Image: Valero station
Pat Sullivan  /  AP
"You can expect us to maintain our balanced approach by investing in growth projects, paying off debt, buying back stock and increasing dividends, but clearly we intend to hold much more cash than in the past," said Valero chairman and chief executive Bill Klesse.
updated 10/28/2008 7:11:41 PM ET 2008-10-28T23:11:41

Record crude prices this summer are translating into huge profits, as BP and Occidental Petroleum showed Tuesday, but some energy companies are bracing for tougher times, keeping a closer tab on cash and cutting spending.

Oil producers are coming off a quarter during which crude prices reached an all-time high of $147.27. But prices have since tumbled more than 50 percent, and the global economic malaise has raised questions about energy demand at least into 2009.

Despite a 71 percent jump in third-quarter profit, Occidental Petroleum said Tuesday it likely would not increase capital spending next year from its current $4.7 billion level. Refiner Valero Energy Corp., which also reported July-September results Tuesday, said it was scaling back spending by 33 percent this year and cutting its 2009 budget.

"You can expect us to maintain our balanced approach by investing in growth projects, paying off debt, buying back stock and increasing dividends, but clearly we intend to hold much more cash than in the past," said Valero chairman and chief executive Bill Klesse.

ConocoPhillips, the third-largest U.S. oil company, also has said it likely will keep capital spending at $15 billion next year.

It's vital that oil companies spend money on new exploration and production if they want to grow.

"The bigger you are, the less chance you're going to cut your capital spending," said Brian Youngberg, an analyst with financial services firm Edward Jones. "You generally have a stronger balance sheet and you tend to look through the ups and downs of commodity markets."

But demand for fuel is falling away amid a broad economic downturn.

The U.S. Department of Transportation last week reported the largest monthly decline in miles driven since World War II.

In the month after gas prices peaked at $4.11 per gallon, Americans drove 15 billion fewer miles in August 2008 than they did in August 2007 — the biggest single monthly decline since the data was first collected regularly in 1942.

Youngberg noted some smaller exploration and production companies are eliminating or delaying projects because they rely on credit markets for funding. That credit isn't available right now, he said.

That's not likely a worry for oil giant BP PLC, Europe's second-biggest oil producer behind Royal Dutch Shell PLC, which said Tuesday its third-quarter earnings rose to $8.05 billion from $4.41 billion a year earlier.

Revenue jumped 45 percent to $103.2 billion from $71.3 billion the previous year.

"The high oil price of the third quarter obviously helped our absolute result," said chief executive Tony Hayward.

Hayward said he was confident the company would continue to do well even though oil prices could dip further.

"I believe BP is well-positioned to cope with such volatility," Hayward said, noting the company had not committed as much money as its rivals to some higher-cost means of producing oil, such as mining tar sands.

"We think the current turmoil may in fact create opportunities for us," he added.

BP's U.S. shares rose $6.37, or 15.9 percent, to close at $46.52.

Los Angeles-based Occidental Petroleum said net income for the three months ended Sept. 30 rose to $2.27 billion, or $2.78 a share, versus $1.32 billion, or $1.58 per share, during the same period a year earlier.

Analysts polled by Thomson Reuters had been expecting earnings, on average, of $2.71 per share.

Revenue for the quarter rose to $7.06 billion from $4.84 billion in the year-earlier period.

Occidental said earnings from its oil and gas segment were $3.61 billion in the most-recent quarter, compared with $1.95 billion a year ago. Markedly higher commodity prices were partially offset by higher operating expenses.

Occidental shares rose $7.62, or 18.1 percent, to $49.70.

San Antonio-based Valero, the nation's largest independent oil refiner, said its third-quarter profit fell 9 percent from a year ago, but results were better than Wall Street expected.

Valero said net income was $1.15 billion, or 2.18 a share, compared with $1.27 billion, or 2.09 a share, a year ago. Valero had fewer outstanding shares in the most-recent quarter.

Excluding a gain from the July sale of a Louisiana refinery, income from continuing operations was $982 million, or $1.86 a share. Third-quarter revenue grew nearly 52 percent to $35.9 billion.

Analysts surveyed by Thomson Reuters expected earnings on average of $1.54 per share on revenue of $35.79 billion.

Margins — the difference between the cost of crude and other feedstocks and what the company makes on refined products — were extremely volatile in the quarter.

Gasoline margins were low in July, when crude prices hit record highs, but began to improve in August as oil prices began their downward spiral. Margins for distillate products, such as diesel and jet fuels, were robust throughout the quarter, Valero said.

Given the current economic downturn, Valero said it now expects capital spending to be around $3 billion this year, well below the $4.5 billion it had initially planned. For 2009, it expects capital spending to be about $3.5 billion, down $500 million from its previous guidance.

In a call with investors, company officials said the refiner planned to scrap plans for a new coker at its refinery in Port Arthur, Texas, and delay improvement projects at other sites.

"What we've got is a combination of a couple of deletions from our capital budget," said Rich Marcogliese, Valero's chief operating officer. "But primarily it represents a number of deferrals on discretionary investments."

Valero shares rose $1.70, or 11.3 percent, to $16.81.

Earnings season is in full swing for energy companies. Also reporting this week are Exxon Mobil on Thursday and Chevron Corp. on Friday.

Copyright 2008 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

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