Loading...
Symbols:
Authors:

Big Oil Looks to Cash in on Crude Oil Prices

by: Zacks.com July 24, 2008 | about stocks: COP / MRO / OXY    

Zacks.com

About this author:
Become a Contributor Submit an Article
  • Font Size:
  • Print

by Tracey Ryniec

Crude Prices Fall off of Record Highs

Hurricane Dolly, churning in the Gulf of Mexico and expected to hit along the coast of northern Mexico and Southern Texas in the next few days, wasn't enough to scare crude prices higher this week as a majority of the oil installations are outside of Dolly's impact zone.

Crude oil hit a record high of $147 a barrel in early July only to pull back to under $125 in the last several days. This week a year ago, crude was at $71 a barrel.

Natural gas prices have fallen even more sharply than crude, down over 30% from the highs of early July to under $10.00 per million Btu.

As crude and natural gas have declined, so have shares of energy companies, including the large integrated oil companies.

Refining Margins Should Improve

A decline in crude prices isn't necessarily a bad thing for the large integrated oil companies which refine crude into gasoline. Recently both ConocoPhillips (COP) and Marathon Oil (MRO) have warned about the refinery margins in the second quarter.

ConocoPhillips said that worldwide refining margins were higher than the first quarter by nearly 50% but the company wouldn't see all of the gain due to negative impacts from secondary products, such as fuel oil, natural gas liquids and petroleum coke, which make up approximately 20% of COP's overall refined product production. COP's realized refining margins increased by only 24%.

Marathon's refining margin fell to $0.0850 per gallon compared to $0.3925 per gallon in the second quarter 2007. The company attributed the primary reason for this reduction was the substantial decline in refining margins in the Midwest (Chicago) and Gulf Coast markets quarter to quarter.

MRO said the Light Louisiana Sweet [LLS] 6-3-2-1 crack spread on a two- thirds Chicago, one-third Gulf Coast basis decreased from $15.47 per barrel in 2007 to $2.47 per barrel in the second quarter of 2008.

Big Oil Has Lots of Cash

With crude at record highs, the integrated oil companies are seeing excellent cash flows. Occidental Petroleum (OXY) announced on July 18 that it was purchasing an additional 20 million shares under its repurchase program that started in 2005.

Through the end of the second quarter, 59.5 million shares had been repurchased. The company cited "market conditions" as the reason for the share repurchase as the company believed that the stock was "trading at a significant discount to intrinsic share value."

On July 23, ConocoPhillips announced that it would repurchase $2 to $3 billion worth of shares in the third quarter as part of its $10 billion 2008 share repurchase program.

Companies are also making development deals. On July 8, ConocoPhillips entered into a $10 billion agreement with the Abu Dhabi National Oil Company to develop the Shah Gas Field in Abu Dhabi.

Consensus Estimates Are Rising

Brokerage analysts have been raising estimates on many of the integrated oil companies in the last 90 days.

ConocoPhillips reported second quarter earnings on July 23 and surprised on analysts' estimates by 3 cents, reporting $3.50 per share compared to consensus estimates of $3.47 per share, despite estimates rising over the last 90 days. Consensus estimates has jumped 18.4% over the prior three months.

One-third of covering analysts have raised estimates on Occidental Petroleum in the last 30 days as consensus estimates have jumped 46% in the last 90 days. OXY reports second quarter earnings on July 24.

One-third of brokerage analysts have also raised estimates on MRO for the second quarter in the last month. Marathon reports on second quarter earnings on July 31.

COP and OXY are Zacks #1 Rank (Strong Buy) stocks. MRO is a Zacks #2 Rank (Buy) stock. All three are classified in Oil-US Integrated. This group contains one other Zacks #1 Rank stock- Hess Corporation (HES) - and a Zacks #3 Rank stock- Markwest Energy (MWE).

Disclosure: The author of this article owns shares of ConocoPhillips.

Related Articles

This article has 2 comments:

  •  
    Jul 24 11:27 AM
    Refining Margins Should Improve... ExxonMobil XOM will also be helped significantly when oil prices go down. It is a major buyer of oil, as well as a producer, that refines much more than it produces.
    Reply
  •  
    Jul 24 12:24 PM
    <Refining Margins Should Improve>

    Inventory numbers don't bear this out. Greater gas and distil inventories with demand destruction China and US spells lower margins.
    Reply
More Comments on COP ยป
More by Zacks.com
Investment Resources
Money Managment
Research
Seeking Alpha provides these ads as a service to its leading contributors
Articles on related themes
Exploration & Production
Oil & Gas Majors
Alternative Energy
Coal