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Marathon, BP close out terrible 4Q for oil sector

HOUSTON (AP) — The list of the world’s biggest oil companies stung by crude’s swift collapse grew by two on Tuesday, as BP PLC and Marathon Oil Corp. both reported fourth-quarter losses to end a dismal earnings period for major producers.

Crude’s steady descent at the end of the year, including a 60 percent plunge in the fourth quarter, pushed down profit and revenue for many oil and gas companies to their lowest levels in several years.

BP’s $3.3 billion loss for the final three months of 2008 was its first quarterly loss in seven years. Last week, its larger European rival, Royal Dutch Shell PLC, posted its first such loss in a decade.

With oil hovering around $40 a barrel, and the likelihood of a prolonged recession, the prospects for first-quarter earnings are pretty bleak, too. ConocoPhillips Chairman Jim Mulva said last week he expects the challenges to continue into next year.

“The first quarter will definitely be uglier than the fourth,” said Fadel Gheit, an analyst at Oppenheimer & Co.

And the fourth quarter was pretty ugly.

Houston-based Marathon said it lost $41 million in the October-December period as the company wrote down the value of its Canadian oil sands venture, in part because of the steep decline in commodity prices. It also slashed capital spending for 2009 and decided against splitting the corporation into two.

In the fourth quarter a year ago, Marathon earned $688 million. It’s the fourth-largest U.S. integrated oil company, meaning it’s involved in exploration and production as well as refining and selling gasoline.

Marathon cited the economic downturn Tuesday as the reason it opted not to break itself into two separate companies, one focused on exploration and production and the other on refining and marketing. It had been considering such a move since last summer as a way to enhance shareholder value.

“During our evaluation, the overall business environment has witnessed a period of unprecedented financial and commodity market uncertainty,” said Marathon president and chief executive Clarence P. Cazalot Jr. “Given this environment, we have concluded it is in the best interest of our shareholders to remain a fully integrated energy company.”

Deutsche Bank analyst Paul Sankey said he was disappointed because he saw advantages in the split. The exploration and production company would have been a prime target for cash-rich majors like Exxon, and the refining outfit would have had enough earnings potential to make it a top company in the sector.

But Sankey conceded a divided Marathon would not have the same borrowing power as a unified giant, “so pulling the split is a net positive.”

Marathon shares fell 4 cents to $26.84 Tuesday.

London-based BP, Europe’s second-largest oil company, swung to a steep fourth-quarter loss after posting an $8 billion profit in the third quarter and a $4.4 billion profit in the year-ago period.

When oil price changes on unsold inventories are stripped out, BP remained in the black during the fourth quarter. So-called replacement cost profit — a key measure for oil companies — was $2.6 billion in the fourth quarter of 2008, down on 2007’s equivalent of $3.4 billion.

Though the replacement-cost profit during the most-recent period was hefty, it was at the bottom end of market expectations.

BP blamed currency changes, in particular the fall of the euro and the pound against the dollar, as well as higher tax bills in Russia, for the weak performance. In addition, the company said it took a $700 million one-off loss related to its Russian joint venture, TNK-BP, which was dogged by political infighting last year.

Company shares rose 72 cents to $42.29.

With oil prices so volatile, BP said it will focus on cutting costs. The company announced plans last year to lay off 5,000 of its 97,000 employees, and executives indicated Tuesday they were on target to meet that goal.

“We need to continue the drive to make BP more efficient,” said CEO Tony Hayward.

Analysts and investors have kept close watch on oil companies’ spending plans for 2009, and they got two vastly different reports Tuesday.

BP said it intends to keep this year’s spending on capital expenditures in line with 2008 levels, likely between $20 billion and $22 billion.

Marathon, meanwhile, said it was slashing its 2009 capital spending program and announced a $5.7 billion budget. That’s 24 percent below 2008 spending levels.

The company said its global exploration and production budget of $2.5 billion is 26 percent below last year’s levels. For refining and marketing, it plans to spend $1.9 billion this year, $1 billion less than 2008 outlays.

Oil and gas producers large and small are scaling back operations as they prepare to ride out a recession that’s crushing energy demand around the world.

One exception is the industry’s biggest player, Exxon Mobil Corp., which last week reported a U.S. record for annual profit even as its fourth-quarter results fell 33 percent to $7.8 billion. The company has yet to announce its 2009 capital expenditure budget, but some analysts believe it could be the only oil major in a position to ratchet up spending significantly. Its 2008 spending came to $26.1 billion, up 25 percent from 2007.

Two other oil majors, Chevron Corp. and Royal Dutch Shell, have said they plan to keep this year’s spending largely in line with 2008 levels — a projected $22.8 for Chevron and $31 billion at Shell.

For the full year, BP said net profit was $21.2 billion, up slightly on 2007’s $20.8 billion. Marathon reported full-year net income of $3.52 billion, down from the $3.96 billion it earned in 2007.

Marathon said the $1.4 billion impairment charge was to write down all the goodwill value linked to its 2007 purchase of Western Oil Sands Inc. for $5.5 billion.

Goodwill is the difference between the purchase price of a company and the book value of its tangible assets, such as equipment and real estate. Accounting rules require companies each year to adjust for any declines.

The pressures facing oil companies have mounted in recent months as the price of oil dropped from an all-time high above $147 a barrel in July. BP’s Hayward said the global economic slowdown will likely mean that demand for oil will be 500,000 barrels a day lower in 2009 than in 2008.

In a presentation, Hayward said the company would break even in 2009 with oil prices between $50-$60 a barrel.

“At BP,” he said, “we’ve been managing volatility for 100 years in good times and bad times.”

AP Business Writer Pan Pylas contributed to this article from London.

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