Bloomberg: Exxon, Shell and BP May Say Profit Fell on Refining (Update1)

By Fred Pals and Eduard Gismatullin

Oct. 22 (Bloomberg) — Exxon Mobil Corp., Royal Dutch Shell Plc and BP Plc may report the first profit decline in five years after natural gas prices and earnings from making gasoline dropped.

Exxon Mobil, the world’s biggest oil company, probably will say third-quarter net income fell 8.3 percent to $9.6 billion, based on the average of analyst estimates compiled by Bloomberg. Shell’s profit excluding one-time items dropped 21 percent to $5.58 billion, according to the median analyst estimate. BP’s earnings on the same basis may fall 12 percent to $3.98 billion.

Natural gas prices retreated 6.4 percent in the U.S. on speculation inventories would be sufficient to meet winter heating demand, and refining margins dropped 5.2 percent as gasoline demand weakened with the end of the summer driving season. Even so, shares of the biggest oil companies rose on optimism profits will rebound after crude advanced to a record $90.07 a barrel in New York trading last week.

“This is not going to be a great set of results,” said Ivor Pether, who helps manage the equivalent of $17 billion at Royal London Asset Management, including $2 billion of BP and Shell shares. “Despite the high oil price, gas pricing has been weak, production volumes are generally down and refining margins have fallen as well.”

Analyst predictions for The Hague-based Shell and BP profits also exclude changes in oil-inventory values. Shell spokesman Wim van de Wiel said Oct. 18 the average third-quarter estimate from analysts providing predictions on that basis was $5.64 billion. BP spokesman Robert Wine said the same day the average estimate was $3.96 billion. Exxon Mobil declined to comment.

Cut Jobs

It’s likely to be the first time since the second quarter of 2002 that all three will report lower earnings at the same time.

BP, which reports tomorrow, said Oct. 11 that it plans to cut jobs, pare layers of management and break up its gas, power and renewable-energy unit to revive growth after what Chief Executive Officer Tony Hayward described as a “dreadful” quarter.

Hayward, who took over from John Browne in May, is trying to restore investor confidence in the London-based company after a Texas refinery blast two years ago killed 15 people, new Gulf of Mexico projects failed to start pumping on time and rusty pipelines in Alaska shut the biggest U.S. oil field.

Refining Margins

Refining margins, or profits from turning crude into fuels such as gasoline and diesel, fell to $8.05 a barrel in the third quarter from $8.49 in the year-earlier period, according to data posted on BP’s Web site.

“This is going to be a punishing quarter,” said Fadel Gheit, an analyst at Oppenheimer & Co in New York. “The question is, who is going to decline less and how bad will it be?”

Natural gas prices in the U.K. tumbled 9.3 percent in the quarter to 30.58 pence a therm amid mild temperatures and adequate supplies, while benchmark U.S. prices declined to $6.16 per million British thermal units, according to data from BP.

Shell, which reports Oct. 25, is seeking to “rejuvenate” production by mining Canadian oil sands and pursuing a Qatari venture to make diesel fuel from natural gas.

CEO Jeroen van der Veer anticipates refinery profits will recover. Last month, Shell said it will spend $7 billion with a partner to more than double the size of their Texas plant. The Port Arthur project would be the biggest in the nation.

Power Failures

Irving, Texas-based Exxon Mobil under CEO Rex Tillerson may say profit was hurt by power and equipment failures at refineries in Texas and at Fawley, the biggest in the U.K., when it reports Nov. 1.

Exxon Mobil shares are the best performing of the three this year, climbing 20 percent. Shell’s A-class shares in London, up 14 percent this year, fell 1 percent to 2,035 pence as of 9:59 a.m. in London today. BP’s shares, which have risen 6.8 percent since the start of the year, declined 0.8 percent to 606 pence.

The share gains have been bolstered by surging crude prices, which in New York were an average 6.4 percent higher in the third quarter than a year earlier and climbed to the highest since the contract was introduced on the New York Mercantile Exchange in 1983 on Oct. 19.

Militant Attacks

Exxon Mobil’s third-quarter production likely increased by 1 percent to 4.028 million barrels of oil equivalent a day, according to an Oct. 18 report to clients by Bank of America Corp. Shell’s daily production may have dropped 4 percent to 3.115 million barrels of oil equivalent because of militant attacks in Nigeria, Bank of America wrote.

Oil and gas production at BP probably fell 4.6 percent to 3.64 million barrels a day, curbed by maintenance at its Alaska Prudhoe Bay field and a July shutdown of a North Sea gas pipeline, Lehman Brothers Holdings Inc. said in a report Oct. 18.

BP is losing about $600 million in operating profit each quarter because its refineries in Whiting, Indiana, and Texas City, Texas, are running below capacity, Bank of America said. Combined, the two plants can handle 865,000 barrels of crude a day, or more than OPEC member Qatar.

To contact the reporters on this story: Fred Pals in Amsterdam at [email protected] ; Eduard Gismatullin in London at [email protected]

Last Updated: October 22, 2007 05:12 EDT

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