Can the oil companies continue to turn out record profits in the face of an oil surplus? ON Wall Street, some industry analysts are already beginning to answer "no," as they inform their customers that some of the major international oil companies may report their first negative earnings comparisons next quarter for the first time since the summer of 1978.
"The momentum is beginning to shift from the major international oil companies," says Osman Eralp, an analyst for Bache Halsey Stuart Shields Inc., as a combination of recession and excess crude oil on the markets begins to eat into the companies' profit margins.
"By the beginning of 1981," predicts analyst Paul Mlotok of Cyrus J. Lawrence Inc., "the earnings comparisons should be even more dramatic, since the first quarter of 1980 will be a hard act to improve on." In this year's first quarter, the oil companies reported profit gains that ranged from 50 percent to 250 percent.
However, warns Constantine D. Fliakos, vice-president at Merrill Lynch, Pierce, Fenner & Smith, there are so many variables in the oil game that predicting oil company profits is a difficult task. For example, he points to the current advantage the Arambco partners have over other oil companies. By buying their oil from Saudi Arabia for $28 per barrel, they are earning $150-200 million more than companies who must buy their oil elsewhere. "If OPEC [the Organization of Petroleum Exporting Countries] develops a uniform pricing structure," he notes, "then the profits of the Aramco partners will shrink."
Even if the oil companies do see their earnings growth sag, points out Mr. Fliakos, "the industry isn't going to lie down and melt like an ice cube."
Already, some oil companies are beginning to see a slowdown in the rate of their profit growth. Exxon Corporation, the world's largest oil company, reported second quarter operating earnings dropped 17 percent from the first quarter level, although the profits were 60 percent higher than the second quarter of 1979.
In an interview, Roger Hedrick, assistant controller of Exxon, notes that the main reason for the slowdown in the rate of earnings growth was competition. Profit margins came under pressure as costs continued to rise, but the ability to pass them on to the consumer did not. "Whether its the recession, conservation, or whatever reason, the marketplace is affecting our ability to recover our higher costs," he says, adding that "at the moment, government regulations are not a factor in the cost squeeze."
Even though Exxon says it is seeing its profit margins pinched, the size of its earnings tends to make people wince when they hear the oil companies complain. For example, in its latest quarter, Exxon reported net income of about $1 billion on sales of $26.2 billion.For the year, Value Line, an investment survey, is estimating Exxon will have earnings of over $5 billion on sales of $100 billion.
On Wall Street, where the oil companies have been the darlings of the investment world this year, doubts are cropping up about the future earnings prospects of some of the major international oil companies.
Analyst Eralp notes, "People are now saying the international oil companies are not the gigantic cash cows we thought they were." Especially vulnerable, he states, "are oil companies with declining reserves, uninteresting exploration exposure, and unsafe and unexciting prospects to increase reserves."
Instead, he says, investors are looking at companies with large amounts of US oil production. With domestic oil prices slated to be totally decontrolled by October 1981, oil companies with "first tier" or old oil reserves have a guaranteed increase in their earnings when that oil reaches the world market price. However, they are also faced with the windfall profits tax which will limit their gains.
Oil companies with large US production have already demonstrated their advantage over companies relying on OPEC sources for oil. Standard Oil of Ohio, for example, with large production in Alaska, saw its second quarter earnings surge by 124 percent.
The domestic oil companies are also not faced with the uncertain movements of the US dollar. Exxon, for example, reported that because the dollar weakened in the second quarter, it had a foreign exchange translation loss of $368 million after it converted its overseas earnings to dollars. In the previous quarter, the dollar had been strong and Exxon had a gain of $313 million.
Because of the large differences between the international oil companies and the domestic producers, the oil analysts are telling their clients to buy the stocks selectively. "So far this year," says Mr. Mlotok of C. J. Lawrence, "anything you bought that pumped oil was a winner; now, if you want to stay ahead of the market, you have to be selective."
Furthermore, comments Mr. Eralp, "the companies are not cheap anymore; their stock prices have appreciated considerably." But, he concludes, "don't forget you're talking about oil, the one remaining measure of value that means anything. So, it only makes sense that the oil industry should be worth more than the rest of US industry."