New York Times: Exxon and Shell Report Record Profits for 2006

A fuel delivery to a service station in Keller, Tex. Exxon Mobil reported that it earned $39.5 billion in 2006.

Donna McWilliam/Associated Press               
By CLIFFORD KRAUSS
Published: February 2, 2007

HOUSTON, Feb. 1 — Oil prices have fallen, but Exxon Mobil and Royal Dutch Shell left their smaller competitors in the dust and reported record annual profits Thursday.
 
By making $180 million a day between them, the two largest publicly traded oil companies displayed their ability to ramp up production worldwide over the year, even in unstable places like Chad and Nigeria. Growth may be slowing and is likely to continue to do so in the future, but these two companies showed they could navigate the year’s volatile energy prices that caused smaller companies to stumble in their fourth-quarter profits.

The expanding profits at Exxon Mobil and Shell, however, may also make them big targets for the Democratic Congress whose leaders want oil companies to pay higher taxes and work to curb global warming.

Analysts said that with oil prices rebounding again with more frigid weather, the entire industry is almost assured of seeing strong profits again this year.

Production in Mexico and Venezuela is declining because of politics, poor management, investment shortfalls and aging fields. And in Russia, production is slowing because of tensions between the government and foreign oil and gas companies over big investments. With worldwide crude inventories full, Saudi Arabia is keeping production in check to maintain its influence over pricing.

Energy consumption in China and India, meanwhile, continues to soar.

Just a few weeks ago, many traders were predicting that oil would fall below $50 a barrel. But now the consensus of traders is that $50 is more likely a floor, so that big profits should continue in an industry that is swimming in cash.

“Only a few months ago, I thought oil prices could go down to $40 and natural gas prices to $5,” laughed Fadel Gheit, senior energy analyst at Oppenheimer & Company, who has since tossed out those expectations.

As for the earnings, he said: “The brutal focus on efficiency makes Exxon Mobil head and shoulders above everybody else. They arrive ahead of all the passengers, even those traveling on the same train.”

Exxon reported annual profit of $39.5 billion, or $6.62 a share, for 2006 — its second consecutive annual record. Once again, the profit was the largest reported by any American company in history.

While Exxon’s fourth-quarter results were actually down a bit from the year before, the enormity of its annual profits had Democratic politicians shaking their heads.

Under Democratic control, the House of Representatives quickly passed legislation last month to raise nearly $15 billion in taxes and royalties and use that money to finance research for alternative fuels. Many in the Senate support similar legislation, which may get a boost from a common perception in Congress that large oil companies are richer than ever and not doing their part to curb global warming.

As soon as Exxon Mobil released its earnings, Representative Edward J. Markey of Massachusetts, who is a leading Democratic spokesman on energy issues, accused the company of using its “outlandish profits” to lobby for energy policies that benefit it rather than the American people.

“The hypocrisy of the oil and gas lobbyists is so high that even as these record profits gush from their company balance sheets, they try to block all attempts to recover the royalties they owe the American taxpayer,” Mr. Markey, who is on the House Energy and Commerce Committee, said in a statement.

Apparently sensitive to perceptions, Shell did not announce that its annual profit was a company record.

The profitable results of the two companies came after reports by other energy companies in recent days that slipping commodity prices, rising steel and labor costs and higher royalties and taxes had hurt their bottom lines.

Exxon’s refining and chemical businesses benefited from the dip in gas prices, giving it a cushion that the smaller companies did not have. Its worldwide oil production increased modestly over the year, though it declined slightly in the fourth quarter.

Shell reported a 21 percent rise in its fourth-quarter earnings, to $5.28 billion. That was mostly a result of a 4.1 percent increase in daily production of oil, to 3.65 million barrels, in the quarter. The company also continued to profit from its superior marketing and refining ability outside the United States.

Shell’s income in 2006 was $25.44 billion, up from $25.3 billion in 2005.

Shell predicted oil and gas production growth of 1 percent to 2 percent annually through 2010, and slightly more after that.

Exxon reported profit of $10.25 billion, or $1.76 a share, in the fourth quarter. That represented a decline of 4.3 percent from the fourth quarter of 2005, when energy prices soared after Hurricanes Katrina and Rita.

Shares of Exxon Mobil rose 98 cents, or 1.32 percent, to $75.08, while American depository receipts of Shell rose $1.23, or 1.80 percent, to $69.48.

Occidental Petroleum, ConocoPhillips, Hess and several other oil companies have reported drops in quarterly profits in recent days, but those results are in comparison to record or near-record in the quarters a year earlier.

Exxon executives concede that the company faces some big potential hurdles in the coming months should OPEC countries cut production quotas and negotiations go badly over transfer of control of operations in Venezuela.

Nicole Decker, an oil analyst at Bear Stearns, cautioned that 2007 could be a problematic year for oil companies because increased steel and labor costs “have not been reflected in the bottom line yet.” She added that while she could imagine oil prices rising above $60 in the coming months, “I don’t think anybody thinks oil prices will go up to where they once were.”

She said increased production in Malaysia and Azerbaijan this year could help nudge down prices.

The lower fourth-quarter profits at many oil companies mostly reflected declines in oil and gas prices at the end of last year. Oil prices for the quarter ranged from $55 to $63 a barrel, averaging just shy of $60. That represented a 15 percent decline from the third quarter, but less than 1 percent lower than the fourth quarter of 2005.

Oil prices for all of 2006 averaged $66, or $10 higher than in 2005, according to a recent Citigroup report on the energy industry. Oil prices reached a high of $77 in July, but they dipped to as low as $52 in recent weeks.

Prices have firmed up lately on speculation among traders that fuel supplies in much of the United States will decline in the coming weeks because of cold weather and better-than-expected economic growth. Prices edged down slightly Thursday, to $57.30, and are about 10 percent lower than a year ago.

 

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