Oil majors' profits to soar on record crude

LONDON (Reuters) - The world's five largest fully publicly traded oil companies are expected to, yet again, report record profits next week, thanks to high oil prices, even as investors fret over the recent pullback in crude.

In addition to earnings, investors will also be watching for news on controversial, long-delayed service agreements with Iraq and for signs soaring costs are easing.

Oil prices averaged over $120 a barrel in the second quarter -- almost double the level in the same period of 2007 -- before rising to a record high above $147/barrel on July 11.

Analysts predict this will push sector earnings up around 30 percent in the quarter compared to the same period in 2007, and is likely to attract further criticism from politicians and hard-pressed motorists.

Exxon Mobil Corp (XOM.N), the world's largest non-government controlled oil company by market value, is predicted to post quarterly net income of over $13 billion on Thursday, according to Reuters calculations, compared to $10.3 billion last year.

Earlier the same day, industry No. 2, Royal Dutch Shell Plc (RDSa.L) is forecast to report a 20 percent rise in current cost of supply (CCS) net income, excluding one-off items, of $8.3 billion, according to a Reuters poll of 9 analysts.

BP Plc (BP.L) is forecast to post a 44 percent rise in replacement cost (RC) net income, excluding one-offs such as field sales, to $7.7 billion, on Tuesday.

CCS and RC net income both strip out unrealized gains from changes in the value of inventories, making them comparable with net income under U.S. accounting rules.

The forecast results would be the highest quarterly profits ever for all three companies. Exxon's result would be a U.S. corporate record, while Shell's would be a European record, analysts said.

OUTPUT STABLE, REFINING WEIGHS

Oil and gas production across the sector is expected to be stable in the second quarter, after sliding in recent years, although it will be a mixed picture.

BP is forecast to lift output 0.4 percent to 3.82 million barrels of oil equivalent per day (boepd) but Shell is predicted to suffer a fall of 2.5 percent to 3.10 million boepd due to a dearth of big startups.

Earnings from refining crude will be hit in the quarter.

Average refining margins were the highest for almost three years in Northwest Europe and the Mediterranean but halved in the U.S. compared to the same period last year, according to figures from BP.

Shell, Exxon and BP have been selling refineries in Europe so they will feel the full force of this trend but even industry No. 4, and Europe's largest refiner, Total (TOTF.PA) is forecast to see downstream earnings sag due to a weaker dollar and an outage at a refinery.

Paris-based Total is forecast to report second quarter net income excluding one-offs and inventory gains, of around 3.6 billion euros on Friday.

Companies may update investors on their plans to invest in Iraq. Exxon, BP, Shell, Total and industry No. 5, Chevron (CVX.N), which also reports on Friday, have all been in talks on short-term service agreements to help boost Iraqi output.

Baghdad had hoped to sign deals early this year but so far none have been signed. Company executives have said they are close to signing but Iraq accuses them of delaying.

U.S. Democratic senators have urged the Bush administration to try to stop the Iraqi government from awarding the contracts, saying the no-bid deals may inflame sectarian tensions.

Investors will also be eyeing cost rises next week.

Taxes are the main reason industry profits do not track oil prices but the soaring cost of extracting oil from the ground has also been a key factor -- and a more worrying one since costs do not automatically fall with prices in the way taxes do.

The $20 fall in oil prices from their peak earlier this month brings this question into focus. In the past three years, soaring oil prices have more than compensated for rising costs.

However, some analysts predict oil prices will continue to sag and may end Big Oil's long run of record earnings.

Nonetheless, falls in share prices over the past year and price-earnings ratios of only 7-8 times --low compared to other sectors -- means few analysts have sell recommendations on the Supermajors, as the industry's big 5 are known.

"The market continues to rate oils around 20 percent below implied discounted cash flow fair value levels," Jason Kenney, oil analyst at ING said in a research note.

Neil McMahon at Bernstein said stock prices in the sector were currently discounting oil prices of between $70-$90/barrel and disregarding the companies' much large baser of unproven reserves.

(Editing by Louise Ireland)