The world's largest oil companies likely had an "ugly" second quarter, with earnings hit by a halving of oil and gas prices, sharply lower refining margins and, worst of all for many, stubbornly high costs. The oil and gas sector will likely report a 62 percent drop in second-quarter earnings compared to 2008, and a 27 percent decline compared to the first quarter of 2009, analysts at Citigroup predicted.
The quarter-on-quarter decline comes despite a recovery in crude prices to almost $60 per barrel from around $44 in the first quarter, and reflects continued weakness in gas prices and crude processing margins and, for many, lower production.
"Generally, if there is an area where we are going to be disappointed, I'd say it is the integrated oil companies," said Fred Dickson, market strategist at D.A. Davidson & Co in Lake Oswego, Oregon.
Exxon Mobil, the world's largest non-government controlled oil company by market capitalisation, is expected to report second quarter net income of $4.75 billion, down 59 percent on April-June 2008, according to Reuters estimates.
U.S. No. 2, Chevron is forecast to post a 70 percent drop in net income to $1.82 billion.
Europe's largest oil company, Royal Dutch Shell Plc, is predicted to report a 70 percent fall in current cost of supply net income, excluding one-off items, with an average forecast of $2.55 billion in a Reuters poll.
BP Plc, Europe's No. 2, was forecast to report a replacement cost net income, excluding one-offs, of $2.81 billion, a 67 percent drop on the year.
Replacement cost and current cost of supply net income exclude unrealised profits or losses related to changes in the value of fuel inventories, making them comparable with net income under U.S. accounting rules.
STICKY COSTS
Soaring oil prices prompted and, for many oil industry investors, disguised a doubling in the cost of producing oil between 2004 and 2008.
Now, after a collapse of crude prices from a record above $147 last July, companies including BP and Shell are pressing suppliers hard for discounts.
Companies have claimed some success in this. In the first half of the year, upstream oil and gas production costs fell 8 percent, according to a survey by industry consultants IHS CERA.
However, many oil executives doubt their profit margin will be boosted by significant cost cuts. Much of the drop in the IHS CERA index is due to a collapse in steel prices, since a peak in mid-2008, and in the cost of hiring rigs.
However, steel prices have started to rise again in recent months and analysts believe rig rates may be nearing a bottom.
Meanwhile, prices for highly complex equipment, on which the industry increasingly relies, due to the need to explore for oil in ever more remote locations, have remained stubbornly high.
Analysts at Morgan Stanley, who predicted an "ugly" quarter for the sector, said that as companies report in the coming weeks investors could be disappointed about how "sticky" costs may be.
However, with so much bad news forecast, any positive may buoy investors. "The sector could see something of a relief rally if results prove no worse than expectations," Gordon Gray, oil analyst at Collins Stewart, said.
