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Energy


Industry Outlook -- Basic Industries: ENERGY

ENERGY

Profit growth may slow to a trickle, but the world still craves oil, and companies that can easily crank up production of crude should do best

The energy industry won't match the blistering rise in profits it enjoyed in 1996. The problem isn't demand. Even though Asia's energy-hungry Tigers should moderate their pell-mell expansion, worldwide energy demand will still rise perhaps 2.4%, just short of last year's torrid 2.7% rise. Supply isn't a problem, either. Iraq's return to the world oil market should depress prices only slightly by adding 600,000 barrels of oil a day to supplies.

Still, oil companies will barely increase profits. PaineWebber Inc. oil analyst Steven A. Pfeifer expects the oil majors' profits to rise between 2% and 5% this year, compared with an estimated 31% in 1996. One reason is that new petrochemical production capacity will push down the prices they can fetch for chemicals. Also, refiners' margins will be pressured by strong crude prices. With the world still craving oil, those companies that can most easily crank up crude production should see the biggest profits. Pfeifer's favorites--Mobil Oil, British Petroleum, Texaco, and Marathon Oil--are aggressive producers of oil and natural gas, with strong cost-cutting programs. And they have relatively small chemical operations, so they won't be hurt as much by weakness in chemical prices.

COLD CASH. Natural-gas companies will see smaller profit gains, too. Prices should settle a bit, to $2.25 per 1,000 cubic feet, down from '96's average $2.45, says analyst Carol Coale of Prudential Securities Inc. But demand should be healthy. She sees U.S. natural-gas production hitting a 10-year high of 19.9 trillion cubic feet, up 1.6%, if winter is as cold as usual. She expects gas companies' profits to rise 32%, vs. a quadrupling last year.

With profit growth slowing, energy companies are squeezing out costs. Shell Oil, Star Enterprise, and Texaco, for instance, may combine their U.S. refining and marketing operations. But, says Prudential Securities oil analyst Frank P. Knuettel, "on balance, most of the big savings are over."

That's a message Wall Street got some time ago. Despite higher profits, shares of 20 major companies rose just 24% through mid-December, matching the gain of the Standard & Poor's 500-stock index. Shares of oil-equipment and oil-service companies did better, rising an average 44%--because of growing shortages of drilling rigs and of skilled field workers. Standouts last year included Schlumberger Ltd. and Baker Hughes Inc., whose stocks both rose about 50%.

Investors haven't shaken their belief that prices--and profits--could crater once Iraq starts pumping oil big-time. Analysts project the yearly average price will fall 7%, to $20.50 a barrel, in 1997. Playing it safe, Texaco Inc. approves drilling projects only if they will pay off with oil prices as low as $15 a barrel.

That same caution runs up and down the oil patch, which hasn't forgotten its early 1980s hangover. The best hope for energy companies in 1997 is that worldwide demand--fueled by those Asian Tigers--will continue to surge.By Gary McWilliams in HoustonReturn to top

TABLE

Prognosis 1997

POSITIVES

-- Crude oil and gas prices look to stay high--a profit bonus for producers

-- Alliances promise lower operating expenses

-- Asia's booming oil needs should boost world demand a robust 2.4%

NEGATIVES

-- Information on Asian markets is spotty, making forecasts difficult

-- Shortages of drilling rigs and experienced workers are pushing up costs

-- High energy prices have consumers angryReturn to top


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