Why Big Oil will pump out big earnings
Forget about this summer's 'commodity crumble.' These majors will deliver strong third-quarter earnings.
By Dan Dicker, TheStreet
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.
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.
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.
"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.
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!
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
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.
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.
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?"
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