Exxon Mobil Posts 2nd-Highest Profit Ever

By Steven Mufson
Washington Post Staff Writer
Friday, October 27, 2006

Buoyed by high petroleum prices and an increase in production, oil industry colossus Exxon Mobil Corp. yesterday reported that its third-quarter earnings rose to $10.49 billion, putting the company on track to break the record it already holds for annual corporate profits.

The results marked a 6 percent increase from the third quarter of last year, thanks largely to the average $65.14 a barrel it received for the roughly 2.5 million barrels of crude oil and natural gas liquids it produces every day.

That average was about the same as in the second quarter of this year but still up $7.12 from the third quarter of 2005, when prices spiked after Hurricane Katrina.

"It was a tremendous quarter," said Jacques Rousseau, oil analyst at Friedman Billings Ramsey & Co. The quarterly profit was the second-highest in U.S. corporate history -- after Exxon Mobil's fourth quarter last year. Excluding one-time gains that boosted the fourth-quarter results, the quarter just ended was even more profitable.

Analysts said, however, that the latest quarter could also mark a peak in the oil giants' profits if crude oil prices begin to ease. Many speculators and members of the Organization of the Petroleum Exporting Countries fear that the three-month slide in oil prices will continue. For now, though, oil prices remain high, closing yesterday at $60.36 a barrel.

Both Exxon Mobil and Royal Dutch Shell PLC, which also reported earnings yesterday, topped analysts' forecasts because of profit margins that were higher than expected in gasoline marketing, where pump prices fell more slowly than wholesale prices. That more than offset the sharp drop in refinery profit margins in August and September. Exxon Mobil earned $2.7 billion from worldwide refining and marketing in the third quarter.

Exxon Mobil's profit capped a week of earnings results from major oil companies -- good news for the companies' shareholders but fuel for lawmakers and consumer advocates who call the oil industry's profits excessive.

Rep. Edward J. Markey (D-Mass.) said the oil companies posted record profits "not because they're creating any new product or being innovative, but because they control the supply of foreign oil that feeds America's addiction." He said their results "underscore the need for our country to move in a new direction that makes us less dependent on oil to meet our energy needs."

While Exxon Mobil executives said the company earned only a dime on every dollar of sales, investment bank analysts said the more important figure was the company's much higher rate of return on capital.

"The oil companies are not really looking at return on sales. They're looking at the return on the money that is entrusted to you," said Fadel Gheit, oil analyst at Oppenheimer & Co. And that, he said, was "phenomenal." Though Exxon Mobil did not give a figure, Rousseau estimated it would be around 40 percent this year. Gheit said the company's return on capital would be 31 percent this year after including the tiny yields on the company's huge cash holdings of $37.3 billion, which are bigger than the official reserves of Canada, South Africa or Argentina.

Both analysts and company executives said that while those returns look like gushers at today's prices, the oil firms could not have foreseen those prices when they bet on projects years ago.

Ken Cohen, Exxon Mobil's vice president of communications, said the company was "seeing the benefits of investments made . . . a decade ago" when crude oil prices dipped as low as $10 a barrel -- "not knowing what the prices would be today."

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