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Big Oil's Earnings Are Lousy

Isac Simon
November 1, 2011

This year has brought a fantastic ride for Big Oil. Thanks to the various geopolitical disturbances in oil -producing countries around the globe, crude oil prices have been on the higher end of the spectrum for a major part of the year.

The curtains are down on yet another round of earnings for these behemoths, and it should be no surprise that they rang up fantastic profits. The market, in turn, is duly ratcheting up their share prices. The net result: Mostly everyone seems satisfied, from top management to the retail investor.

Well, almost everyone. The bottom lines definitely look better, but the underlying fundamentals aren't as good as you might think.

Drilling down
When any single fact is given undue emphasis, people generally tend to take it for granted that the particular fact in question explains everything. Let me put that in perspective. Suppose we hear about an "upstream earnings increase of $X billion on higher prices for crude oil." Sounds impressive, right? The last three editions of quarterly earnings have seen CEOs and CFOs crowing over "growth in earnings" when compared to last year's corresponding quarters.

But how long does management expect to survive solely on that fact? For several months, maybe, but what then? What about next year? Will these companies be able to project a similar growth pattern? Not unless they can increase production -- at the same time hoping that current crude oil prices remain stable.

Numbers don't lie
Here's how the major oil producing stocks fared against the S&P 500 in the past 12 months and how they stack up in terms of production.


Returns in the Past 12 Months

Nine-Month Production for 2011 (in MBoe/d)

Nine-Month Production for 2010 (in MBoe/d)

Production Change (%)

S&P 500 5.9%      
ExxonMobil (NYSE: XOM  ) 17.4% 4,497 4,271 5.3%
Chevron (NYSE: CVX  ) 27.2% 2,684 2,755 (2.6%)
ConocoPhillips (NYSE: COP  ) 17.3% 1,626 1,752 (7.2%)
BP (NYSE: BP  ) 8.3% 3,442 3,872 (11.1%)
Royal Dutch Shell (NYSE: RDS-A  ) 9.2% 3,186 3,252 (2%)
Statoil (NYSE: STO  ) 16.5% 1,808 1,868 (3.2%)
Total (NYSE: TOT  ) (4%) 2,341* 2,393* (2.2%)

Sources: Google Finance, company filings, and author's calculations.
MBoe/d = Thousand barrels of oil equivalent per day.
*Total's production data are for the first six months of the corresponding years.