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For Oil Firms, Prices May Ease Storm’s Blow

The Wall Street Journal: For Oil Firms, Prices May Ease Storm’s Blow

“Shell’s Mars field — which cost $1 billion in initial development costs — along with other fields that account for some 40% of its production in the Gulf, may be out of commission well into next year. Nearly two weeks after the storm, the company had restored a little more than a third of its 450,000 barrels of oil equivalent to a day of production, according to a Shell update last week.”

Monday 19 September 2005

Higher Margins Are Making Up
For Drop in Production Volume;
Many Are Still Assessing Damage

By CHIP CUMMINS in London and RUSSELL GOLD in Austin, Texas
Staff Reporters of THE WALL STREET JOURNAL
September 19, 2005; Page C1

The rigs, pipelines and refineries of most of the world’s largest publicly traded oil companies were hammered by Hurricane Katrina. But sorting out the storm’s impact on the energy industry’s bottom line isn’t as simple as tallying up the wreckage.

The oil majors say it is too early to pinpoint the financial fallout from the hurricane, which struck the Gulf Coast three weeks ago, but it is clear that several already are losing millions of dollars a day from bottled-up production and disrupted refining operations. By crimping the supply of crude oil and gasoline on the market, however, the storm is propping up oil prices and refining margins for companies such as Exxon Mobil Corp., BP PLC, Royal Dutch Shell PLC, Chevron Corp. and Total SA of France. That should at least partly make up for any big storm-related expenses.

“Their loss in volume is very often made up by higher margins,” said Jon Rigby, an analyst at UBS in London who covers European oil majors. He has “buy” ratings on BP and Total and a “neutral” rating on Shell. UBS does investment-banking business with all three companies and frequently trades their shares.

Indeed, Lehman Brothers earlier this month upgraded its earnings estimate for Exxon by about a third, to $1.62 a share, or about $10.2 billion, for the third quarter, based on expected higher oil prices and refining margins in the wake of Katrina.

Still, some companies face a much harder time rebuilding their operations, and that could curb profits and delay big projects. Total has only minimal operations in the Gulf of Mexico. Shell, the biggest oil producer in the region, appears to have suffered the most damage, and its stock price has underperformed because of it.

Shell’s Mars field — which cost $1 billion in initial development costs — along with other fields that account for some 40% of its production in the Gulf, may be out of commission well into next year. Nearly two weeks after the storm, the company had restored a little more than a third of its 450,000 barrels of oil equivalent to a day of production, according to a Shell update last week.

The rest of its daily oil output, about 290,000 barrels a day, is stuck for now below the seabed. That is roughly 8% of the company’s overall production. If that were all oil, it would equate to about $18 million in sales each day.

Share prices in oil companies have soared this year on the back of higher oil prices, with the Dow Jones World Integrated Oil Index up 40% from a year ago. Still, these stocks aren’t overpriced compared with their peers in other industries. The world’s largest oil companies had a price-to-earnings ratio below 14, while the Dow Jones Industrial Average has a P/E ratio of 18.3.

But Shell — the third-largest oil company by market value behind Exxon and BP — took a hit earlier this month as the extent of the hurricane damage became clear. Shell shares have climbed back, gaining about 4% since Aug. 26, the Friday before Katrina hit. Other major oil companies have done better, posting gains of between 6% and 9% for Exxon, BP, Chevron and Total. Shell isn’t yet saying how much it thinks the clean-up might cost. As of 4 p.m. trading Friday on the New York Stock Exchange, Shell’s American depositary shares were up 58 cents to $64.75.

Last year, Hurricane Ivan cost the oil industry just under 44 million barrels of lost production. Ivan, a much weaker storm, sunk seven offshore oil platforms. So far, the Coast Guard counts more than 50 for Katrina.

BP’s offshore facilities fared well, but the company says it will be unable to produce oil from its deepwater facilities for several weeks because of damage to underwater pipelines. That stops up an estimated 175,000 barrels a day of output. BP says it won’t likely have details about the storm’s financial impact until early next month.

Exxon says crews are still assessing its facilities, and 28,000 barrels a day of oil production remain off line. Its Chalmette, La., refinery, just east of New Orleans, remains closed due to damage from flooding. It could take several more weeks to restart. An Exxon spokesman said damage assessment is continuing as workers begin to clean up debris and pump out water.

Chevron’s offshore Petronius platform was ready to pump crude, but its pipeline is still being assessed, keeping 50,000 barrels a day from reaching shore. Its giant Pascagoula, Miss., refinery had extensive damage and will remain closed for weeks. Chevron said it won’t likely have an estimate on the cost of the storm until it reports earnings next month.

As the oil titans struggle with repairs and lost production, the fat profits they are raking in are exposing them to political risks — but also creating opportunities. The oil-industry bashing is acute in Europe, where farmers and other citizens are fuming about fuel prices and where Exxon, BP, Shell, and Total have big operations. French Finance Minister Thierry Breton is threatening a windfall-profits tax.

Crude prices skyrocketed to a record right after Katrina struck, but have dropped sharply in recent days, taking off some of the heat. In late trading Friday on the New York Mercantile Exchange, oil futures were down $1.75 at $63 a barrel. That is down about 11% from an intraday post-Katrina peak of $70.85.

Katrina has nonetheless resuscitated proposals for gasoline-tax increases, price caps and windfall taxes in the U.S. A Republican-led Congress isn’t expected to embrace such measures. But some politicians and activists are rallying behind them.

“People recognize something has to happen and that consumers aren’t just going to stand by,” said Navin Nayak of the U.S. Public Interest Research Group, an environmental and consumer-rights group.

Katrina is also presenting opportunities for the oil industry. Congress is considering legislation to open up more acreage to drilling. That would provide new opportunities for oil companies to replenish their reserves close to home, thus relatively inexpensively.

“Katrina has put a spotlight on the fact that a large portion of the U.S. energy infrastructure is in a small geographic area,” said Charles Swanson, director of Ernst & Young’s energy business. “We now have one more reason to look at this.” Mr. Swanson, who has no direct holdings in energy stocks, says Ernst performs professional services, including auditing and providing tax advice, for various energy companies.

Write to Chip Cummins at [email protected] and Russell Gold at [email protected]

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