US Oil, Services Companies to See Strong 3Q Despite Price Declines

Third-quarter profits for major U.S. integrated oil and oil field-services companies are expected to be solid, even as a recent steep slide in commodity prices has clouded forecasts for the fourth quarter and beyond.

"Definitely in terms of total earnings, (the third quarter) is going to be a great quarter" for the big oil companies, said Keybanc Capital Markets analyst Jack Aydin. "I wouldn't cry for them" because of the decline in oil prices.

Still, Aydin said the third quarter won't be so good from the perspective of "earnings momentum" heading into the fourth quarter. He added that many companies will report a drop-off in third-quarter profits compared with the year-ago period and compared with the second quarter.

Mark Gilman, an analyst with marker-research firm The Benchmark Company, concurred, calling the third quarter something of a "transition" period.

"In general, we would look for earnings in the fourth quarter to be comfortably below the year-ago period," Gilman said.

Oil, trading recently around $60 a barrel, has slipped about 23% after hitting an all-time intraday high of $78.40 on July 14.

Margins for refining and marketing of petroleum products also dropped off precipitously during the last month of the third quarter, as evidenced most notably by a slide in gasoline prices.

Observers chalk up the broad trends to a number of factors, including fewer supply jitters amid what has been a mild 2006 hurricane season so far, as well as an easing of political tensions in Lebanon and some other regions.

Meanwhile, analysts said production could be down in the third quarter also. ConocoPhillips (COP) lent credence to such views this week, announcing that it expects oil and gas production to be off about 5% from the second quarter, largely because of BP PLC's (BP) pipeline problems at the Prudhoe Bay oil field in Alaska.

While the third quarter should be "very, very profitable," Aydin said he expects earnings for the major oil companies to be off about 10% from the second quarter and from the year-ago third quarter.

The declines could be even steeper for smaller exploration-and-production companies that are more dependent on natural gas and domestic markets, he said.

As for oil field-services companies, Johnson Rice & Co. analyst Joe Agular expects third-quarter results to be improved from the second quarter and "much better than (the third quarter) last year."

Drilling and other oil-field activity increased during the current quarter and has yet to slow down, he said, buoying profits for the services companies. But Agular said Wall Street will be sifting through the upcoming earnings reports for any evidence that the trend is reversing along with commodity prices.

"If you're just looking at the third quarter itself, generally speaking, the results should be strong," he said. "But the issue today is, exactly what is going to take place?" in the future.

Agular doesn't expect a slowdown in oil drilling, saying most oil companies have "big cushions" in their capital-spending budgets because they base the plans on prices of about $35 a barrel. But he said it's possible drillers could pare back on natural gas, where high inventories continue to crimp prices.

To be sure, oil prices remain high by historic standards, and oil companies have ridden them to huge profits. Several analysts said Exxon Mobil Corp.'s (XOM) total 2006 income still may surpass the $36.13 billion it earned last year, which is a corporate record.

The spot price for West Texas Intermediate crude averaged about $72.82 a barrel in the third quarter, up 3% from about $70.41 a barrel in the second quarter and up 15% from about $63.19 in the year-ago third quarter.

Natural gas prices were flat with the second quarter, however, and off about 28% from the year-ago third quarter. Natural gas at the Henry Hub, the benchmark U.S. delivery point for futures contracts traded on the New York Mercantile Exchange, averaged about $6.73 per thousand cubic feet in the third quarter, compared with about $9.30 in the year-ago period.

              Thomson First Call   Year-Ago    Reporting 
Company               Estimate       Net          Date 
 
Baker Hughes Inc.     $1.08         $0.65        Oct. 27 
BJ Services Co.        0.75 (4Q)     0.41        Oct. 31 
Chevron Corp.          2.03          1.64           NA 
ConocoPhillips         2.50          2.68        Oct. 25 
Diamond Offshore       1.30          0.60        Oct. 27 
Exxon Mobil Corp.      1.61          1.58           NA 
GlobalSantaFe Corp.    1.10          0.44           NA 
Halliburton Co.        0.54          0.95        Oct. 23 
Hess Corp.             1.56          2.60        Oct. 25 
Marathon Oil Corp.     3.13          2.09        Oct. 31 
Murphy Oil Corp.       0.74          1.23        Oct. 24 
Nabors Industries      0.99          1.11        Oct. 24 
Noble Corp.            1.38          0.55        Oct. 19 
Occidental Petroleum   1.37          4.25        Oct. 18 
Schlumberger Ltd.      0.77          0.89        Oct. 20 
Weatherford Intl       0.66          0.31        Oct. 23 
 

(The Thomson First Call estimate and year-ago net may not be comparable due to one-time items and other adjustments.)

Copyright (c) 2006 Dow Jones & Company, Inc.