Producers’ second quarter earnings continue to eclipse Wall Street forecasts because of higher natural gas and oil prices, but the profits shadow continued reports of lower overall natural gas production in North America. ExxonMobil Corp., Royal Dutch/Shell Group and Apache Corp., which all released 2Q earnings Thursday, reported higher production compared to a year ago. However, only Apache reported higher worldwide gas output, and North American gas production was lower for all three.

ExxonMobil reported net income of $5.79 billion (88 cents/share), which was 39% higher than 2Q2003’s $4.17 billion (62 cents). The company also repurchased 45 million common shares in the second quarter. Revenues totaled $70.69 billion, up 24% from $57.17 billion a year earlier. The company spent $3.62 billion on capital and exploration projects, down 5.6% from a year earlier. However, earnings in its exploration and production (E&P) division were $3.85 billion, up 36% from 2Q2003 on higher commodity prices.

Worldwide, quarterly gas production at ExxonMobil decreased only slightly to 9 Bcf/d from 9.283 Bcf/d in 2Q2003. However, the Irving, TX-based major’s U.S. gas production fell 15%, and North American gas sales totaled 2.961 Bcf/d, down from 3.268 Bcf/d in 2Q2003. Included in the shortfall was about 70 MMcf/d in North American asset sales, according to controller Pat Mulva, who presided over a conference call with analysts on Thursday.

Although U.S. gas production has fallen, Mulva enthusiastically promoted Exxon’s new liquefied natural gas (LNG) projects, which include a large project with Qatar (see Daily GPI, April 30). He said the company would continue to diversify its portfolio with more LNG and gas-to-liquids projects, which offer “very competitive returns.”

Shell, which settled an inquiry with U.S. and British regulators into its reclassification of reserves (see related story), announced a 54% increase in quarterly net income, with most of the improved performance in its downstream businesses. Net income was $4 billion, compared with $2.6 billion in the year-earlier period, it said.

However, earnings fell 3% within the E&P unit. There was a 5% decline in production and a $330 million charge from unsuccessful explorations, the company said. A decrease of 2% from the effect of asset sales (95 MMboe/d) and the price effect on production entitlements was not included in the declining numbers. In addition, the London-based major said it would only replace 60-80% of its expected full-year production of 3.7-3.8 MMboe.

“E&P was clearly a disappointment and a challenge,” said Jeroen van der Veer, Shell’s chairman. He said production in 2005 and 2006 “is likely to remain in the range of 3.5-3.8 MMboe/d.”

Shell’s Gas & Power segment also reported a shortfall in earnings, which were $338 million in the quarter compared with $452 million in 2Q2003. While the company reported “strong LNG performance” and gains from asset sales ($18 million), the earnings were offset by “significantly lower Marketing and Trading performance in North America.”

On strong commodity prices, Apache earned $372 million ($1.13/diluted share), an increase of 53% over $243 million (74 cents) recorded for the same period of 2003. The 2Q2004 earnings included two unusual items that together reduced the per-share results by 19 cents: a $48 million after-tax reserve for an arbitration award and the $14 million after-tax impact of the employee share appreciation plan. Apache said it is contesting the arbitration award.

Apache reported a large decline North American production overall. In the United States, Apache’s gas volumes totaled 665,167 Mcf/d, down from 702,109 Mcf in 2Q2003, while in Canada, gas volumes grew to 327,537 Mcf/d from 317,079 Mcf/d a year earlier. Worldwide, gas production averaged 1.25 Bcf/d, up 38 MMcf/d sequentially and a slight increase from 2Q2003.

“The story in the second quarter was higher production, lower lifting costs and strong commodity prices,” said CEO G. Steven Farris. “Our drilling program is showing excellent results across Apache’s portfolio. We invested $1 billion on exploration and development in the first half, and this increased activity level is providing strong momentum for the second half.”

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