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Oil Companies’ Profits Likely to Drop Sharply

THE WALL STREET JOURNAL

APRIL 26, 2009, 8:04 P.M. ET

The market will get a daily reminder this week that the days of record-setting oil-industry earnings are over — for now.

On successive days, beginning Tuesday, BP PLC, Royal Dutch Shell PLC, Exxon Mobil Corp. and Chevron Corp. will report results for what is expected to be the worst quarter for these profit machines in many years.

“The biggest fall in quarterly earnings on record,” analysts at Barclays Capital predicted for the European oil companies. Analysts’ estimate for Exxon Mobil suggest a 58% drop in profit to $4.5 billion.

The drop in first-quarter earnings isn’t a surprise, with oil prices down about 55% from where they were a year ago. What remains to be seen is how good a job the oil companies are doing in driving down costs. Analysts and industry executives will be keeping a close eye on this.

Early reports have given mixed signals. Italian oil company Eni SpA said it wasn’t seeing any real reductions in its cost of drilling wells. But ConocoPhillips was much more upbeat when it reported results Thursday, indicating that costs were coming down thanks to negotiations with contractors, eliminating overhead and, ironically, lower fuel costs helping it run refineries more cheaply. Most analysts were skeptical last month when ConocoPhillips promised to shave $1.4 billion off its costs this year, but the company said it had already found $400 million in savings.

Cutting costs is a “huge issue,” said Jason Gammel, analyst with Macquarie Research. If oil companies can cut costs quickly, margins “won’t contract as much as we would have expected in a low commodity price.”

Write to Russell Gold at [email protected]

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