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Oil Earnings Likely to Slip as Prices Fall

THE WALL STREET JOURNAL

OCTOBER 28, 2008

The global economic slowdown threatens to turn Big Oil from victor to victim.

The major integrated oil companies report third-quarter earnings this week, with BP on Tuesday,Exxon Mobil and Royal Dutch Shell Thursday and Chevron Friday. Together, they are expected to report more than $35 billion in net income for the period, during which New York Mercantile Exchange crude-oil prices sank 28%. Exxon alone is expected to report another record profit of more than $12 billion.

The earnings outlook is a bit darker for this quarter, as crude has kept tumbling, recently down 56% from its July 3 peak. Wall Street analysts, on average, expect Exxon to earn $11 billion in the fourth quarter and $10 billion in the first quarter of 2009.

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Falling crude prices aren’t apocalyptic for the majors. Higher prices were strangling profits in their “downstream” businesses: refining, marketing and selling gasoline.

Still, cheap oil is no boon. Macquarie Research analyst Jason Gammel recently slashed his forecast for crude-oil prices to $77 a barrel in 2009 from $103, and suggested that would shave 23% off his 2009 earnings estimates for integrated oil companies.

Many analysts suggest the stock prices of integrated oil companies are oversold. Mr. Gammel, who has “outperform” ratings on all the majors, said they are priced for oil at $32 a barrel.

But as long as companies and consumers are still pulling in their horns and working off debt, a rally for any asset is unlikely. That includes oil — big or otherwise.

Estee Lauder Tries to Put on a Good Face

When the makeup comes off, will Estee Lauder look as pretty?

The cosmetics belle reports fiscal first-quarter earnings Tuesday morning, and while analysts expect Estee’s 22 cents a share will beat year-ago efforts by 10%, they are sounding glum about the future.

The global economy is downshifting and consumers are retrenching in the U.S. and Europe, Estee Lauder’s primary markets. Moreover, while makeup is clearly a commodity women won’t forsake even in a recession, makeup sales are likely to shift to some degree toward less-expensive brands.

Long associated with department-store cosmetics counters, Estee Lauder is home to more upscale brands and the company has been slow to move its lines into cosmetics retailers such as Sephora and Ulta, which are taking market share. The company has begun moving in that direction recently, but Estee still earns a large chunk of money through department stores. Historically makeup has been a recession shock absorber for department stores, but these days the stores already are struggling.

At the moment, “there’s still an expectation that international growth will offset some of the slowness in the U.S.,” said Morningstar analyst Michelle Chang. “But if international falls off a cliff, that will be a real worry.” Though the coming quarter will tell a more complete story, Tuesday’s number should at least give a hint about how the international consumer is holding up.

—Jeff D. OpdykePlease send questions and comments to [email protected]

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