Oil Prices Push Income to $14.83 Billion
By Steven Mufson
Washington Post Staff Writer
Friday, October 31, 2008
Exxon Mobil smashed its own U.S. record for quarterly profits yesterday, ringing up $14.83 billion in net income thanks to soaring summertime crude oil prices. But with crude oil prices now less than half their July peak and the economic outlook bleak, the record may stand for a while.
Exxon's third-quarter earnings rose 58 percent compared to the corresponding period in 2007, and its per-share earnings of $2.86 were higher than what analysts expected, capping a week of strong profit numbers from the world's premier oil companies, all of which benefited from the spike in oil prices in July.
Royal Dutch Shell also posted higher earnings yesterday, beating analysts' estimates with a profit of $8.45 billion for the third quarter. Conoco Phillips, the third-largest U.S. oil company, said last week that its third-quarter profit jumped 41 percent, to $5.19 billion.
The recent drop in oil prices to less than half the July peak will probably lower oil company profits in the current quarter and the year ahead; yesterday, UBS, citing lower demand for oil as a result of the economic slowdown, cut its forecast for oil prices next year by 36 percent, to $75 a barrel.
Lower prices could also imperil some of the world's most expensive oil exploration and development projects. Royal Dutch Shell said yesterday that it would delay any decision on an expansion of its Athabasca oil sands project in Canada, citing inflated labor and equipment costs. Analysts have long said that Canadian oil sands, which are difficult to turn into liquid crude, only make economic sense if oil prices are higher than $65 a barrel.
"The cost overruns in Canada have been astronomical," said Fadel Gheit, oil analyst for Oppenheimer, "and it was not cheap to start with." Last week, Suncor said it was slashing capital spending in Canada's oil sands by a third.
Exxon spokesman Kenneth Cohen seized the occasion to portray Exxon as a pillar of strength in uncertain economic times. Pointing to the company's $37 billion cash hoard, he said Exxon would maintain its capital spending plans, expected to average more than $25 billion a year through 2012.
"Our investment plans are unaffected by the current decline in crude oil prices," Cohen said. "While there has been significant volatility in financial and credit markets, the commitment of Exxon is strong."
Nonetheless, the sheer size of Exxon's earnings incites criticism. Rep. Edward J. Markey (D-Mass.), chairman of the House Select Committee on Energy Independence and Global Warming, renewed his criticism of Exxon for not investing in renewable energy alternatives. Exxon and many analysts respond that it is better for Exxon to stick to what it knows, oil and gas, and let investors use dividends to invest in renewable energy if they choose.
Even with the recent fall in prices, the oil giants such as Exxon are still barreling toward full-year earnings that will easily set new marks in the history of U.S. corporate profits. Markey said the top four oil companies would earn $150 billion this year.
While people often calculate Exxon's earnings in terms of seconds -- it earned about $1,800 a second in the third quarter -- Cohen said it also paid more than $4,000 a second in taxes and more than $14,000 a second in costs. Revenue for the quarter was $137.74 billion.
Investors appeared to focus on the future, however, as Exxon shares fell in early trading and then rose to $75.05, up 40 cents for the day. The company's shares have dropped just over 20 percent this year; the Standard & Poor's 500-stock index has dropped 35 percent.
The engine of Exxon's earnings growth came from its production of crude oil, where high prices more than offset production volume that was 8 percent lower than in the third quarter of 2007. Exxon produced 2.29 million barrels a day of crude oil and natural gas liquids (the biggest portion, 28 percent, in Africa) and received an average of $111 a barrel during the three-month period.
Although Exxon expanded production off the coast of West Africa and in the North Sea, the firm's overall oil production fell as a result of the natural decline of older fields, down time because of maintenance, hurricane damage and contract terms that trim its share of production at high prices.
"It's an uphill battle for the company to increase production," Gheit said. But he said Exxon could benefit if overheated oil and gas exploration costs drop.
The company also made more money from its refining and marketing operations, widening profit margins in those areas even as retail prices set record highs over the summer.
During the quarter ended Sept. 30, Exxon also spent $8.7 billion buying back its own stock, reducing the number of outstanding shares by about 2 percent. Exxon says this helps return money to shareholders, but some critics argue that it should use the money to expand oil and gas exploration or to invest in renewable energy.
Exxon's capital expenditures were $6.9 billion, up 26 percent from the third quarter of 2007.
The profit figures included a one-time gain of $1.6 billion from the sale of the company's natural gas transmission business in Germany.
The third-quarter results also included a $170 million charge to cover a punitive damages award from the oil spill that took place when the tanker Exxon Valdez ran aground in Alaska in March 1989. The set-aside for the hotly contested damage award is barely more than 1 percent of the company's profit this quarter. Exxon has set aside $460 million for the damages so far this year.
Even without the one-time items, the company's profit still would have set a new U.S. record at $13.4 billion.
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