Why Big Oil will pump out big earnings

Forget about this summer's 'commodity crumble.' These majors will deliver strong third-quarter earnings.

By TheStreet Staff Oct 12, 2011 1:46PM

Image: Oil Well Pumpjack © Roger Milley/Vetta/Getty ImagesBy Dan Dicker, TheStreetTheStreet

 

The biggest oil companies, such as Chevron (CVX), Exxon Mobil (XOM) and ConocoPhillips (COP), have tremendous complexity in operations and ultimately in profitability.

 

There are exploration and production divisions, enormous segments dealing with transport and refining, and separate segments for natural gas, liquids and chemicals.

 

As complex as these companies are, the price of a barrel of crude is still the most important input to their earnings results and therefore has the biggest impact on their stock prices. It is no wonder that these mega-cap oil companies' share prices have historically followed the price of the oil they generate.

 

Much has been written about the "commodity crumble" this summer, when crude oil prices dropped more than 20% and copper and other base metal prices fell more than 30%.

 

Many analysts are therefore less optimistic about the earnings reports expected soon from the big integrated oil companies.

 

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Although I don't think this is the best moment to buy these shares, I'm not deterred from them based upon what oil has done in the past three months.

 

If anything, I believe earnings are much more likely to surprise to the upside. In fact, the much-discussed "depression" in commodity prices and oil in particular is being overblown and misinterpreted.

 

To prove this, one need only look at the crude oil chart going back to the first of the year.

 

I am referencing the Brent crude chart traded by the Intercontinental Exchange because this benchmark has more closely tracked real physical oil prices -- the ones that will affect earnings the most.

 

First, it's immediately apparent how expensive crude oil has been this year. It rose to more than $100 a barrel in the first quarter and since then has traded significantly higher than that, save for last week's momentary dip.

 

This means prices have easily been 25% higher than they were in 2010, and that will deliver a boost to oil companies' earnings compared with last year.

 

The second thing you'll notice is that although prices have moderated somewhat in the third quarter, the average price of oil hasn't really declined all that much. In fact, it's down hardly more than $5 a barrel from the second quarter to the third.

 

The bottom line is that Big Oil has likely made a mint of money in the third quarter, not significantly different from the massive amounts coined in the second quarter and fantastically better results in the third quarter of 2010.

 

And although complex "upstream," "midstream" and "downstream" components of the reports that Chevron, Exxon, Conoco and others are about to deliver will cloud the waters, the still relatively high price of oil will continue to be the most striking and profitable piece of their earnings profiles.

 

All will handily beat expectations in this quarter, and I expect the shares to pop.

So even though these shares are not at their sweet spot right now, investors shouldn't fear earnings misses.

 

At the time of publication, Dicker owned shares of Chevron.

17Comments
Oct 12, 2011 3:01PM
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and when is fuel going down? no one is working, no one is hiring all do because we the people can not afford to drive around to look for work, but yet you oil companies probably made 14 billion dollars this qtr. alright for the big guy sticking it into the little guy.
Oct 12, 2011 3:11PM
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Why Big Oil will pump out big earnings?
Maybe because the same barrel of oil that they used to sell for $40 way back in the day and made a damn good profit then costs just as much today as it did then to get it out of the ground, but they have been selling it for twice that and more forever! Pretty simple!!! Can you imagine how silly their board meetings are? "Hey Jimmy, we need to increase profits...". Jimmy says, "No problem, Let me call my media boys and tell 'em we've had a pipeline break or somthin...". Two minute meeting ends and al the board members go back to their yachts or jets......

Oct 12, 2011 3:36PM
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 It is a shame that people have to suffer fiancially while companies like Goldman's make huge profits off something that they do not use and only invest in. All Goldmans has to do to make money is talk about something happening in the Middle East or bring up the peak oil theory. The can talk the price down buy futures and talk it right back up. It must be nice. Oil is a commodity and the price should be driven by supply and demand. Demand has not doubeld nor has supply been cut in half. Washington needs to get the traders out of it. The only way companies should be allowed to trade oil futures is if they are consumers.
Oct 12, 2011 4:01PM
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Here is a good example why jobs are hard to come by.  It was stated a few months ago that the oil companies are a major contributor of the lack of jobs.  As long as they keep the price high, that makes transportation cost high.  That makes the delivery of raw goods higher.  This makes finial production costs higher and then finial delivery costs higher.  Then no one buys the goods because it cost to much to buy.  Then company making the goods slows down do to poor sales then the lay offs occur.  The manufacturing company can't hire more people because productions cost are to high, then unemployment becomes higher.

