In theory, sky-high oil and gas prices mean both should be reporting record results.
In fact, both are likely to be reporting poor results as higher costs bite deeper into revenue streams.
Woodside is expected to be the hardest hit by the corrosive effect of rising costs, and the debilitating effect of increased depreciation charges.
Santos will have critics watching closely to see whether its reserve replacement ratio includes a sharply higher proportion of lower-value coal seam methane.
In both cases the results underline the never-ending challenge for an industry which relies on discovery to justify its existence, because without discovery petroleum companies (and the entire industry) shrink.
Everyone in the oil and gas game understands the discovery imperative, but not everyone in the investing world has such as clear view of why so much must be spent on exploration.
Woodside and Santos provide an insight into the problem confronting the global hydrocarbons industry where discoveries have become less frequent, and generally smaller.
In effect, petroleum is an industry in some sort of perpetual decline, a trend which needs to be explained to government which has a habit of looking at profits flowing from high oil prices, rather than understanding the need to re-invest in exploration at an ever-higher rate – if oil supplies are to be maintained near their current level for much longer.
Woodside will be first of Australia’s big two to report with the financial community tipping a profit result around $1.14 billion, but with some stockbrokers suggesting a result as low as $1 billion – a hefty decline on the 2006 profit of $1.43 billion.
Santos chimes in on Thursday with a consensus tip of $569 million, but with some brokers forecasting a result as low as $520 million.
Neither result will thrill the investing world, and might even come as a surprise to government and the wider community because so much more might have been expected.
The poor results might even be an opportunity for industry lobby groups to explain that pumping oil is not always a particularly smart way to make money and now is not a particularly smart time to make life harder for the industry through higher taxes or more onerous regulatory controls – that is, if government actually wants the oil industry to survive.
In detail, numbers The Slug has seen for Woodside point to pre-tax, and pre-depreciation earnings of around $3 billion. After all the charges layered on that the profit boils down to around $1 billion – not a lot in today’s business world.
Better profits are expected in future years, with 2008 and 2009 tipped to come in at around $1.5 billion.
But the spotlight this week will be on 2007 earnings with a special focus on what is likely to be a very poor result in terms of earnings per share (EPS), arguably the key measure for investors.
Woodside’s EPS is likely to be around $1.70, a percentage fall of close to 16% on 2006. Santos’s EPS is likely to be around 92c, also a percentage fall of around 16%.
Better times might lie ahead, but 16% declines in EPS are exceptionally poor results which will be hard to explain at a time of record high oil and gas prices.
The trick for management of both companies, and for industry lobby groups, is to use those declines as a reason to make life easier for oil companies, if Australia is to actually retain a home-grown petroleum industry.
