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ExxonMobil Earnings Plunge; Shell Takes $2B Charge

Top North American natural gas producer ExxonMobil Corp., and leading Gulf of Mexico (GOM) operator Royal Dutch Shell plc delivered less-than-stellar results in the second quarter year/year.

The result: ExxonMobil is cutting back on its share buybacks, and Shell has launched a strategic review of its North American portfolio.

ExxonMobil CEO Rex Tillerson claimed that the latest quarter reflected a "continued strong operation performance," but it was generally hit-and-miss. Profits in 2Q2013 totaled $6.9 billion ($1.55/share), versus year-ago earnings of $15.9 billion ($3.41). Revenue declined 16% to $106.5 billion.

The exploration and production (E&P) earnings fell by one-quarter year/year on higher operating expenses overseas. However, U.S. E&P profits jumped 32% on higher natural gas prices.

ExxonMobil Senior Vice President David Rosenthal, who led a conference call Thursday with analysts, faulted "constrained" global economic growth and a "sluggish" U.S. economy as two reasons for the downturn in profits. However, the company is moving forward with two North American liquefied natural gas export projects and possibly could a third one in Alaska, he said.

ExxonMobil and majority owned Imperial Oil Ltd. in June unveiled a 30 million metric ton/year (mmty) LNG export project that would be sited on the coast of British Columbia (see Daily GPI, June 21). In May, ExxonMobil and partner Qatar Petroleum International prefiled with U.S. regulators for a proposed 15 mmty export project for Golden Pass Products LNG terminal in Sabine Pass, TX; it already has an import permit (see Daily GPI, May 17).

The biggest development ongoing in the U.S. onshore is the liquids-rich Ardmore Basin in south-central Oklahoma, home to the Woodford Shale. "It remains our most attractive and active unconventional play with 12 operated rigs," Rosenthal told analysts. The operator has added to its core area, bringing its total position to more than 280,000 acres. Gross operated production there reached 31,000 boe/d in 2Q2013, 73% higher year/year.

Analysts were interested in ExxonMobil's U.S. natural gas, which has declined a bit over the last few quarters. A big reason is prices, and the producer has been shifting more rigs to liquids-rich plays, he explained. "But we are also seeing very strong performance...in the Marcellus in particular...and we're tracking right along...in terms of well productivity some of the benefits we're getting from advanced completion technologies...Now you are starting to see kind of the fruit of those efforts as we ramp things up, more pad drilling et cetera."

Shell's quarterly performance was a disappointment, CEO Peter Voser said Thursday. The company took a $2 billion charge that primarily related to the value of U.S. and Canadian liquids-rich properties. A review of U.S. and Canadian assets may lead to selling as much as half of Shell's main nine unconventional natural gas and oil assets.

The deepwater Gulf of Mexico (GOM) portfolio continues to make a "solid profit," but it's less rosy overall for North America, with the exploration and production unit likely to remain at a loss through "at least" December, Voser told analysts. Shell also has abandoned plans this year to drill offshore in Alaska, which has further cut into the outlook.

"We are not targeting oil and gas production volumes; rather we are focusing on financial performance," Voser said. The writedown doesn't mean that Shell has soured on North America's unconventionals, however. "I think the liquids-rich shale development in North America in general is progressing well," and the reduction in the value of some assets only reflects the higher risks involved in developing the portfolio.

Shell has made some of the largest capital commitments of any overseas major in North America, including its big investments in the Gulf of Mexico. The operator currently produces about 300,000 boe/d in its unconventional North American resources, of which about 50,000 boe/d came from liquids-weighted shales at the end of 2012, CFO Simon Henry said during the conference call with analysts.

The writedown reflects "the latest insights from exploration and appraisal drilling results and production information," but executives declined to say what that meant.

The company, said Voser, "is entering a new phase of more substantial portfolio change, which will lead to a higher rate of divestments in the coming years." Besides possibly selling North American assets, the review includes plans to possibly sell Nigerian assets, which have been besieged by poor security and declines in production.

The writedown reverberated across the second quarter report and was the primary cause of a 60% decline from year-ago profits, Henry said. Shell's current cost of supplies, a figure used by European producers that excludes gains/losses from inventories and is equivalent to U.S. net profit figures, totaled $2.39 billion (27 cents/share) in 2Q2013, versus $5.98 million (66 cents) in the year-ago period. Excluding one-time charges, Shell earned $4.6 billion, still 20% off year/year. Group revenues fell to $112.67 billion from $117.07 billion.

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