Energy Watch Part III: Big Oil Well Off Highs (XOM, COP, RDS.A, CVX, BP, MRO, PCZ, APA)

Even with oil prices well off of recent highs, these are still very much considered as above historical highs.  The large integrated oil companies have experienced either declines or very small gains in value over the last year, and these are generally well off of their 52-week highs.  Exxon Mobil (NYSE:XOM) has declined almost 4.5% over the last year but is down about 20% from its 52-week highs. BP (NYSE:BP) has fallen over 25% from its highs; Royal Dutch Shell (NYSE:RDS.A) is down 22% from its highs. ConocoPhillips (NYSE:COP) is off about 18% from its highs and Chevron (NYSE:CVX) is off almost 20% from its highs. Among smaller companies, the losses from recent highs are even worse.  Apache (NYSE:APA) is down more than 28% from recent highs, Marathon (NYSE:MRO) is down about 28% from its recent highs%, and PetroCanada (NYSE:PCZ) is down about 31% from its recent highs.  As you will see below, there are many reasons for these exaggerated drops and perhaps some underlying opportunities as well.

Refining and marketing have had a serious impact on earnings for allthese companies, with the exception of Apache, which is strictly anexploration and production operation. Refining margins are either waydown or non-existent. As we’ve noted before, gasoline inventories areat the top of their historical ranges, primarily because US drivers arekeeping their cars parked. What’s selling at premium prices are dieseland jet fuel, and refineries are aggressively seeking light, sweetcrude that yields as much as 30 gallons of distillates per 42-gallonbarrel. Production declines in Nigeria have reduced supplies of thistype of crude by as much as 400,000 b/d.

The refineries are forced to turn to heavy, sour crude which yieldsonly about 20 gallons of distillates per barrel. This has driven up thecost of diesel and jet fuels, and put a serious crimp in major oilcompany valuations. The situation is unlikely to change untilrefineries increase their capacity to produce distillates from theheavier crudes. Most are working on the issue, but it will take sometime and some serious investment.

A final word about Apache. It’s second quarter earnings and revenuesbeat analysts’ expectations, but production declines cast a chill overthe good news.

Big oil valuations depend on proved reserves and quarterly production.Production glitches have been covered up by high prices, and provedreserves are not growing. That combination is strong enough to keepstock prices low even when these companies report record earnings. Yes,it’s a mean old world.

Paul Ausick
August 18, 2008