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The New York Times: Chevron, Like Its Rivals, Reports Higher Profits Amid Global Concerns

Published: July 29, 2006

Chevron reported yesterday that its second-quarter earnings climbed by 18 percent, marking the company’s highest profit for any three-month period. But the results paled next to the earnings announced this week by other large oil companies, and Chevron’s stock price dropped substantially on a day when American markets otherwise soared.

Like Exxon Mobil, Shell, BP and ConocoPhillips, who have all reported a banquet of riches in recent days, Chevron said that it had been profiting from the rising price of oil, which is now more than $70 a barrel, and strong refining margins.

In all cases, however, the reports of profits were full of caveats. The companies reported higher labor and equipment costs, enduring expenses from last year’s Gulf Coast hurricanes, drying wells in long-established fields and mounting taxes demanded by foreign governments.

Chevron and the other companies noted in their earnings reports that they were increasingly reliant on giant projects that take years to develop in countries like Nigeria, Angola, Venezuela and Kazakhstan, places where changes of government can lead to torn-up contracts and possible expropriation.

Chevron, based in San Ramon, Calif., said it earned $4.35 billion, or $1.97 a share, up from $3.68 billion, or $1.76 a share, for the same quarter last year. Revenues rose $5 billion, to $52 billion, from the same period in 2005 because of higher prices for crude oil and refined products and the added sales from Unocal operations acquired last August.

The company’s profits would have been larger had it not been for a $300 million charge for uninsured costs for damages to equipment caused by last year’s hurricanes.

Shares of Chevron fell 2.5 percent, to $66.03, in New York Stock Exchange trading. Analysts said that investors were disappointed that Chevron did not meet their expectations for even higher profits and were concerned over company warnings that its production would decrease in Venezuela because of greater control over oil fields exercised by the government of President Hugo Chávez. In a conference call, Chevron executives told analysts yesterday that the conversion of their Venezuelan subcontracting agreements to joint ventures with the Pdvsa state oil company would reduce company production by 90,000 barrels of oil a day in the second half of the year.

“The financial impact of that is immaterial to Chevron,” Chevron chairman and chief executive officer, David J. O’Reilly, said, “because we’re going to a higher margin but lower volume amount of crude there.” Mr. O’Reilly added that the company was shifting its international operations to more stable areas, like Asia, the Caribbean and the West Coast of the United States.

Nevertheless, the loss of Venezuelan production will contribute to a slight decrease in forecasted total company production to 2.6 million barrels of oil a day in the second half.

Market jitters over Chevron’s results reflected a troubling trend shared by virtually all the major international oil companies: increasing exposure in politically unstable countries, where nationalistic governments like Venezuela’s are tightening terms of contracts, and guerrilla attacks on oil facilities are mounting in places like Nigeria.

“Their dependency on unstable areas is increasing,” said Antoine Halff, an oil analyst at Fimat USA, a brokerage firm, speaking about Chevron but also other companies. “The share of their production that used to come from stable economies like the U.S. or the North Sea is declining because those areas are mature and face production decline.”

The week of big oil profits reached a crescendo Thursday when both Exxon Mobil and Royal Dutch Shell reported a 36 percent gain in second-quarter earnings.

But Shell reported that its oil and gas production actually fell by 8 percent for the quarter, due largely to the loss of 177,000 barrels a day in Nigeria because of political unrest and production contracts under which output is obliged to drop as oil prices rise.

Exxon, which reported a stunning $10.36 billion net income for the quarter, was the only one of the big three producers to increase output in the quarter. Much of that growth was produced by the recent start-up of the Erha project 60 miles off the Nigerian shore.

ConocoPhillips reported a 65 percent increase in profit on Wednesday for the second quarter. But there were soft spots in its performance. Production in its Prudhoe Bay, Alaska, field was off by 20,000 barrels a day, and repairs cut output in the North Sea.

Those shortcomings were more than compensated for by its large investments in Libya, the Timor Sea and Russia’s Lukoil. Net income from the company’s noncontrolling stake in the Russian oil company soared 55 percent to $387 million in the quarter.

Analysts have warned that ConocoPhillips made a risky move by purchasing the stake in Lukoil in 2004, but the bet significantly increased the company’s reserves at a bargain price.

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