THE WALL STREET JOURNAL: Exxon and Shell Profits Surge even as Oil Production Declines
30 April 05
By JEFFREY BALL and CHIP CUMMINS
Staff Reporters of THE WALL STREET JOURNAL
Exxon Mobil Corp. and Royal Dutch/Shell Group both reported huge increases in first-quarter income, benefiting from the industrywide bonanza also swelling the coffers of their peers: high prices for the oil they pump and high margins for refining it. Both companies reported that their oil production declined, however.
Feeling pressure to return more of its mounting cash pile to investors, Exxon said it will spend about $3.5 billion in the second quarter on buybacks to reduce shares outstanding, up from $2.5 billion in the first quarter.
The world’s biggest publicly traded oil company said net income totaled $7.86 billion, or $1.22 a share, up 44% from $5.44 billion, or 83 cents a share, a year earlier. The latest quarter included a $460 million gain from the sale of a stake in China Petroleum & Chemical Corp., known as Sinopec. Revenue rose 21% to $82.05 billion.
Shell reported net income of $6.8 billion, before subtracting for minority interests, up 40% from $4.85 billion in the first quarter of 2004. The company said it recorded a net gain of $220 million in the quarter, which included proceeds from divestments, partly offset by a noncash mark-to-market charge of $172 million related to long-term natural-gas contracts. A year earlier, Shell took a net credit of $490 million. Revenue rose 26% to $72.16 billion from $57.27 billion.
Exxon’s results were a record first-quarter take for the oil behemoth, based in Irving, Texas. But they amounted to a bit of a letdown after fourth-quarter profit of $8.42 billion, which was a record not just for Exxon but, effectively, for any publicly traded U.S. company. After that, analysts rushed to bid up their estimates for Exxon’s earnings in 2005. The first-quarter results then fell short in analysts’ eyes.
Exxon shares were down $2.38 to $56 at 4 p.m. in New York Stock Exchange composite trading.
For the first period, profit in Exxon’s chemical business was particularly buoyant, continuing a trend. Chemical earnings totaled $1.28 billion, excluding the Sinopec gain, more than double the year-earlier figure of $564 million.
But Exxon’s oil and gas production was down. The company said its oil production fell 3.5% in the quarter because higher output from new fields in West Africa and Norway “was more than offset” by several factors: declines in older fields, maintenance, asset sales and adjustments in production-sharing contracts.
Exxon’s natural-gas production fell 6.4%, as higher production in Qatar was more than offset by field declines, lower demand in Europe and asset sales.
All told, Exxon said, combined oil and gas production dropped 4.7% from the year-earlier quarter. Excluding asset sales and the effects of production-sharing contracts, total production fell 2%.
Many international oil companies have come under criticism from investors for not spending more of their cash hoards to find and develop new sources of fossil fuel. Critics say the big U.S. and European oil companies’ failure to boost spending more than they are doing points to a troubling long-term problem for the industry: It’s getting harder to find enough new oil and natural gas each year to replace the amount being pumped out of the ground.
Exxon said its capital and exploration spending in the quarter was $3.42 billion, up 0.5% from a year-earlier but down 19% from the fourth quarter.
At Shell , the net income figure translates into €1.51 ($1.95) per share of Royal Dutch Petroleum Co., the Hague, Netherlands, compared with €1.11 per share last year. London-based Shell Transport & Trading Co. earned 15 pence (28.6 cents) a share, up from 11 pence. The two companies jointly own the operating units of Shell . They plan to unify their holding structure this summer.
After an energy-reserves accounting scandal last year, Shell has reinvested heavily in its exploration and production business. While much of the investment isn’t expected to start bolstering the bottom line for years, the company appears to have chalked up some early gains in the first quarter.
Excluding divestments, natural-gas production increased 4%. Shell also boosted production from new fields in Britain and Malaysia and ramped up production in the U.S., more than offsetting older, declining fields in the U.S., Norway and Oman. Operational disruptions, however, drove overall hydrocarbon production lower.
Total petroleum production dropped 5% to about 3.9 million barrels a day from 4.1 million barrels a day. Excluding the effects of divestments and the cancellation of a gas contract, however, total hydrocarbon output dropped just 2%.
Shell’s share of liquefied natural-gas sales totaled 2.88 million tons of gas, up 15% from 2.51 million tons in the first quarter of 2004. Shell has invested heavily in a series of capital-intensive LNG plants, which super-cool natural gas into a liquid form, allowing it to be shipped by tanker.
Shell said total capital investment grew almost 4% to $3.24 billion in the latest quarter from $3.12 billion in the first quarter of 2004. Spending for exploration and production projects soared 23% to $2.36 billion from $1.91 billion a year ago. The industry has been buffeted by soaring oil-field costs. Steel, a critical component for oil-well construction, and rates for oil-field equipment have risen sharply in recent months.
At 4 p.m. in New York Stock Exchange composite trading, the American depositary shares of Royal Dutch Petroleum were off 15 cents at $58.33 and those of Shell Transport were off one cent at $53.61.