Oil companies, refiners hurt by refining margins

And for companies whose primary business is refining oil and selling gasoline, second-quarter earnings versus a year ago could be ugly. Plummeting stock prices for many refiners reflect the difficult operating environment.

Major oil companies and refiners begin reporting earnings for the April-June period next week. Already, Chevron Corp., ConocoPhillips and Marathon Oil Corp. have said margins associated with refining and selling gasoline--their so-called "downstream" operations--were lower than a year ago.

The problem lies on a couple of fronts. For one, because companies like Chevron don't produce enough oil themselves to meet their refining needs, those companies have to buy oil on the spot market, where prices have roughly doubled from a year ago.

Also, because demand for gasoline has fallen in recent months, the companies can't raise wholesale and retail prices fast enough to keep up with rising crude prices and other escalating expenses.

"The summer drive season just hasn't helped things," said Standard & Poor's analyst Paul Harvey. "Crude is still going up, and demand for gasoline is flat to going down. And it's going down in the summer. Typically, that shouldn't happen."

But lower refining and marketing margins--which also have hampered profits in recent quarters--aren't expected to hurt the major oil companies' overall profits because they are reaping massive profits from exploration and production, thanks to record prices for crude and natural gas.

Profits at the three largest U.S. oil companies--Exxon Mobil Corp., Chevron and ConocoPhillips--are forecast to jump more than 20 percent to $25.2 billion for the quarter that ended June 30, compared with combined earnings of $20.4 billion in the same period last year, according to analysts surveyed by Thomson Financial.

"Chevron (and other energy companies) had an excellent June quarter--in spite of the likely drag from the company's U.S. downstream petroleum business," securities firm Wall Street Access said in a report last week.

Petroleum refiners, however, have no upstream arms to fatten earnings.