Major Oil Cos. Warn of Lower Margins

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Major Oil Cos. Warn of Lower Margins

NEW YORK -- Two major oil companies -- Valero Energy Corp. and Chevron Corp. -- released quarter updates yesterday, warning that their margins would be negatively impacted as a result of high oil prices.

In its update, Valero said it expects throughput margins to be lower for the third quarter compared to the year-ago quarter, due to "substantially higher feedstock costs resulting from increased premiums for light sweet crude oils," the company stated. The higher cost for feedstock is expected to reduce the company's throughput margins by about $700 million in the third quarter versus the same quarter last year.

On the operations side, Hurricane Humberto's affect on Valero's Port Arthur refinery, as well as impacts on the company's St. Charles and Ardmore refineries during the quarter are also expected to cause lower throughput margins, the company stated.

Meanwhile, San Ramon, Calif.-based Chevron blamed lower profits from fuel refining as the reason why it expects its third-quarter earnings to be "significantly below" the record $5.4 billion seen in the company's second quarter of this year, The Los Angeles Times reported.

Chevron said its results also would be hurt by $700 million in net charges for asset impairment, environmental remediation, tax adjustments and other items, the report stated. The company saw lower throughput for its refineries during the quarter due to shutdowns at its refineries in El Segundo and Pascagoula, Miss., according to the report.

On the West Coast, industry refining margins saw a record $30.28 a barrel in the second quarter. However, the margins fell to less than half of that -- $14.11 a barrel -- in the third quarter, the LA Times reported. Marketing margins on the West Coast slipped also, to $2.42 a barrel from $5.12 a barrel in the second quarter, the report stated.

These announcements are a signal that across the industry, the era of record results is ending, the report stated. "We've left the peak earnings behind now, and it is going to be more challenging going forward," Fadel Gheit, an oil analyst at Oppenheimer & Co. who owns Chevron shares, told the LA Times.

"Most companies will have lower production volumes, higher per-unit costs and sharply lower refining and marketing earnings," he continued. "The only bright spot was higher oil prices, and that was offset by all the other negatives."

Refining and marketing margins peaked around mid-May and then plummeted, as refiners bought oil at record-high prices, but could not pass on the cost because gasoline prices and demand fell, he said.

In addition, ConocoPhillips reported last week that its third-quarter refining profit will be lower than previous quarters, and Marathon Oil Corp. issued a similar message earlier this week, the LA Times report stated.