With oil prices soaring and consumers facing record prices at the pump, Big Oil must be living the high life, right? Wrong. One of the hidden ironies of skyrocketing oil prices is that the oil companies are not seeing the gains that the crude prices might indicate. Other aspects of their businesses, not to mention political backlashes abroad, are dragging down earnings

You may expect to see the share prices of the big firms at all-time highs, but the stocks of the three supermajors‾Exxon Mobil, Chevron and ConocoPhillips—have failed to inspire. Through the second week of July, ConocoPhillips was up just 0.7% to $88.47; Chevron fell 0.7% and traded at $92.80; and Exxon Mobil had fallen 8.7% to $85.42. Meanwhile, exploration and production companies are way up, including Devon Energy and Apache Corp., which rose 21.2% to $111.11 and 13.3% to $124.93, respectively. So why are investors wary of the energy heavyweights?

Ironically, the high oil price isn't all good news for these companies, says Tina Vital, an integrated oil & gas equity analyst at Standard & Poor's. The supermajors also have "downstream" operations, including refining oil products and selling gasoline. As the price rises, margins on these products tend to fall, as the companies can't pass the full price increase on to consumers. According to S&P, refining margins for the first quarter of this year fell 60% from the second quarter of 2007, though the ratings agency expects to see some improvement before the end of the year.

High oil prices have also emboldened national governments to raise taxes on oil companies operating within their borders or even take control of their assets entirely. In 2007 the Venezuelan government expropriated ConocoPhillips' oil interests in the country, contributing to a 1% decline in the company's oil-and-gas production for that year. "The shift to national oil companies from integrated oil companies is being priced in," says Terence Brennan, a portfolio manager at DWS Scudder. "The countries with reserves want the technology but don't want foreign companies to own the reserves, so [investors] see a dilution of the opportunity set."

And it's not only the political risks overseas that are giving investors pause. The big oil companies are seen as an easy target for campaigning politicians appealing to consumers squeezed by record gas prices. There already has been talk of a windfall tax on oil company profits during the current campaign. Jeffrey Saut, chief investment strategist at Raymond James, has a bullish long-term outlook on energy but has reduced some exposure to the sector in the run-up to the election. "You are going to see an effort out of the politicos to break the price of oil to the downside between now and the election," he says. "It's a wrong-footed strategy but they'll do it to pander to the voting populace." In addition, it's also getting more costly and difficult to access new oil reserves. Suppliers of rigs and drilling platforms have seen demand for their products soar allowing them to boost prices.

But, S&P's Vital believes investors have allowed these concerns to overshadow an overall positive outlook for the supermajors, and may be missing a big opportunity. S&P has strong buy recommendations on ConocoPhillips and Chevron and a buy on Exxon. Vital points to a number of large projects that are expected to begin operation this year, encouraging figures for reserves and estimated average earnings growth of 34% for the year, compared to flat growth in 2007. Average production growth for the supermajors is expected to be 2% to 3% for 2008, compared to an estimated 1% increase in global oil supply overall. "I think the worries are unfounded. They have the reserves, expertise, technology and stable earnings," Vital says.

DWS's Brennan also sees opportunities. "The supermajors are a good investment," he says. "They haven't participated in the rally but we're encouraged to believe they will."