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Feb 20, 2006
Soaring oil and natural gas prices have inflated energy companies' net profits to a record level both in the global and domestic fronts.
For the year ended December, Exxon Mobil Corp., the world's largest publicly traded oil company, racked up net profit worth US$36.13 billion – an all-time record for any publicly-traded company – or some 4.26 trillion yen, up 42.6 per cent year-on-year. This is followed by a 36.5 per cent surge in net profit to US$25.31 billion at Royal Dutch Sell Plc and a 30.8 per cent jump to US$22.34 billion at BP Plc.
Japanese oil refiners also enjoyed a substantial rise in profit under ever climbing product prices.
Japan's largest Nippon Oil Corp. has lifted its group pretax profit projection for the year through March by 70 billion yen (US$592 million) to 300 billion yen, up 41 per cent from a year earlier.
Cosmo Oil Co. has also raised its group pretax profit forecast by 24 billion yen to 117 billion yen, an 85.2 per cent increase from the preceding year. Cosmo's net profit prediction has been revised upward by 16 billion yen to 60 billion yen, a 130 per cent rise from fiscal 2004.
But over half of this substantial increase in profits at these Japanese oil companies is attributable to the weighted average inventory valuation method, which tends to overestimate the value of ending inventories thus underestimating cost of goods sold, and overestimating profit at the time of fast product price increases.
In the case of Nippon Oil, its ending inventory valuation method is estimated to have inflated group pretax profit by as much as 155.5 billion yen. If the accounting bias in inventory valuation were removed, group pretax profit would be 145 billion yen, which is smaller than that of the previous year's 151.7 billion yen.
The overestimated ending inventories, however, will become the overvalued beginning inventories in fiscal 2006, which will lead to a greater cost of goods sold and the underestimation of profit, as the rise in crude oil prices seems to have passed its peak. In fact, Nippon Oil forecasts its fiscal 2006 pretax profit to drop 50 per cent from the projected fiscal 2005 level to around 150 billion yen. Cosmo Oil also anticipates a profit decline of 30 per cent.
The vulnerability in earnings capability of Japan's oil companies has been blamed on the fact that their operations are not vertically integrated. Most of these firms buy crude oil from the oil field development firms, trading companies or major global players and sell refined products to their affiliated retailers.
Some Japanese oil companies explore and develop overseas oil fields, but their exploration capability and financial strength to take risks involved in the oil field development projects are still limited.
Unlike these Japanese firms, Exxon Mobil, Royal Dutch Shell, BP and Total S.A. are fully integrated concerns with operations that encompass oil field exploration, development, transportation, refining, production of petrochemical products and marketing of these products.
An answer to more stable managerial basis and greater risk taking capability for Japanese oil companies is an industry-wide restructuring. Even the giant oil firms of the U.S. and Europe are survivors of numerous mergers and acquisitions (M&As).
The August 1998, the takeover of American Oil Company (Amoco) by British Petroleum as well as the November 1999 merger of Exxon Corp. and Mobil Corp. altered the landscape of the global oil industry.
Back in November 2005, Japan's largest oil development firm Inpex Corp. and the third largest Teikoku Oil Co. signed a merger agreement for the unification of their operations in April.
Like other oil companies, Inpex has reported a record pretax profit of 180.5 billion yen for the fist half of fiscal 2005 through September, a 63 per cent increase owing to high oil prices. The company's merger with Teikoku will bring its annual revenue to 650 billion yen. But still the annual revenue of the unified entity is only about 2 per cent that of Exxon Mobil.
With most of the existing large oil fields staying in the hands of the major global players, Japanese oil concerns such as Inpex have no choice but to explore new fields in Africa, Latin America and central Asia, but the exploration costs are soaring because of increasing geopolitical risks and environmental concerns.
Furthermore, energy thirsty emerging economies such as China and India are eager to outbid their competitors for securing new oil fields overseas.
********************* Date Price ********************* July 2001 100 yen July 2002 100 yen July 2003 101 yen July 2004 114 yen July 2005 125 yen Jan 2006 128 yen *********************
The Inpex-Teikoku merger, therefore, should be seen as a first step toward the industry-wide restructuring, through which a fully integrated oil firm that can withstand the toughing international competition against big players should emerge.
*********************************************************** Company Sales Operating Net Profit Profit *********************************************************** Nippon Oil 2,701.03(19.6%) 145.48(61.3%) 81.88(41.2%) Idemitsu 1,484.5 (10.3%) 29.3 (6.2%) 44.4 (–) Kosan Cosmo Oil 1,203.20(21.4%) 50.68(132.5%) 29.56(614.3%) Showa Shell 1,059.58(20.7%) 50.25(132.5%) 28.61(136.8%) Sekiu ***********************************************************
Average retail price of regular gasoline in Japan (per liter)
Group half-year earnings for FY2005 (billions of yen)
Note: Figures in parentheses show year-on-year change.
Japan Energy Corp. is now part of the Nippon Mining Holdings Inc. group and no consolidated earnings figures comparable with other refiners are available.
Nippon Oil Corp.
1-3-12 Nishi-Shinbashi
Minato-ku, Tokyo 105-8412
Tel: 03-3502-1131
Idemitsu Kosan Co.
3-1-1 Marunouchi
Chiyoda-ku, Tokyo 100-0005
Tel: 03-3212-3114
Japan Energy Corp.
2-10-1 Toranomon
Minato-ku, Tokyo 105-8407
Tel: 03-5573-6085
Cosmo Oil Co.
Minato-ku, Tokyo 105-8528
Tel: 03-3798-3211
Showa Shell Sekiyu KK
2-3-2 Daiba
Minato-ku, Tokyo 104-8581
Oil Information Center Japan
1-13-1 Kachidoki
Chiyoda-ku, Tokyo 104-8581
Tel: 03-3534-7411

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