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New York Times: Oil Patch’s Profit Party Is Slowing Down

October 23, 2006: Filed at 3:54 p.m. ET

WASHINGTON (AP) — The oil industry’s profit party is still raging, just not as wildly as last year.

Five of the world’s largest energy companies are expected to report combined third-quarter earnings this week of more than $30 billion, though profits were weighed down by falling prices for natural gas and gasoline.

The industry derived much of its strength from crude oil prices, which averaged roughly $70 a barrel in the July-September period and hit an all-time peak above $78 amid conflict in the Middle East. A sharp decline in crude-oil futures since then, however, suggests profit growth in the oil patch could slow further in the months ahead, analysts said.

The major integrated oil companies releasing third quarter results this week — BP Plc, Chevron Corp., ConocoPhillips, Exxon Mobil Corp. and Royal Dutch Shell Plc — ”likely have witnessed peak earnings, at least for the near-term,” said A.G. Edwards energy analyst Bruce Lanni.

Analysts surveyed by Thomson Financial expect these five companies to report quarterly profits of $30.71 billion — an amount larger than the annual economic output of Bolivia. Still, Wall Street judges companies by how rapidly they are growing, and on that basis the oil industry’s results aren’t as impressive.

In the third quarter of 2005, these same five companies earned $32.88 billion.

That bonanza came on the heels of hurricanes Katrina and Rita, which sent energy prices soaring even as it curtailed some Gulf of Mexico production and Gulf Coast refining.

Chevron is expected to benefit nicely from the restoration of a huge Mississippi refinery that was shuttered by last year’s storms. Analysts are predicting year-over-year third-quarter profit growth of 23 percent for the San Ramon, Calif.-based company.

BP, on the other hand, is likely to turn in one of the more disappointing performances due to a wide range of operational troubles, including a pipeline leak in Alaska and the slower-than-anticiapted recovery of a Gulf of Mexico platform.

Its third-quarter profit is forecast to decline by roughly $1 billion, according the consensus of analysts surveyed by Thomson Financial.

BP, with results coming out Tuesday, will be the first of the major integrated companies to report earnings.

While the results of individual companies will vary, the net profits at each of the integrated oil companies would have been much higher were it not for a substantial late-summer slump in gasoline prices.

After climbing as high as $3-a-gallon in early August, the average retail price of gasoline fell to $2.43 a gallon by the end of September thanks to a surge in supply, particularly from overseas. That weighed heavily on revenues from the refining segment.

U.S. refining profits sank by more than 20 percent in the third quarter, according to A.G. Edwards’ Lanni.

Profits from natural-gas drilling also were weaker due to collapsing prices for this industrial and home-heating fuel. A warm winter sapped demand and the recovery of Gulf of Mexico production led to record summertime inventories.

Lanni said that ”if current trends persist, we could see a flat to down fourth quarter, year over year.” The wild card, he added, is the weather.

John Felmy, chief economist at the American Petroleum Institute, said the oil industry’s profits are still high enough that it will remain in the cross-hairs of politicians and consumers, especially in an election year.

”Every candidate is speaking about it,” Felmy said.

Bryan Caviness, an analyst at Fitch Ratings in Chicago, said rising supplies and weaker pump prices may have crimped oil companies’ third-quarter profits, but that these trends could prove to be temporary.

”All it takes is one international incident to really spark prices again,” he said.

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