Duke, Exxon Offer a Study in Contrasts

Duke ( DUK) and ExxonMobil ( XOM) went their separate ways again Thursday.

The energy giants were once partners in a widely watched trading venture. But that operation, Duke Energy Trading & Marketing, began winding down as the merchant-energy industry sputtered toward oblivion. And now, latest-quarter results show that Duke and Exxon are moving in very different directions once more.

Duke has seen its stock soar since crowning a new leader, but the company handily missed first-quarter earnings expectations on Thursday. Duke Energy North America, the company's troubled in-house merchant energy operation, once again tarnished results.

Meanwhile, ExxonMobil turned in another impressive performance. The huge energy company reported a first-quarter profit of $5.44 billion on revenue of $67.6 billion. And although last year's earnings were 23% higher, due to one-time gains, ExxonMobil posted higher operating profits across all of its major business lines.

"First-quarter earnings, excluding accounting changes and special items, were a record and improved in all parts of the business," ExxonMobil Chairman Lee Raymond declared.

In midday trading, Exxon added 40 cents to $43.52, while Duke sagged 31 cents to $21.51.


For the latest quarter, Duke reported operating profits of 32 cents a share that fell shy of the analyst consensus and even outside analysts' projected range. Mounting losses at DENA triggered the miss.

"Overall, ongoing earnings were in line with our expectations except for DENA, which was affected by mark-to-market losses," explained turnaround CEO Paul Anderson. But "thanks to our asset sales and continued solid earnings and cash flow from our franchised electric and natural gas pipeline businesses, Duke Energy's financial strength and flexibility are rapidly improving. As a result, our key businesses are positioned to selectively pursue growth opportunities."

Still, investors have already rewarded Duke for its asset sale proceeds -- now at or near the full-year target of $1.5 billion -- by making the company's stock one of the top gainers in a sector that has easily outperformed the broader market. And Duke's biggest divisions actually saw profits slide during the latest period.

Duke reported that earnings before interest and taxes at its largest unit, franchised electric, fell 6.6% to $424 million due to lower wholesale power sales and extra outage costs. The decline came despite a 3.4% jump in residential sales, as the company continues to lose industrial business in a tough Carolina economy.

Duke's natural gas transmission division also posted a first-quarter profit decline. In that unit, EBIT slid 6.3% to $398 million due to the absence of earnings from divested assets and a prior-year gain.

But field services -- where profits jump on high commodity prices -- offered a clear bright spot. There, EBIT more than tripled to $92 million in the latest period.

Prudential analyst Carol Coale was already looking for an upside surprise from that division. But she failed to see the hit from DENA that caused Duke to miss her above-consensus earnings estimate of 39 cents a share.

In the first quarter, DENA swung from a modest profit to a huge $521 million EBIT loss. Granted, most of the loss stemmed from a $325 million writedown of power plants it hopes to sell in the glutted Southeastern market. But even without the special charge, DENA ended the quarter $106 million in the red. Most notably, it suffered an unexpected $93 million mark-to-market loss that shaved 6 cents from the company's bottom line.

Meanwhile, Duke Energy International saw first-quarter EBIT spiral by 28% to $29 million due to yet another charge. DEI recorded a $13 million write-off on a nitrogen production plant in Mexico it intends to sell.

The company's real estate division fared better. Crescent Resources -- which revealed its specific profit contribution for the first time ever -- reported a jump in EBIT to $60 million from break-even a year ago. Duke attributed the jump to "increased land and commercial sales" during the quarter.

Duke reported two other positive developments. The first-quarter loss in its "other" category, consisting of three small divisions, narrowed from $48 million to $5 million due to an asset sale gain and the absence of year-ago charges. And last year's $5 million loss on discontinued operations turned into a substantial $246 million profit due to a big gain on the sale of Duke's Australian assets.

Interest expense jumped 9.2% to $356 million, however. Still, the company ended the quarter with ample liquidity of $3.4 billion.

Anderson, for one, applauded the company's recent achievements.

"We have made excellent progress in executing our 2004 business and financial plan," he declared.

Upping the Ante

Even so, supermajor ExxonMobil easily turned in the better quarter. It reported a first-quarter profit of 83 cents a share, beating the consensus estimate by 8 cents. Revenue grew 6%.

Excluding special items, upstream earnings from exploration and production inched up $20 million to a record $4.01 billion. Downstream earnings from refining and marketing rocketed 28% to $1 billion. And chemical earnings nearly doubled to $564 million.

Prior to the company's report, Lehman Brothers analyst Paul Cheng singled out ExxonMobil as a suitable investment for those who want exposure to the supermajors. And he saw the oil giant go on to beat all of his expectations. Still, he warned in advance that the sector may have already peaked.

"Despite expectations for continued strong oil prices," Cheng wrote this week, "we reiterate our 2-Neutral rating on the integrated oil sector since we think the group is already fully valued."

Cheng has an overweight rating on ExxonMobil, however, "due to its excellent balance sheet, conservative management team and consistently rising dividend."

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