TAKE away Exxon Mobil Corp, Chevron Corp and ConocoPhillips and profits at US companies are the worst in at least a decade.
Without the US$70 billion that oil producers earned in the last two quarters, profits at companies in the Standard & Poor's 500 Index tumbled 26 percent and 30.2 percent, the biggest decreases for any quarter since Bloomberg started compiling data in 1998. Energy companies made up almost half the income growth reported by S&P 500 companies in the first three months of 2008 as oil prices surged past US$100 per barrel, the data show.
The results leave the benchmark for American equities vulnerable to declines as oil companies' costs balloon and production slips, according to Bank of America Corp, Charles Schwab Corp and Allianz Global Investors.
The industry is getting less profit from a barrel of oil than at any time since 2005, just as the rest of the US economy is sputtering. Still, energy shares posted the S&P 500's steepest gains in the past year, bloating their representation to 15 percent of the index.
"It's kind of a Catch-22," said Joseph Quinlan, 49, New York-based chief market strategist for the investment management unit at Bank of America, which oversees US$643 billion in client assets. "The better energy does, the weaker the rest of the S&P. It masks some of the weakness."
Biggest gain
Energy companies in the S&P 500 reported an average 25.9 percent gain in first-quarter profit, the biggest of the index's 10 industry groups, data compiled by Bloomberg show.
For the broader market, earnings declined by 18.3 percent, based on the 441 companies in the S&P 500 that already announced results.
The drop increases by 7.7 percentage points when profits for energy producers are stripped out, according to Bloomberg data, making the contribution of oil companies the biggest in at least 10 years. Even after taking out financial firms and consumer companies that reported lower earnings, oil profits accounted for almost half of the overall gain of 11.02 percent for the S&P 500, Bloomberg data show. June futures on the S&P 500 retreated 0.2 percent to 1,423.50 at 10am in London.
The divergence in the earnings of oil companies from the rest of corporate America indicates that the S&P 500's two-month, 12 percent rally may not be sustainable, according to Neil Dwane, who oversees about US$139 billion as chief investment officer for Europe at Allianz Global Investors' RCM unit in Frankfurt.