Big Oil: Deutsche Bank's Bearish Turn

The firm lowered its rating on Exxon Mobil shares, saying major energy outfits face a "difficult set" of earnings reports this week

Exxon Mobil's (XOM) shares have had such a strong run, Deutsche Bank Securities on Sunday Apr. 22 downgraded the integrated oil giant's stock to hold from buy. Analyst Paul Sankey also warned that the energy industry has experienced setbacks that could crimp earnings.

Crude-oil prices have trended lower during recent months from their all-time high of $77 last summer as scarcity fears subsided (see, 1/29/07, "Barrels Of Confusion"). But countering such declines, Americans have continued using cars for their travel and gobbling gasoline. The retail cost of gas in the U.S. is up more than 9 cents from a year ago to around $2.70 per gallon according to the Energy Information Administration.

Against this backdrop, Exxon has seen its shares rise almost 8% year to date and 0.2% on Apr. 23 to $79.89. Deutsche Bank had a target price of $80 on the stock. The question remains as to how long Exxon's good times last.

"We see the integrated oil group as approaching a difficult set of earnings over the coming week, with mixed capture of what has appeared to be a super-strong environment," Sankey said in a research note.

Exxon plans to announce its financial results for the first quarter on Apr. 26. Analysts surveyed by Thomson Financial think the Irving, Texas company will announce $1.51 per share for the first quarter. Deutsche Bank estimates that Exxon's profits will be down 10% in the March quarter compared to the $1.69 per share it earned in the Dec. quarter.

Sankey noted in his report that oil companies have faced challenges in recent months that could affect their earnings performance. For example, the winter in Europe was warm, diminishing demand for heating fuel in the region. And high levels of refinery downtime created a difficult earnings environment, Sankey says, without describing specifically which problems have affected Exxon.

Setbacks have recently hit the refining industry, sparking fears about supply and putting upward pressure on gasoline prices, but limiting companies' production at the same time. For example, Valero Energy's (VLO) refinery in Sunray, Tex. hasn't been operating at full capacity since a fire damaged it in February, according to media reports.

Meanwhile Venezuela's president Hugo Chavez's government is planning to take 60% ownership of heavy oil projects in the country by May 1, "a process that will hurt ExxonMobil and tend to focus attention on the risk that this global super-major faces in gaining access to sufficient reserves to feed its vast production requirements," Sankey wrote.

Even amid a time of fat profits, energy giants like Exxon will face tougher times bolstering their bottom lines.

(Deutsche Bank does and seeks to do business with companies covered in its reports, but their authors are not directly compensated for providing specific recommendations.)

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