Storms profit energy industry

By Steve Quinn
Published October 22, 2005

DALLAS -- Hurricanes Katrina and Rita ultimately benefited energy companies because, as supplies tightened, prices for gasoline, diesel and jet fuel soared.

Exactly how much money was made will become clearer next week, when the industry begins to detail its third-quarter performance. Analysts are expecting huge profits.

"They are just printing money right now," said oil analyst Fadel Gheit at Oppenheimer & Co. in New York. "They are making so many trips to the bank because they can't take all the money there at one time."

Exxon Mobil Corp., Chevron Corp., BP PLC, ConocoPhillips Co., and Royal Dutch Shell PLC are expected to report a $9 billion, or 46 percent, increase in their combined third-quarter profits, according to analysts' estimates compiled by Thomson Financial. Last year, the five companies earned $19.6 billion in the July-September period.

The windfall isn't limited to the major integrated companies that produce, refine and sell energy at the retail level.
Independent oil and gas producers, as well as independent refiners, also are expected to report double-digit profit increases. And despite indications of a slowdown in the growth rate for energy demand, the fourth quarter is already shaping up to be another good one for the industry -- partly because production of oil and natural gas in the Gulf of Mexico remains hindered.

The back-to-back hurricanes already have cost the region more than 11 percent of its annual oil production (about 60 million barrels) and nearly 8 percent of its yearly natural gas production (about 305 billion cubic feet). More than 60 percent of the Gulf's daily oil production and more than 50 percent of its daily natural gas production remain offline and some 2 million barrels of refining capacity remain out of service, according to the energy information service Platts.

However, Mr. Gheit said that because most energy producers "are covered by insurance for physical damage as well as business interruption, the negative impact on earnings is expected to be minimal."

The rising cost of energy is driving the industry's profitability jump.

The spot price for West Texas Intermediate crude oil averaged $63.19 per barrel during the third quarter, or 44 percent higher than last year, according to U.S. Energy Department estimates.

Yesterday, crude oil futures rose 61 cents to $60.63 a barrel after dropping as low as $59.15 a barrel -- the lowest since late July.

Natural gas delivered at the Henry Hub averaged $9.79 per 1,000 cubic feet, an increase of 74 percent from a year ago.

The companies also benefited from rising prices for gasoline, diesel and jet fuel after the hurricane-related closure of refineries and pipelines, which instantly constrained supplies.

The industry outlook was good even before the hurricanes. There is less room for error in the U.S. energy market these days thanks to the reduction of fuel inventories and slow addition of new refining capacity -- trends that have helped make refining much more profitable in recent years.

"We're also selling record amounts of product and have been cutting costs through consolidations that further bolster the bottom lines," said John Felmy, chief economist for the American Petroleum Institute, a Washington trade group.

The staggeringly high profits could put energy companies on the defensive for making such windfall profits in the wake of a disaster.

"It's going to make people mad, and it's going to be a [public-relations] nightmare for these companies," said Matthew R. Simmons, a Houston oil and gas investment banker.

The average retail price of gasoline nationwide briefly climbed above $3 a gallon in September. Last week, U.S. pump prices averaged $2.73 per gallon, or 69 cents higher than a year ago.

Watch for refiners and independent producers to weigh in with their own stout performances, analysts say.

Independent oil and natural gas producers -- many of which had rigs and platforms in the storm's path -- also will deliver upbeat earnings, analysts said.