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The Wall Street Journal: Results at Exxon,Shell May Augur Growth Slowdown

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By JEFFREY BALL in Dallas and CHIP CUMMINS in London
October 27, 2006; Page A2

Several quarters into one of the flushest periods in the oil industry’s history, Exxon Mobil Corp. and Royal Dutch Shell PLC are showing signs the wild ride might be slowing and that they are settling in for a period of more-stable prices and results.

Exxon Mobil, of Irving, Texas, still reported third-quarter net income of $10.49 billion, up 5.7% from a year earlier and one of the largest quarterly profits for a U.S. company. But the average price at which Exxon sold a barrel of oil was $65.14, up 12% from a year earlier but nearly flat compared with the second quarter amid moderating oil prices this year.

Shell, of The Hague, Netherlands, reported $5.94 billion in third-quarter net income, but rising costs, higher taxes and production difficulties in Nigeria hurt the company’s results. Earlier in the week, it said it was pursuing its first big deal since emerging from a restructuring.
 
Shell’s move comes as BP PLC Chief Executive Officer John Browne this past week suggested he thought lower oil prices might trigger more consolidation. Speculation about increased dealmaking underscores a problem oil companies have faced for years, one that could be compounded by sliding oil and natural-gas prices: how to expand amid dwindling access to new reserves.

Exxon said its third-quarter production of oil and natural gas rose 7.2% from a year earlier, to four million barrels a day of oil equivalent. That reflects new oil projects, particularly in West Africa, but it also reflects abnormally low natural-gas production in the year-earlier quarter, a result of the 2005 Gulf Coast hurricanes.

In another indication, the company said, of its effort to boost energy supplies, Exxon said its capital-and-exploration spending was $5.06 billion in the third quarter, up 15% from a year earlier.

Exxon’s earnings from the upstream part of the company’s business — the production and sale of crude oil and natural gas — rose 13% from the year-earlier quarter, to $6.49 billion, excluding a gain relating to a European gas business a year ago. Earnings from the downstream side of the business — which buys crude oil and converts it to products such as gasoline — rose 29% to $2.74 billion.

On a per-share basis, Exxon’s third-quarter profit rose 12%, to $1.77 from $1.58 in the year-earlier quarter. Revenue in the latest quarter fell 1.1% to $99.59 billion.

Exxon’s results this year put it on track to beat last year’s $36.13 billion profit. For the year’s first nine months, the company reported profit of $29.25 billion, up 15% from the same period in 2005.

Exxon officials also said the company is moving forward with negotiations to sell gas from the Sakhalin-1 project off Russia’s far eastern coast to China National Petroleum Corp. Henry Hubble, Exxon’s vice president for investor relations, said the Exxon-led consortium running Sakhalin-1 is in talks with OAO Gazprom, Russia’s natural-gas monopoly, “about how to export” the gas.

Shell’s third-quarter net income fell 34% from a year earlier, but analysts said Shell did better than they expected. A big disposal last year made year-earlier comparisons particularly unflattering.

As recently as December, Shell CEO Jeroen van der Veer questioned whether deals valued at more than $10 billion made sense. This year, “we have clearly changed our guidance there,” Shell Chief Financial Officer Peter Voser said in a conference call yesterday, though he declined to issue any new guidance. Earlier in the week, Shell approached the board of its main Canadian affiliate about a possible offer of 7.7 billion Canadian dollars, or about $6.84 billion, for the 22% stake in the company Shell doesn’t already own.

Shell said net income fell to $5.94 billion, or 93 cents a share, from $9.03 billion, or $1.35 a share, in the third quarter last year. Revenue rose 10% to $84.25 billion from $76.44 billion. Profit was hit by charges totaling $77 million, compared with a net gain of $1.57 billion last year.

Shell’s numbers conform to international financial-reporting standards, which differ from U.S. generally accepted accounting principles. In 4 p.m. New York Stock Exchange composite trading yesterday, Exxon’s shares rose 61 cents, or 0.9%, to $71.62, while Shell’s shares increased 2.7%, or $1.82, to $69.46.

Write to Jeffrey Ball at [email protected] and Chip Cummins at [email protected]

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