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Majors' Output Falls Despite Higher Spending

ExxonMobil Corp. spent 38% more to look for oil and natural gas reserves in 2Q2008 -- nearly $7 billion worldwide -- but the oil major's output still slumped 8% from the same period a year ago. Exxon's record profit, up 14%, barely topped the earnings reported by rival Royal Dutch Shell, which reported a 1% production decline. Meanwhile, Chevron Corp.'s earnings were up 11%, but output dropped 3.4%.

Exxon's adjusted output was down 3%, and Henry Hubble, vice president of investor relations, told energy analysts during a conference call that one way to build reserves across the board would be for the United States to open more areas for offshore drilling (see related story). U.S. natural gas volumes available for sale fell to 1,274 Mcf/d in the period, from 1,540 Mcf/d in 2Q2007.

"We would like to do more," Hubble said of Exxon's exploration and development program. Besides lack of access in the U.S. offshore, Hubble explained that the Irving, TX-based major's output has been negatively affected by international production-sharing contracts, which provide a smaller portion of output to the operator if oil prices rise.

Similar declines in output will be seen if prices continue at high levels, Hubble warned. Exxon's annual capital budget for the next few years is $25-30 billion..

Energy analysts, who questioned Hubble about Exxon's lack of production prowess, expressed their concern. Shareholders also sold stock, selling around 3% for a drop of $2.41/share by midafternoon Thursday.

"These results are much lower than expected and put a lot of pressure on the company's management to do something," said Fadel Gheit, an energy analyst with Oppenheimer & Co. "They will either have to make an acquisition or boost their share buyback program."

UBS energy analyst William Featherston said he had expected Exxon's adjusted production to be flat or up around 1% to meet his target for 2008.

"If oil prices are going up $20 and $30 a barrel a quarter like they have been, it hides a lot of flaws," said CreditSights Brian Gibbons. "The question on everyone's mind is, how do these guys expect to grow production given the restrictions on access to reserves?'"

Exxon, considered the world's largest publicly traded oil company, posted net profit of $11.68 billion ($2.22/share), up from $10.26 billion ($1.38) in 2Q2007. The results narrowly surpassed its previous record of $11.66 billion, which was set in the final three months of 2007. Earnings were boosted by the producer's plan to continue to repurchase stock; it spent $8 billion to reduce outstanding shares by 1.7% in the quarter.

Europe's largest oil company, Royal Dutch Shell plc, reported a 33% increase in its quarterly profit Thursday to $11.56 billion from $8.67 billion a year ago.

The Anglo-Dutch producer also wants to make up for lost production from some of its overseas holdings, including Nigeria, where militants attacked an offshore production vessel in June; and in Russia, where it had to sell its share in the Sakhalin Island oil and natural gas project to state-controlled energy company OAO Gazprom last year.

Shell's output dropped about 1% from a year ago to 3.1 million boe/d from 3.18 million boe/d.

The results were "competitive," said Shell CEO Jeroen van der Veer. He also rejected accusations that the company was profiteering from high commodity prices and not reinvesting its money into more exploration and development.

"If we do less investment there will be less supply for consumers," said van der Veer. "The world needs energy."

Shell is reinvesting its profits, he said, and has set a capital spending budget of $35-36 billion this year, up from the previous estimate of $24-25 billion -- if the company's $5.8 billion bid for Canada's Duvernay Oil Corp. launched in July is successful (see NGI, July 21).

"Shell is making substantial, targeted investments to grow the company for shareholders and help ensure that energy markets remain well supplied," he said.

San Ramon, CA-based Chevron, which issued its quarterly report Friday, saw its quarterly profit jump 11% from a year ago on higher commodity prices. It reported net profit of $5.98 billion ($2.90/share), compared with $5.38 billion ($2.52) in the same period a year ago.

Worldwide, Chevron's production fell to 2.54 million boe/d from 2.63 million boe/d in 2Q2007. Absent the impact of higher prices on volumes recovered under production sharing and royalty contracts outside the United States, Chevron's production rose slightly.

Chevron's North American gas production also fell over the period, but it reported gains from its Canadian operations. Sales of U.S. gas reached 7,631 MMcf/d, down from 8,153 MMcf/d a year earlier. Canadian gas sales grew to 692 MMcf/d from 602 MMcf/d.

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