Exxon’s Earnings Reflect Decline in Energy Prices

Exxon’s Earnings Reflect Decline in Energy Prices
By JAD MOUAWAD
Copyright by The New York Times
Published: October 29, 2009
http://www.nytimes.com/2009/10/30/business/global/30oil.html?hpw


Exxon Mobil, the world’s biggest publicly traded oil company, said Thursday that its profit fell 68 percent in the third quarter as oil and natural gas prices slumped from last year’s highs.

The company earned $4.73 billion, or 98 cents a share in the quarter, less than analysts had expected. That compares with earnings of $14.83 billion in the period a year ago, the company’s best quarter ever.

Exxon became the world’s most profitable corporation in 2008, earning $45 billion with oil averaging $100 a barrel. But the drop in prices has hurt Exxon and most other oil companies, as the economy has slowed. Many companies have been forced to cut budgets and abandon some projects.

Exxon’s shares fell more than 2 percent to $72.27 in morning trading in New York. The company’s profits came below forecasts of $1.06 a share because of a weaker than expected performance at its production and development unit, according to William Featherston, a managing director at UBS Investment Research.

In its release, the company noted the “ongoing global economic recession and reduced demand for products.”

The company said that its spending in the quarter fell by 5 percent compared with last year, to $6.5 billion. Its oil and gas production in the period rose by 3 percent.

Meanwhile, Royal Dutch Shell, Europe’s biggest oil company, reported a 62 percent drop in third-quarter profit Thursday and said that the market remained uncertain.

Shell’s net income fell to $3.25 billion from $8.45 billion in the same period last year. Its shares fell by 3 percent in London on Thursday morning.

“We see some indications that energy demand and pricing are improving but the outlook remains very uncertain, and we are not expecting a quick recovery,” Peter Voser, Shell’s chief executive, said in a statement.

Shell has outlined a sharp cost-cutting program in recent months. It is eliminating 5,000 jobs, about 10 percent of its workforce, and merging some units. The company said that as part of its restructuring efforts, it will take a charge in the fourth quarter that may total “several hundred millions of dollars” because of the job cuts. The company said it had reduced operating costs by about $1 billion in the first nine months of the year.

Similar efforts are already paying off at BP, the British oil giant. The company reported better-than-expected earnings on Tuesday after beating its own cost-reduction targets and increasing output. Chevron, the second largest American oil company, reports its earnings on Friday.

Higher oil prices in recent years meant that oil companies increased their spending in more expensive exploration efforts, such as oil sands, to increase production. They were also forced to boost spending as costs throughout the industry doubled between 2004 and 2008.

But as prices fell, oil majors as well as independent producers across the country have struggled to adapt. They have capped wells that have become uneconomical, for example, and in Canada, heavy oil projects have been put on hold.

While oil prices have dropped 45 percent since their peak last summer, costs have fallen only by 15 percent to 20 percent since last year’s peak, said Patrick de la Chevardière, chief financial officer of the French oil giant Total.

Conoco Phillips, for example, said it will reduce its capital expenses by 12 percent next year, and planned to sell assets worth $10 billion over the next two years. Conoco said Wednesdaythat its third-quarter profits fell 71 percent to $1.5 billion.

Eni, the giant Italian oil company, slashed its dividend by 23 percent over the summer, in part to protect its spending program, but the move stunned investors who have long been accustomed to the industry’s policy of paying high dividends.

The recent recovery in oil prices has been a relief for producers. While $80 a barrel is still a historically high price, the industry has been squeezed because of investment decisions made when prices were high.

Few petroleum executives imagine returning to a world where oil prices trade at $20 a barrel, their average throughout the 1990s. In fact, many are saying that spending in the industry has been crimped and projects have been delayed since oil prices dropped from last year’s highs.

In fact, oil at $70 a barrel is increasingly viewed as a new floor for the industry. Below that level, oil executives say they will find it difficult to expand production or invest in new exploration projects.

Julia Werdigier contributed reporting from London.