Exxon's Profit Is Not Quite As Huge

Exxon Mobil, the world's biggest publicly traded oil company, has a tough act to follow: its own.

Bolstered by record high crude oil prices, the company yesterday reported a hefty profit of $9.41 billion, or $1.70 a share, for the third quarter of this year. But because of lower profit margins in its refineries and lower oil and gas production, that was 10 percent lower than its earnings of $10.49 billion ($1.77) a year earlier and fell short of what analysts expected.

That sent Exxon Mobil shares down $3.49, to $88.50 a share, and contributed to the broader slide in U.S. stock markets yesterday. Exxon is the largest component of the Standard & Poor's 500-stock index.

"Growth for Exxon Mobil will likely be tough . . . emphasizing again the law of large numbers -- and Exxon's difficulty in 'moving the needle,' " Citigroup oil analyst Doug Leggate told clients yesterday. Last year Exxon's profit was bigger than that of any public company in U.S. history.

Exxon's third-quarter revenue rose 2.8 percent, to $102.3 billion.

The oil industry's still-substantial earnings come during a sharp recent run-up in crude prices. Although they edged down $1.04 a barrel yesterday, to $93.49, that level remains nearly 60 percent above what it was a year ago. The average price of U.S. oil futures in the third quarter was $75.15 a barrel, according to Bloomberg News.

"You can't just focus on crude oil," said Exxon Vice President Kenneth Cohen. He said that because Exxon processes more oil in its refineries than it produces, the company needs to buy crude oil, and some parts of its business "got caught between crude prices and the prices we get for the sale of our products," he said.

Refining and marketing earnings were $2 billion, down $737 million or 27 percent from the third quarter of 2006, the company said. Profit margins in that sector of the oil business have been down from record levels for most oil firms that have reported earnings.

Exxon's exploration and production earnings also edged down. Exxon said that was because of a 14 percent drop in Africa, output cuts in Venezuela, declines in mature oil fields and lower production quotas in the Organization of the Petroleum Exporting Countries.

Exxon had $5.4 billion in capital and exploration expenditures in the third quarter, and it spent $7 billion to buy back shares of its own stock.

High crude prices have been fueled by speculation that one more supply disruption or constraint could bring even more stratospheric prices.

Yesterday a nonprofit organization called Securing America's Future Energy (SAFE) sponsored a role-playing exercise to respond to a scenario in which explosions disrupt a key pipeline that runs through Azerbaijan, unrest continues in Nigeria and sour relations prompt a cut in output by Iran and Venezuela. Oil prices were said to hit $165 a barrel in the hypothetical scenario.

A star-studded cast played the roles of Cabinet members and military chiefs: former Treasury secretary Robert E. Rubin, former deputy secretary of state Richard L. Armitage, author Daniel Yergin, retired Gen. John P. Abizaid, former Environmental Protection Agency administrator Carol Browner, former Navy secretary John F. Lehman and others. SAFE advocates reducing dependence on oil for national security and economic reasons.

Despite such risks to the security of oil supplies, most investment-house analysts said Exxon's profit, like that of most of other oil companies, could tumble because the chance that crude prices might fall from their current highs is at least 50 percent.

"We believe the upside potential is not greater than the downside risk from lower energy prices," said Fadel Gheit, oil analyst at Oppenheimer & Co. "We think oil prices are inflated by excessive speculation about supply disruption in the event of a military conflict with Iran. Although possibility for such action may exist, we rule out any meaningful impact on supplies, as we think Iran needs oil export revenue more than the world needs its oil."

Gheit also said high prices could cut into demand for petroleum products. Henry Hubble, vice president of investor relations at Exxon, said demand for petroleum products continued to rise in Asia and was "about flat" in the United States this year. "It is hard to say what portion of that was due to higher prices," he said, compared with other economic factors.