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Exxon oil production struggles for growth

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Financial Times: Exxon oil production struggles for growth

By Sheila McNulty in Houston and Carola Hoyos in London
Published: May 1 2008 14:55 | Last updated: May 1 2008 23:09

ExxonMobil , long regarded by its peers and investors as the most successful interational oil company, is beginning to show signs of weakness, revealing on Thursday that it is struggling to increase oil production and to squeeze profit out of its refining business.

The world’s biggest energy group announced a first-quarter record profit of $10.9bn but its oil production fell almost 10 per cent in the first three months of the year and refining profits slumped.

While the broader market rallied, Exxon shares fell 3.6 per cent to $89.70 as analysts warned that the company might fail to grow at all in the next five years.

Neil McMahon, an analyst at Sanford Bernstein, said: “Over the next five years their slow production growth guidance may not come to pass at these high oil prices given production sharing agreements.”

The disappointment was deepened by the fact that BP and Royal Dutch Shell, Exxon’s closest rivals, had kept production flat or growing and had beaten expectations.

Exxon’s overall oil and gas production fell 5.6 per cent from the year-earlier quarter. Prproduction in Africa, a key new area of investment, fell 20 per cent as high oil prices and contract stipulations forced it to hand over more of its production to host country governments. Venezuela’s nationalisation of its oil fields also hurt the group’s volumes, as did declines at Canadian gas fields.

Unlike Royal Dutch Shell, which is stressing its research in second generation biofuels, and is a leader in making natural gas into transport fuels, Exxon has long argued that traditional alternatives, such as wind power, have proved uneconomic. But it says it is researching future fuels that it is less ready to talk about publicly.

The figures are likely to increase pressure from investors for Exxon to raise dividends. It devoted $8bn to buying back its own shares and $1.9bn to dividends while adding another $6.9bn to its now $40.9bn cash pile.

“They need to seriously consider a change of plan,” Mr McMahon said. “They don’t appear to be growing in volume terms and given the quality of their balance sheet, they need to give money back to their investors through a higher dividend.”

The $8bn in share buybacks dwared the company’s $5.5bn spending on capital and exploration, prompting criticism by Edward Markey, chairman of the US House select committee on energy independence, who said: “At the rate of current stock buybacks, Exxon will have no privately held stock within 15 years.’’

Hillary Clinton, the Democratic presidential contender, also responded to the earnings report, saying there was “something seriously wrong with our economy when Exxon’s record $11bn in quarterly profits are seen as a disappointment by Wall Street”.

Exxon earned $2.03 a share, up 25 per cent from last year, but less than the $2.14 expected by analysts. Its net income of $10.9bn was up 17 per cent from last year.

Copyright The Financial Times Limited 2008

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