Daily Telegraph: Oil profits will hit record – but can it last?

By Russell Hotten, Industry Editor
Last Updated: 7:51am GMT 31/01/2008

The world’s independent oil majors are about to announce a series of eye-popping profits numbers.

ith crude averaging $90 a barrel for the final three months of 2007 the likes of Shell and ExxonMobil have been given a nice little end-of-term boost to their full-year figures. So expect to hear the word “record” used a few times in the next few days as they unveil their Q4s.

But is this going to be as good as it gets? It’s difficult to feel sorry for a company like Exxon, which will tomorrow announce profits equivalent to around $75,000 a minute.

But the high crude price has masked huge pressures building up for oil companies.

The cost of getting the stuff out of the ground has soared. The rise in equipment and labour costs is well into double digits, fuelled by a worldwide lack of the engineers and the infrastructure needed to find and pump crude.

Oil companies are finding it increasingly difficult to bring new fields online fast enough to replenish their reserves. And check the Q4 numbers for oil and gas production figures. Many are likely to be weak.

There are also signs that margins in companies’ refinery divisions are coming under pressure. Refining margins for the industry as a whole are estimated to have fallen 14pc to $5.72 a barrel in the Q4, down from $6.67 in the same period in 2006. What oil companies can make from higher oil prices they can lose by having to pay extra for the crude going into their refineries.

And then there is the emergence of “resource nationalism”, the impact of which will start to be really felt from this year and beyond. The governments of energy-rich countries are demanding a bigger slice of the revenues. The conditions being imposed on new – and re-negotiated – production sharing agreements are now much more onerous.

Of course, if the oil price keeps rising then companies will continue to be cushioned. But many analysts, who only a couple of months ago where predicting that oil would soon cross and then stay above the $100 threshold, are now not so sure.

Last week, fears about a US recession led to oil falling to $87. The US Energy Information Agency forecasts that the oil price will average $87 a barrel this year, up from a previous estimate of $85. The average price will then fall to $82 a barrel in 2009.

In a recent research note, analysts at JP Morgan said that if oil fell much below $85 a barrel the bank’s positive view on oil companies’ earnings estimates will start “coming to an end.”

ExxonMobil

Forecast to make profits of $39.2bn for 2007, just under a record $39.5bn set in 2006. The Q4 figure is expected to be around $10.37bn, which would be $300m less than the Q4 profit in 2005 of $10.7bn – the largest in corporate history. Every $1 rise in oil adds about $125m to quarterly profits.

Chevron

The second largest US oil company is on course for its fourth consecutive year of record profits, topping last year’s $17.1bn. The company has already said that it expects Q4 profits to be more than the $3.72bn made in Q3. Analysts predict Q4 profits of about $4.8bn.

BP

Despite BP’s well documented operational problems last year, Europe’s number two oil company is still expected to a Q4 profits rise of almost 15pc to about $2.3bn. However, for the previous nine months of 2007, BP’s profits were down 22pc to £7bn.

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