Exxon, Shell Report Steep Profit Declines

A Two-Thirds Drop for Both Oil Giants

Exxon Mobil and Royal Dutch Shell, the world's two biggest oil firms, reported sharply lower second-quarter profits Thursday, hurt by crude oil prices that are running at a little less than half of last year's record-shattering levels.

Exxon Mobil's profit slid to $3.95 billion, or 81 cents a share, down 66 percent from the second quarter of 2008 as the weak global economy hurt earnings across the company's production, refining and marketing, and chemical businesses. The oil giant said its capital spending was modestly slower than the $29 billion annual pace it had forecast earlier, attributing that to the financial limitations of its partners, the benefit of a stronger U.S. dollar earlier in the year and cheaper exploration costs.

"Clearly, we are in a different place in the economic cycle than we were just 12 months ago," said Kenneth Cohen, Exxon's vice president of public affairs. "Our earnings over the past few years benefited from the high-commodity-price environment and robust economy . . . but the oil business is a cyclical business."

Royal Dutch Shell exceeded analysts' low expectations for the second quarter, reporting a profit of $3.8 billion, a 67 percent drop from a year earlier. It said it received an average of $52.19 for every barrel it produced, down from $110.96 a barrel in the second quarter last year.

In addition to industry-wide trends, Royal Dutch Shell's performance was affected by unrest in Nigeria, where attacks by insurgents in the Niger Delta cut the company's average daily production from 210,000 barrels to 120,000 barrels.

The Exxon and Shell results capped a week of lower earnings for the major oil companies, as BP and ConocoPhillips also saw the fat profits of last year absent. Profit at BP, Europe's second-largest oil company, fell 53 percent. At Conoco, the third-biggest U.S. oil firm, earnings plunged 76 percent. Exxon said it actually lost $15 million during the second quarter on its downstream businesses in the United States, which includes refining and marketing of petroleum products.

Exxon shares fell about 1 percent Thursday, to $70.72. Shares of Royal Dutch Shell fell 9 cents, to $52.60, in New York Stock Exchange trading.

"Energy demand is weak," Shell's new chief executive Peter Voser told analysts in a conference call. "There is excess energy-supply capacity in the world today and industry costs remain high. Conditions are likely to remain challenging for some time, and we are not banking on a quick recovery."

Shell said it was slashing overhead. In the 30 days since taking over as chief executive, Voser has cut senior management posts by 20 percent, the company said. The company also indicated that it would trim capital spending by about 10 percent in 2010, but analysts at Collins Stewart, a financial advising firm, said "most of this fall should come from cost deflation rather than reduced activity."

In Washington, there was little anxiety about the fall in oil profits. "It is important to note that the profits are lower because Exxon earned a record $11 billion-plus a year ago," said Daniel J. Weiss, senior fellow at the liberal-leaning Center for American Progress. "Exxon's earning decline is like LeBron James scoring only 20 points one game."

Exxon Mobil continued to spend heavily on share buybacks, reducing the number of outstanding shares by 1.5 percent at a cost of $5 billion in order to help bolster the stock price and earnings per share. Critics say the money would be better spent on energy projects; Exxon says the buybacks are a way of "returning money to shareholders." But the company said it would only spend $4 billion on acquiring shares this quarter.

The company also paid $3 billion to replenish its pension plan; it pumped $1 billion into the pensions in the first quarter and expects to spend another $600 million later this year. Royal Dutch Shell pumped $3.6 billion into its pension plans.

As a result of that and other factors, Exxon's cash holdings dropped by $9.4 billion, to $15.6 billion, about half of what it had at the end of 2008.

Both Exxon, based in Irving, Tex., and Shell, with headquarters in The Hague, are struggling to maintain or increase oil and natural-gas production in the face of natural declines in old fields. Exxon's oil and gas output fell 3.3 percent, to the equivalent of 3.68 million barrels a day, though it said part of that was a result of mild weather and low natural-gas use in Europe. Shell's output fell 5.3 percent, to 2.96 million barrels a day.

But both companies said they remained committed to big projects aimed at boosting their output over the next few years.