 

Gee wouldn't be nice if for once a company would think of the negative effect they are having on this whole economic picture and do something about it.  Instead of complaining that profits are down so i can't buy that 500 ft ship.  In 2008 when oil was down around this price now we were paying around 2.80/gal for gas.  To the oil companies if you want to see job growth stop thinking of you pocket books and start thing of the whole nation.  

Oct 12, 2011 3:36PM
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Well surprise, surprise, aren't we all just shocked....NOT. Gas here in my town went up 10 cents overnight. It finally made it to $3.19, today $3.29. When the NYSE is doing well, the others get the prices dictated to them. And you wonder why masses hopes it crashes. Manipulation at its finest.

 

And with the holiday season just around the corner they smell profits and gouging. Yea, stick it to the little people. The oil companies will be getting the other retailers profits this year too.    

 

Bunch of Hitlers.

Oct 12, 2011 4:54PM
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"The bottom line is that Big Oil has likely made a mint of money in the third quarter, not significantly different from the massive amounts coined in the second quarter and fantastically better results in the third quarter of 2010."

 

No kidding, at $3.54 a gallon on the low end in Las Vegas no wonder they have "made a mint". Oil is at $85 a barrel today so we should be paying no more then $2.75. Why is it that when oil prices go up we see prices at the pump go up in a matter of days but when oil prices go down it take weeks or even months to see the prices adjust? I just don't get it. Maybe I'm out of line here but I don't think so.

Oh and thanks for rubbing it in our faces how well the oil companies are doing while the general population struggles to pay these outrageous prices.

Oct 12, 2011 4:53PM
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There is nothing that can stop the greed of "BIG OIL".  They could make a profit if oil was $20.00 a barrel.  The fact is, that it is traded on the market & speculation has driven the price per barrel beyond supply & demand.  Make the futures buyers take physical possession of it or suffer the loss & make them put it back on the market & tax them on the sale.  Why can't our Congress pass some reform that will benefit everyone?   THey know exactly what's stalling our economy & refuse to deal with!
Oct 12, 2011 5:28PM
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Yea Leon Vazquez,

We need Obama pissing away a few more trillion dollars, That's what we need!  He's done such a great job the last almost 3 yrs!  Wake up buddy he had his chance with the Dem majority the first 2 yrs & look where it's got us!  Unemployment is the only Job this Idiot is able to create!

Oct 12, 2011 3:36PM
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Are you serious? Is this really an article on how good the Big Oil companies have it?......this article is a joke. this guy doesn't need to write any more articles.
Oct 12, 2011 5:47PM
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    First, ask yourself the question, "Who owns most the oil in the world?"   Then ask yourself, "Who are the OPEC countries and what do they do to supply and demand?" and " Who is pulling it out of the ground and refining it for these OPEC countries?"

    Then ask yourself, " Why do European countries pay 3x more than Americans pay?" and  "Why do Arabians and Venezuelans and other OPEC countries pay less at the pump?"  Then ask yourself, "What is the U.S. government tax per gallon of gasoline and who controls that?"            

     When you answer those questions, you will have a better grasp of why we pay what we do at the pump and why oil companies make a profit. I say give oil some competition and convert to natural gas. It is totally worth it. CNGoutfitters.com

Oct 12, 2011 6:03PM
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Pewter,

I totally agree with you on CNG.  The bigger problem is that as stated in the 2nd paragraph in this article is that "BIG OIL" has hands all over natural gas as well.  How long before they exploit the cost of that as well?

Oct 12, 2011 7:15PM
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Stumpjumper

 

The point i was making is, why can't the oil companies roll there big profits back into the pump.  there was one poster that said it best.  Oil should be traded on a supply and demand basis only.  Not when someone comes up with a military coup, a broken pipe line or your not playing fair.  And it should not be controled as "You need this you pay".  Tell me would you pay 2 cents for an asprin or pay $10.00 for an asprin.  That's the difference between home and the hospital.  We are in a economic hole, why do this companies have keep driving the problem the wrong way.

