The Oil Business Could Be Worse (But Not Much)

By Julian Murdoch

As expected, it was a rough couple of weeks as the oil majors ramped up the spin machine to explain (or gloss over) what happened during the first quarter of the year. Let's be honest here - we all knew it was going to be bad. Oil prices averaged $98.43 per barrel in the U.S. during the first quarter of 2008 and only $43.31 for the first quarter of 2009. When the price the market is willing to pay for your product is cut in half, all a company can do is hang on and do what it can to lessen the impact of the fall.

Some did okay, others got burned, but no one is unscathed.

Company	Symbol	Mkt Cap (5/6/09)	1Q09 Earnings (millions)	% Change From 1Q08	Beat Or Miss?
ConocoPhillips	COP	65.47B	840	-80%	Beat
BP plc	BP	143.25B	2,560	-64%	Beat
Chevron Corp.	CVX	136.03B	1,840	-64%	Miss
Royal Dutch Shell	RDS.A	129.61B	3,490	-62%	Beat
Marathon Oil Corp.	MRO	23.16B	282	-61%	Depends
Exxon Mobil Corp	XOM	333.58B	4,550	-58%	Miss
Eni S.p.A.	E	81.49B	2,500	-43%	Beat
Total S.A.	TOT	126.82B	3,100	-38%	Beat
PetroChina	PTR	185.36B	2,800	-35%	Miss

The above is just an indicative sampling of the oil and gas companies that have reported first-quarter earnings in the past two weeks, sorted from "OH MY GOD" to "well that wasn't great, but we're OK."

Across the board, companies' first-quarter results were down compared with first quarter 2008. Way down. No big surprise there. What is interesting is to see what the market thought the company was going to report, versus what it actually did. After all, we as investors have been conditioned to love upside earnings surprises.

Let's take a look at two companies - one that beat the whisper numbers (ConocoPhillips), and one that missed (Chevron Corp).

ConocoPhillips

ConocoPhillips gets the prize for largest drop from first quarter 2008 to first quarter 2009 - net income was down 80%. To put it into dollars and cents, ConocoPhillips had a net income of $4.14 billion at the end of Q1 08 - this year, that number dropped to $840 million, shedding the equivalent of Iceland, in GDP terms. But even so, once the one-time items and inventory changes were excluded, the company beat earnings estimates by 24%, ending up with 52 cents a share versus the 42 cents per share analysts had been expecting (and versus the $2.62 they reported last year). So yes, it was bad - but not as bad as everyone was expecting.

How did this happen? One reason was that COP pumped out more oil than was expected - approximately 28,000 bpd more than expected, to be exact. A small, but nice, boost to the revenue stream.

But cost cuts were necessary ($35 a barrel in February anyone?), and one place ConocoPhillips cut from was its capital spending. Capital spending is scheduled to drop 37% from last year's levels, to $12.5 billion (including obvious cuts in expensive per-barrel projects, like heavy oil extraction). Those massive cuts are still under way, and frankly, it looks like they're just turning off funds as fast as they can to whatever wheel squeaks. They also laid off 1,300 employees.

Chevron

Compared with ConocoPhillips, Chevron's Q109 profit of $1.84 billion - a 64% drop from Q108's $5.17 billion - doesn't seem so bad. The CEO would certainly be spinning it that way:

Operationally, we had an excellent quarter," said Dave O'Reilly, chairman and CEO of the San Ramon, Calif.-based oil company. "With oil production and refinery inputs both higher than a year ago and operating expenses lower, however, upstream earnings declined sharply on lower prices for crude oil and natural gas. Downstream profits improved mainly on gains from asset sales, while margins on the sale of refined products recovered only slightly from a depressed level in last year's first quarter.

But it wasn't good enough. Analysts were expecting earnings of 81 cents per share - what they got was 72 cents a share once those asset sales (e.g., $400 million from the sale of Chevron's marketing business in Nigeria and Brazil) were excluded.

Additionally, Chevron fell victim to what everyone else in the sector was dealing with - low crude prices. Chevron received an average of $36 a barrel from oil pumped in the U.S. - lower than the average crude price for the quarter - along with declining realized natural gas sales prices. Chevron's production increases (about 2.5% worldwide) and jump in refining earnings ($133 million, up from $4 million because of lower crude prices and the wider crack spread with gasoline and diesel) weren't enough to offset low crude and gas prices.

On the positive side, Chevron should be in a good position when prices rebound. According to William Andrews with C.S. McKee, L.P. who spoke to Bloomberg:

What Chevron's got going for it is they haven't backed off on their exploration program, which means they'll be in a position to capitalize when the economy recovers and prices rebound.

Whenever that may be.

Stock Market Reaction

The point here is this: Even with the miss on earnings and the terrible market for oil, Chevron is simply doing a better job at being a company in a terrible environment. They're controlling costs, yes, but they're also keeping up with their expansion plans, and managed to capitalize on their refining business. By comparison, ConocoPhillips just looks like it's throwing ballast overboard to stay alive.

The stock prices of these two companies do track the performance of oil, though they were a bit slower to respond to the uptick at the end of February, and in neither case was the stock of the company in question penalized or particularly rewarded for beating or missing its numbers. Instead, the year-to-date simply shows that the better company is beating the performance of its commodity.

The Real Juice: China

When talking about commodities, China almost always deserves a mention, and no discussion about oil would be complete without some reference to the world's second-largest consumer of the stuff.

PetroChina had the lowest change in net income when comparing first-quarter results, reporting Q109 results that were 35% lower than the same quarter in 2008, and in the process missed analysts' expectations - but not by much. The 18.96 billion yuan ($2.8 billion) that PetroChina reported was only 2.7% lower than the 19.5 billion yuan ($2.88 billion) analysts expected.

