Chevron CEO O'Reilly: Refining Outlook Looks Sloppy Through 2011

There’s little business in the refining business these days.

Just take a look at the latest third-quarter earning results from super majors ExxonMobil, Royal Dutch Shell and Chevron. And last quarter was even worse for many companies — including Valero Energy, the largest U.S. refiner – as weak demand and high inventories squeezed margins.

The future of the refining business is shaping up to be far from positive. Or if you’re Chevron Chairman and CEO David O’Reilly, the outlook for the refining business is going to be downright ”sloppy.”

“I think it will take a few years to work its way through,” O’Reilly told investors in a conference call Friday. “I would expect 2010 and 2011 to be pretty sloppy before we see this begin to come back into better balance.”

Chevron’s third-quarter profit dropped nearly 52 percent to $3.83 billion compared with $7.89 billion in the same year-earlier period. The San Ramon, Calif.-based company’s profits included gains for about $400 million from asset sales and tax items, much of it related to the Gorgon liquefied natural gas project in Western Australia.

Earnings in the company’s upstream business fell 41 percent to $3.6 billion in the third-quarter. But its downstream segment – like virtually every other oil and gas company — experienced the greatest pain. Chevron’s third-quarter earnings in its downstream business fell 89 percent to $194 million compared with the same period last year. Only $34 million of its profits came from the company’s U.S. downstream business.

“On a macro level, we’re headed for a weak period here,” O’Reilly said in the call to investors. ”The golden age of refining didn’t last long, and we are into a weak period until we see the obvious combination of demand growth and some form of rationalization occur among the weaker players in the more oversupplied areas of globe.”

Chevron has focused on what it considers to be two growth areas: the West coast of the United States and the Pacific – a strategy that is already paying off — and itsculling parts of its downstream portfolio that don’t match up, O’Reilly said.

Margins in the West coast helped Chevron’s third-quarter earnings from falling even lower. Earnings actually increased $130 million from the second quarter of 2009, said Pat Yarrington, Chevron’s vice president and chief financial officer.

Refining outages and maintenance, combined with driving season demand drove retail prices higher (in the region), Yarrington said.

And it appears Asia’s economy and its markets is already showing signs of improvement, said O’Reilly, as he described his observations during a recent trip there. 

“Growth and demand there will be well ahead of what we’ll experience in the U.S. and certainly ahead of what we’ll experience in Europe,” O’Reilly added.