Big Oil earnings set to slow after years of growth

by Jasmina Kelemen, MarketWatch

After years of enjoying growth so stellar that even Republicans once considered reining in its profits, Big Oil's seemingly unstoppable run of quarter-over-quarter success is set to end this week when the industry's biggest names report their earnings. Beset by higher exploration costs, sharply lower commodity prices, weaker refining margins, and rising taxes and royalties, former earnings gushers are expected to report fourth-quarter results fell from both the year-ago and previous quarter.

Earlier this year, as oil prices raced to almost $80 a barrel and gasoline prices shot above $3 a gallon, consumer outcry against the oil industry reached such a pitch that calls to increase scrutiny on the industry's practices and even impose a windfall tax were embraced on both sides of the political aisle in Washington. Exxon was the focus of much of the outcry, especially after turning in an annual 2005 profit of $37 billion, the largest in corporate history. But not even Exxon was immune to the market's deterioration in the final three months of 2006.

Average benchmark oil prices fell almost $11 a barrel, or 15%, during the fourth quarter and were nearly flat with the year-ago level. Natural-gas prices rose 9% from the previous quarter but were down a whopping 46% from a year ago, when prices surged to their highest levels ever after hurricanes Katrina and Rita.

ConocoPhillips offered a glimpse of what was in store for the sector when it announced last Wednesday its quarterly net profit fell 13%, citing lower natural gas prices, higher exploration costs and falling output from some of its fields in Canada. See full story.

As commodity prices tapered off, production costs increased, which is expected to take a bite out of upstream, or exploration and production, earnings.

Year-over-year, upstream costs are estimated to have risen 11%, said William Featherstone of UBS Investment in a note, while upstream earnings are estimated to have decreased 12% from a year ago and 9% versus the previous quarter. The industry also faced rising taxes and royalty payments as producing nations from Venezuela to Great Britain hiked levies against production last year to capture a bigger share of rising oil prices.

The political landscape has also gotten tougher domestically since Democrats overtook Republicans last November in both the Senate and the House. Earlier this month, House Democrats drew on their new majority to pass an energy bill that would repeal roughly $14 billion in subsidies and royalty relief for the oil and natural-gas industry they called "unwarranted" corporate welfare doled out by the last Congress.

But even in a tougher operating environment, the industry is still a huge cash generator.Exxon is expected to surpass last year's banner performance and post annual revenue of $387 billion, a 4% climb, according to a survey of estimates by Thomson Financial. Chevron is expected to see its full-year revenue rise 6% to $210 billion.

MarketWatch