high commodity prices.
