Bloomberg: Chevron Profit Falls as Oil’s Gains Squeeze Margins (Update3)

By Joe Carroll

Nov. 2 (Bloomberg) — Chevron Corp., the second-largest U.S. oil company, said third-quarter earnings dropped for the first time in five years after a glut of gasoline forced prices lower and refinery crude costs climbed to a record.

Net income fell 26 percent to $3.72 billion, or $1.75 a share, from $5.02 billion, or $2.29, a year earlier, San Ramon, California-based Chevron said today in a statement. Excluding such items as a cut in the valuation of overseas assets, per- share profit was 13 cents below the average of 16 analyst estimates compiled by Bloomberg.

Chevron lost money making refined fuels in the U.S. as gasoline demand expanded at just one-fourth its rate of the second quarter. Oil prices topped $80 a barrel for the first time in September, squeezing profit margins on gasoline and diesel. Output at Chevron’s biggest refinery, in Pascagoula, Mississippi, was crippled by a fire.

“Refining margins that were far outsized there for a while have come back to a more normal level,” said Barry James, who helps manage $2.1 billion, including Chevron shares, as chief equity strategist at James Investment Research in Xenia, Ohio. “We may have an economic slowdown coming, and as demand pulls back, that’s going to hurt them even more.”

Combined profits for the world’s six biggest oil companies that report quarterly results fell 10 percent, the steepest decline for the group in five years.

Shares Fall

Chevron shares fell 71 cents to $88.33 at 10:10 a.m. in New York Stock Exchange composite trading. The shares still have climbed 20 percent this year, outperforming Chevron’s biggest U.S. rivals, Exxon Mobil Corp. and ConocoPhillips.

Before today, Chevron hadn’t posted a decline in third- quarter earnings since 2002, when U.S. gasoline prices averaged $1.34 a gallon at the pump, less than half the current level.

Chevron capped a two-week period of lower profit reports from some of the world’s biggest oil companies. Irving, Texas- based Exxon Mobil yesterday said its third-quarter net income fell 10 percent to $9.41 billion, its biggest decline in more than three years.

“Big Oil might not be the best energy play to try to make right now,” said Todd Petzel, who oversees $5 billion as chief investment officer at Offit Capital Advisors LLC in New York.

ConocoPhillips, BP

Houston-based ConocoPhillips last week said its profit dropped 5.2 percent as fuel-making margins narrowed. BP Plc, based in London, posted a 29 percent decline in net income on Oct. 23.

Royal Dutch Shell Plc, StaoilHydro ASA and Occidental Petroleum Corp. all reported higher third-quarter earnings, citing rising crude prices and such factors as currency gains and asset sales.

Chevron’s revenue rose 1.8 percent to $55.2 billion. Profit from refining tumbled to $377 million from $1.44 billion as sales of jet-fuel and heating oil declined, the company said. Chevron’s U.S. plants had a $110 million loss stemming from the August fire at the Mississippi refinery and repair work that crimped output at a plant in El Segundo, California.

Third-quarter gasoline demand in the U.S. rose 0.3 percent from a year earlier to an average of 9.53 million barrels a day. Imports of the fuel rose at almost seven times that rate, creating gluts in some regions, according to the U.S. Energy Department.

Production Declines

Oil and natural-gas output from Chevron wells declined 4 percent to the equivalent of 2.59 million barrels of crude a day after Venezuela seized control of the company’s operations in the country. Profit from oil and gas sales fell 2.1 percent to $3.43 billion.

Chief Executive Officer David O’Reilly plans to spend almost $20 billion this year and next to expand refineries and boost oil output.

Chevron, which triggered the Saudi Arabian energy boom with the 1938 discovery of oil in the kingdom, trails Exxon Mobil, Shell, ConocoPhillips and Total SA in replacing old oil fields with new discoveries, according to data compiled by Bloomberg.

Chevron also has the highest per-barrel costs of finding new reserves among those companies.

O’Reilly, the longest-serving CEO among chiefs of the world’s four largest oil companies, in July set a target of increasing oil and natural-gas output by 3 percent a year through 2010.

Chemicals Segment

Third-quarter chemicals profit dropped 39 percent to $103 million as higher oil prices raised production costs and the business incurred $40 million in environmental clean-up costs.

O’Reilly, a Dublin-born chemical engineer, has overseen $66.6 billion in acquisitions since becoming CEO in January 2000. Chevron shares have posted annual gains averaging 14 percent, assuming reinvestment of dividends, during his tenure.

Resisting pressure from U.S. lawmakers, Chevron plans to keep its stake in two gas fields in Myanmar, where the ruling military junta deployed soldiers last month to crush the country’s biggest protests in almost two decades, O’Reilly said in an Oct. 29 interview in Bangkok.

The company also plans to proceed with an expansion of the Tengiz field in Kazakhstan, O’Reilly said in the interview. Neighboring Russia opposes plans to expand the pipeline that hauls crude from the field.

In Thailand, where Chevron is the largest supplier of gas, the company and its partners in a $13 billion offshore venture won a 10-year extension to their drilling license, Thailand’s Ministry of Energy said on Oct. 29. The Chevron-led group plans to almost double daily output from the fields to 1.24 billion cubic feet of gas.

To contact the reporter on this story: Joe Carroll in Houston at [email protected] .

Last Updated: November 2, 2007 10:16 EDT