 

I don't have a problem with making money, but not when people are hurting and can't afford to pay because some CEO has to buy his girl friend a 2mil condo in florida.  The bottom line i feel is let's get back on our feet, and let the system heal it self.  And in the mean time the CEO's should either start paying what we pay at the pump or roll there profits back to the pump. 

Oct 12, 2011 6:09PM
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 I thought this was about oil not politics. The OPEC couintries do have some of the biggest reserves and the ones that have half a brain understand the keys to survival. First you need water (saltwater does not count) and second you cannot eat sand. We supply the Middle East with a ton food. Pewter is correct the answer to the high price of oil is alternatives and the more you have the better off you will be. Watch Poland in the next few years. They are really working on utilizing their natural gas reserves. 
Oct 12, 2011 4:59PM
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arsonman,

 

 The problem with the price of oil is you think it is at the same price but it is not. WTI is at the same price but Brent is up about $25. The media insists on quoting the WTI price which is very misleading. We have customers that pressure us to ease our energy surcharge based on and we have to explain the difference. Last year Brent was not tradiing at the big premium it is today. It went up with crisis in the Middle East (egypt, Libya, Yemen, etc.) and has not come down. Half our oil is based on the cost of imported oil.

Oct 13, 2011 12:29AM
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    So far, in Texas, compressed natural gas is a dollar less per gallon than regular gasoline. If more natural gas was used for our autos, it would increase the usable fuel supply for American drivers by at least triple. It would also stop our dependency on OPEC (Oil producing countries) oil which supplies 60% of American daily needs. 

    American ground has enough proven natural gas reserves to supply all our fuel burning autos for another 100 years. T-Boone Pickens has a very good idea to convert just half of all our diesel burning 18 wheelers to (compressed natural gas) CNG. Just that alone would wean us from the OPEC's pricing, wig wags and dictates at the pump. All that is needed is infrastructure to support CNG fueling at most truck stops along America's interstates.

    Look,  I am willing to do anything to be free from OPEC. Most OPEC countries hate the Western world in general. Why, I ask myself, " Why are we continuing to support our enemies with huge annual sales of crude oil dollars which end up funding the latest Jihad ?"

    Can anybody out there connect the dots? This is not rocket science but a working solution. Let's go for it, America!

    It has also been shown that with modifications, a jet engine burns CNG  real well. America has the resources to change the world's financial bargaining chips. What are we waiting for? Let's keep America strong/healthy/clean.

    Does anyone know that CNG does not require huge stinky refineries? Burning it in your engine keeps the engine oil cleaner for double the mileage use? CNG burning engines have a longer lifespan than those same engines burning regular gasoline. Just imagine this: American cities with air quality 75% cleaner using the same # of autos burning CNG rather than gasoline.

    You might ask, what about battery operated vehicles? I say, yes to electric cars, however, there are greater draw backs. For instance, batteries must be replaced at approximately the same cost to convert a gasoline engine to CNG. Batteries need to be charged.  Can you imagine a huge # of American autos hooking up to our already overloaded electric infrastructure? What would your monthly electric bill look like? Generating electricity in a number of cases requires burning coal to heat up the steam to turn the generator turbines.  Ask yourself, "Do I want our American landfills full of dead acid leaking batteries?" and "How would that affect our drinking water supply over time?"

Oct 12, 2011 5:55PM
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Hate to say it, but it will take more time than the almost 3 years of Obama fixing to get over those last 8 years of Bush Jr. Bush Sr. had it for 4 years and it took Clinton from 93'-2001  to clean it up and have a surplus. Then 8 years of Bush Jr., figure it out, twice to three times the mess and Obama isn't near as savy as Clinton was. Plus add to the fact the Repubs are constantly working against him because they want it all to crumble down. No, your looking at least 10 years of cure for that ailment.
Oct 12, 2011 5:09PM
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I can only say thanks to the republicanuses in Washington,for the job they are doing,stickit to the"middle class"99% and give all breaks to the rich 1% nicely done,we need OBAMA AND DEMOCRATS IN BOTH HOUSES 4 MORE YEARS !!!!!!!
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