PTR's stock dipped slightly on the earnings news, but since then has been moving upward with oil. Over the past weekend, PetroChina's stock price managed to jump almost 10% - on the news that they'll be floating a bond issue to raise $22 billion to fund exploration and expansion plans.

Once again, pick-and-shovel investors should take note: The market rewards companies that do what companies are supposed to do - pursue growth - as opposed to those that simply try and survive.

Comments

[Wadhamite:]

All of the oil companies made money. Say the same for the auto companies? Where would you rather invest?

Good times will return. Buy low and watch the profits rise.

May 11 01:58 PM

[Michael Del...:]

With Q1-09 profits down 65% from Q1-08 profits, does this mean CVX is only 1/3 the company it was last year? No. It also does not mean that CVX will be twice the company next year, when Q1-10 profits are up 100% over Q1-09 profits. It's an illogical market and a chance to make money whenever the market is over-pessimistic or over-exuberant. IMHO, there is still plenty of room to make money in CVX if you get in on any pullback and you get a nice dividend while you wait a year or two.

May 11 06:37 PM

[THofler:]

Loved the first table, thanks.

I have medium positions in Total and Eni & small positions in Conoco & Chevron. I can be a very patient investor when collecting 6 & 8% dividends.

May 11 09:12 PM

[proxyjoe:]

Well, if COP underperformed the most of the bigs, they were also beaten down for it as well. That leaves them with more upside to regain than CVX, XOM, et.al. For that reason, I like them at $45 better than XOM and CVX at $70

May 12 01:54 AM

[realold:]

I agree with most of you and suggest maintaining positions in several oil companies. Personally, I like Total because it is a good company and not as effected by Obama. COP has good oil and gas balance, but Obama doesn't seem to understand the benefit of NG as a transistion fuel. So, be careful there. NG prices could continue low for a long time.

May 12 11:46 AM

[igggy:]

Anyone remember the 80s (I was too young) when the oil stocks went nowhere for a decade. There is a chance for the same scenario again.

May 12 01:14 PM

[HerrHansa:]

It's still about controlling costs per barrel. Another thing to watch is natural gas prices and output, especially with more integrated players in this sector. Statoil (STO) recently reported, and like the other majors was down Q1 2009 from Q1 2008, which is no surprise: "first quarter 2009 net operating income was NOK 35.5 billion, compared to NOK 51.4 billion in the first quarter of 2008 (MarketWire)". However, I liked what I saw in them a couple months ago, and I am still holding.

May 12 03:11 PM

[Sailingwind...:]

When will they put a stop to Wall Street energy manipulators, these people are out of control and along with foreign imports & outsourcing it was a major contributor to the recession ($5.00 a gal gasoline). All the experts said the oil surge was supply & demand and we now that was all a Wall Street fabrication, someone please tell me WHY we bailed these mutts out?

May 12 05:04 PM

[beenburnedt...:]

Nice analysis that I would like to see more of on S-Alpha. The best thing for oil majors is for crude to stabilize between $55 and $70 in the next couple of years though, no spikes, no dips.

CVX, XOM, COP all good long positions.

May 12 09:46 PM

[been there:]

don't forget about windfall profit tax If obama doesn't enact this there ain't no sand in Saudi Arabia.

May 12 10:44 PM

[Victhom:]

Keep pumping oil if you want but...see this news...

Oil slips to near $58 as signs of weak economies in US, Europe slow recent rally
Pablo Gorondi, Associated Press Writer
On Friday May 15, 2009, 6:44 am EDT
Buzz up! Print Oil prices slipped to near $58 a barrel Friday as signs of economic weakness in the U.S. and Europe led investors to consider whether this month's crude rally was justified.

Benchmark crude for June delivery was down 53 cents to $58.09 a barrel by midday in Europe in electronic trading on the New York Mercantile Exchange. On Thursday, the contract climbed 60 cents to settle at $58.62.

In London, Brent prices were down 49 cents to $58.10 a barrel on the ICE Futures exchange.

Oil recently rose above $60 a barrel on optimism that the worst of the U.S. recession was over, but dismal news this week on retail sales, unemployment and housing have traders reconsidering their outlook.

European data was likewise bleak as it showed the euro zone economy shrank by a massive 2.5 percent in the first quarter, with export-dependent Germany, the region's biggest economy, particularly badly hit.

"Some of the green shoots are looking like yellow weeds," said Christoffer Moltke-Leth, head of sales trading for Saxo Capital Markets in Singapore. "That's going to spill over into equity markets and have an effect on crude."

He projected that prices would fall back toward $50 a barrel soon, which could mean lower pump prices.

Investors got more evidence Thursday that global crude demand may be too weak to justify the recent run-up in prices. The Paris-based International Energy Agency cut its global oil consumption forecast for a ninth consecutive month and now expects demand to fall 3 percent in 2009, or about 2.6 million fewer barrels a day than last year.

May 15 11:46 AM

[Steve Ward:]

A Buffett Contrarian Anyone?

Buffett has sold a ton of COP, greatly reducing his position at a loss it seems. As COP is the freckle faced red headed stepchild of the majors, maybe, just maybe, now and the next few months would be a time to buy. Although, I do like CvX's upstream prospects better for the next 3 to 5 years. If Buffett is still unloading COP, then we all need to see the stock settle down before the "Contrarian Buy".
Unless of course, you believe Buffett knows what he is doing as in buyimg COP last year at prices reflecting 100 plus per barrel.
Short term COP could benefit from less E&P spending with prices at these levels. It could actually build up some cash.

May 17 01:09 PM