U.S. energy co's facing fourth-quarter pain

HOUSTON (Reuters) - The steep drop in crude oil prices will shrink energy companies' fourth-quarter profits and is likely to trigger cuts in exploration and production spending and job losses throughout the sector in 2009.

Chevron Corp (CVX.N) said on Thursday its fourth-quarter earnings will be significantly lower than the previous quarter as the 50 percent drop in average oil prices hurt its exploration and production business.

Additionally, the second-largest U.S. oil and gas company also said refining margins fell sharply in December compared with the previous two months.

That warning from Chevron and a 2 percent drop in crude oil futures pulled the energy sector lower on Friday, with the Chicago Board Options Exchange index of oil companies .OIX shedding 2.6 percent.

"We've had a big decline in the average oil prices from the third-quarter to the fourth-quarter and it obviously is going to impact all the upstream earnings," Evan Smith, co-manager of the Global Resources Fund at U.S. Global Investors Inc.

In a note to clients, JP Morgan said it expects Chevron to report its lowest exploration and production earnings in the fourth quarter since 2004.

Large oil companies with exploration and refining arms can expect a 60 percent decline in profits from their exploration and production business, driven by the oil price decline, Smith said.

Crude oil prices, that had averaged $118 per barrel in the third quarter, tumbled to about $59 per barrel in the fourth quarter. In the 2007 fourth quarter, crude oil prices averaged about $90 per barrel.

"The numbers speak for themselves," said John Olson, fund manager at Houston Energy Partners. "You will have margin compression at every level."

Analysts also expect energy companies to rein in spending as they conserve cash in the face of falling oil prices and tight credit markets. Smaller energy companies have already made big cuts and larger companies like Chevron, Devon Energy (DVN.N) and EOG Resources Inc (EOG.N) are in the process of formulating their budgets for 2009.

EOG said in a regulatory filing on Thursday that its capital expenditures for 2009 will likely not exceed its cash flow. The Houston company also said it will revise its 2009 production forecast, citing uncertainty in the markets.

Also on Thursday, Schlumberger Ltd (SLB.N), the world's largest oil field services firm, said it will cut 1,000 jobs, or about 5 percent of its workforce in North America, where a sharp decline in the number of rigs drilling for oil and gas have hurt its business.

"The turn in oil prices and all the reductions in budgets are head wind for anyone in the oil services business," according to U.S. Global Investors' Smith.

Tudor, Pickering, Holt & Co. Securities Inc, an energy investment bank in Houston, said in a note to clients that it expects more job cuts in the sector.

Oilfield service companies that help energy companies drill for and produce oil and natural gas will need to cut more jobs as they struggle to cope with a U.S. rig count that has fallen about 20 percent since its summer peak and a 40 percent drop in budgets for U.S. exploration and production companies, the firm said.

(Reporting by Anna Driver in Houston; Editing by Tim Dobbyn)