Chevron has record annual earnings, but 4Q earnings drop may point to trimmer 2007 oil profits
SAN RAMON, Calif. (AP) – Chevron Corp. pumped out its third consecutive year of record profits in 2006 despite a fourth-quarter stumble that demonstrated how quickly the oil industry can be tripped up by volatile energy prices largely out of its control. The San Ramon-based company said Friday that it earned $3.77 billion, or $1.74 per share, during last year’s final quarter, a nine percent decrease from net income of $4.14 billion, or $1.86 per share, at the same time in 2005. The earnings were a penny above the average estimate among analysts polled by Thomson Financial.
Despite its first quarterly earnings decline in 18 months, the nation’s second largest oil company finished 2006 with a full-year profit of $17.1 billion to smash its previous record of $14.1 billion set in the previous year.
The performance contributed to another gargantuan year for the world’s largest oil companies, punctuated by Exxon Mobil Corp.’s 2006 profit of $39.5 billion – the largest in U.S. corporate history.
Last year’s combined earnings of Exxon Mobil, Chevron, ConocoPhillips, Royal Dutch Shell PLC and BP PLC are expected to exceed $120 billion – enough to buy about 175 gallons of mid-grade gasoline for every person in the United States. The combined profit also surpasses the gross domestic product of Iraq and more than 160 other countries, according to the most recent estimates compiled by the Central Intelligence Agency.
BP isn’t scheduled to release its fourth-quarter results until Tuesday. But even before factoring in BP’s final numbers for 2006, the five major oil companies already have topped their record earnings of $111 billion last year.
But 2006 may prove to be an inflection point for the industry now that oil prices are hovering around $59 per barrel – nearly $20 per barrel below the peak reached last summer.
For all of 2006, crude oil prices averaged $66 per barrel, according to an analysis by Citigroup.
Oppenheimer & Co. analyst Fadel Gheit expects 2007’s average price to be in the $56 to $58 per barrel range, a reversal in fortune that may wipe out billions of dollars in industry profit.
Some of the lost money could be recovered if lower gas prices fuel more demand, enabling oil companies to boost their profit margins at the pump, Gheit said.
For the most part, though, the 2007 performance of the major oil companies will hinge on the ebb and flow of oil prices – fluctuations often swayed by unpredictable conditions in the Middle East and other mercurial parts of the world.
“These companies really have no control over their own destinies,” Stephen Leeb, president of Leeb Capital Management, which invests heavily in the oil industry. “These are not stocks you own to get rich on. You own them for defensive purposes, just in case some more crazy things happen in the world and oil prices go way up again.”
Oil traders are particularly worried about a military confrontation between the United States and Iran – an unnerving event that nevertheless might spur another earnings boom for Chevron and its peers.
Chevron shares fell 43 cents to close at $74.04 Friday on the New York Stock Exchange, still not far off its 52-high of $76.20. The company’s market value has climbed by about $70 billion, or 75 percent since Chevron’s streak of record earnings began in 2004.
Analysts already have dimmed their 2007 outlook for Exxon Mobil, Chevron and ConocoPhillips for this year, with forecasts provided to Thomson Financial projecting an average earnings decline of seven to 10 percent.
Chevron isn’t gearing up for significant growth this year, with management forecasting 2007 oil production of about 2.6 million barrels of day. The company averaged 2.66 million barrels per day in 2006.
The lowered expectations for 2007 reflect a dramatic shift from last summer when oil prices soared above $78 per barrel – a spike that helped lift Chevron to the first $5 billion quarterly profit in its 127-year history.
But Chevron’s average sales price for crude oil plunged by $11 per barrel from the third quarter, reflecting slowing demand and easing concerns about war or severe weather disrupting supplies.
Lower natural gas prices hurt Chevron even more. The company said its average price for natural gas sold in the United States plunged 42 percent during the fourth quarter to $5.90 per thousand cubic square feet. Natural gas prices in 2005 had soared after damage in the Gulf of Mexico caused by hurricanes Katrina and Rita created supply shortages.
Squeezed by the market conditions, Chevron’s fourth-quarter revenue totaled $47.7 billion, an 11 percent decrease from the prior year.
Even with oil prices tapering off, the industry remains in a far more lucrative position than at the beginning of decade when oil prices seemed to be stuck $30 per barrel.
“If someone came up to me five years ago and said the price of oil was going to be above $40, I would have put them in a straitjacket because it seemed so unrealistic,” Gheit said. “Now, when oil starts moving down toward $50 barrel, we get excited and think it’s a great bargain.”
AP-ES-02-02-07 1607EST