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Houston Chronicle: Even at top, Exxon Mobil feels earnings pinch: Other oil majors have reported second-quarter production declines as well

Even at top, Exxon Mobil feels earnings pinch: No. 1 oil company sees profit, production fall; Shell earnings rise despite drop in output

Kristen Hays, Houston Chronicle – Texas
Published: Jul 27, 2007

Even the oil industry’s mightiest can be humbled in a world with diminishing access to oil and ever-increasing costs of getting it.

Investors roughed up Exxon Mobil Corp. on Thursday when the world’s biggest oil company fell short of Wall Street expectations for the first time in six quarters, with a 1 percent drop in profits and production.

Shares fell nearly 5 percent to close at $88.23 in higher-than-average trading volume on the New York Stock Exchange. Shares have traded between $63.87 and $93.62 in the last year.

Other oil majors have reported second-quarter production declines as well. Royal Dutch Shell, the world’s No. 2 oil company, reported a 2 percent production fall Thursday, but high refining margins pushed overall results 18 percent higher.

BP and ConocoPhillips reported production declines of 5 percent and 10 percent, respectively, earlier this week. ConocoPhillips’ income fell 94 percent because of a one-time $4.5 billion write-off of operations in Venezuela, while BP’s profits rose a modest 1.5 percent.

Chevron Corp. is slated to report second-quarter results today.

Reasons for results Exxon Mobil attributed its results to lack of demand for natural gas in Europe, lower gains on asset sales, declines in mature oil and gas fields and less access to oil and gas under production-sharing contracts with other countries.

Also, cuts in production quotas by the Organization of the Petroleum Exporting Countries played a part, the company said.

Henry Hubble, vice president of investor relations, reminded analysts that Exxon Mobil isn’t immune to inflationary pressure on the industry, such as increasing drill-rig rental rates and prices of materials needed for exploration.

“It does cause us to work even harder to make sure that we’re spending the money well and that we’ll deliver the value to the shareholder and that we’ll be successful with the projects,” Hubble said.

But a company known for sidestepping increased costs through planning and execution is feeling the squeeze, said Fadel Gheit, an oil analyst with Oppenheimer & Co.

“When Exxon disappoints, the market notices,” Gheit said. “Every now and then you will have a hiccup. You can’t have back-to-back home runs forever.”

Below expectations Exxon Mobil earned $10.26 billion, or $1.83 a share, compared with $10.36 billion, or $1.72 a share, in the second quarter of 2006. Analysts surveyed by Thomson Financial expected $1.96 per share.

Per-share earnings rose because robust stock buybacks cut the amount of shares outstanding. Revenue fell to $98.35 billion from $99 billion.

Also, results are on par with last year’s three quarters that surpassed the $10 billion mark, leading to an annual profit of $39.5 billion — the highest of any company in history.

“It’s really not disappointing relative to earnings in the prior period, it’s disappointing relative to the expectation,” Gheit said.

Gheit said analysts may have set themselves up for that disappointment because Wall Street assumes Exxon Mobil will surpass expectations.

The Venezuela question During Hubble’s conference call with analysts Thursday, Citigroup analyst Doug Leggate questioned whether Exxon Mobil would write off its $750 million oil production project in Venezuela.

In May Petroleos de Venezuela, or PDVSA, the country’s government-controlled oil company, took over Exxon Mobil’s 120,000-barrel-a-day project in Venezuela’s oil-rich Orinoco river basin. Last month Exxon Mobil refused to agree to terms of staying on as a minority partner and is in negotiations with PDVSA for compensation for what it left behind.

ConocoPhillips is in similar talks, having left three oil producing projects in the aftermath of Venezuelan President Hugo Chavez’s nationalization of foreign oil operations.

ConocoPhillips wrote off the value of its Venezuelan operations in the second quarter, leaving the company with a $310 million profit.

Hubble said the impact of a loss of Exxon Mobil’s Venezuela project can’t reasonably be estimated while compensation talks are ongoing.

In the quarter, Exxon Mobil’s oil and gas production fell to 4.12 million barrels of oil equivalent per day from 4.16 million barrels a year ago. Exploration- and production-segment income was $5.95 billion, down $1.2 billion.

High margins for refining, marketing and chemicals and the $300 million sale of a German refinery produced better results in those segments. Refining and marketing income reached $3.4 billion, up $908 million from the second quarter of 2006.

Exxon Mobil also repurchased 99 million of its shares for $8.1 billion. Of that amount, $7 billion was used to reduce outstanding shares to 5.5 billion, while the rest offset shares issued along with the company’s benefit plans.

The company spent $5 billion on capital and exploration projects in the quarter for a total of $9.3 billion so far this year. Hubble said the company is on track to spend $20 billion on such projects by year’s end.

Royal Dutch Shell Royal Dutch Shell earned $8.67 billion, or $1.38 a share, compared with $7.3 billion, or $1.13 a share a year ago. Revenue rose to $84.9 billion from $83.1 billion.

The Hague-based company’s refining income rose 42 percent to $2.94 billion, while exploration and production income fell 17 percent to $3.3 billion. Production fell about 2 percent to 3.19 million barrels of oil equivalent per day.

Gheit said Shell’s production picture brightened when the company bought out minority shareholders in its Shell Canada subsidiary in April to increase its footprint in Canada’s oil sands.

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