Fueled by a record surge in oil prices, Exxon Mobil Corp. reported second-quarter earnings of $11.68 billion Thursday, the biggest quarterly profit ever by any U.S. corporation. But the results were well short of Wall Street expectations and its shares fell.
With oil prices more than double last year’s levels, Exxon Mobil’s revenue rose 40 percent to $138.1 billion from last year’s second quarter. Natural gas prices were significantly higher too.
But those higher crude prices squeezed profits from Exxon Mobil’s businesses that rely on crude oil as a raw material, including gasoline refining and chemical production.
The oil giant, based in Irving, Texas, shatters records routinely in earnings season due largely to its massive size. But at 8.5 percent of gross revenues, the company's profit margin is about average for the largest U.S. companies.
The company's results in the latest period broke its own record for U.S. quarterly profits set in the fourth quarter of last year, when it took in $11.66 billion. Right behind that was the $10.9 billion it reported to start 2008.
The record-setting results were largely expected based on the soaring crude prices, which have risen to a current $125 a barrel from about $75 a year ago.
But investors expected even bigger profits Thursday, especially after Europe’s Royal Dutch Shell reported a 33 percent jump in second-quarter earnings to $11.6 billion, which fell just shy of Exxon Mobil’s record mark.
Exxon Mobil earned $2.22 a share for the quarter or $2.27 after excluding the impact of an after-tax charge of $290 million stemming from a court settlement in the case of the 1989 Exxon Valdez oil spill. Analysts on average expected Exxon Mobil to earn $2.52 a share on revenue of $144 billion, according to a survey by Thomson Financial. The estimates typically exclude one-time items.
The company, which produces 3 percent of the world’s oil, got its biggest boost from its exploration and production arm, where earnings rose 68 percent to $10.01 billion from $5.95 billion a year ago. The main driver was record crude prices, partially offset by lower sales volumes and higher operating costs.
But once again, Exxon Mobil’s results revealed a troubling trend at the heart of its business.
Production on an oil-equivalent basis fell 8 percent from a year ago — a significant blow for a company that generates more than two-thirds of its earnings from oil and gas production. That follows an opening quarter of 2008 when the company said overall production fell 5.6 percent from a year ago.
Some of the production declines came from aging oilfields that has passed their peak output. Higher oil prices also cut into the company’s share of revenues on oil fields it produces jointly with foreign governments and state-owned oil companies.
“Most of the production outside of the U.S. is guided by production sharing in contracts, which means if oil prices rise, their entitlement volumes decline,” said Fadel Gheit, an oil industry analyst at Oppenheimer & Co. “And that's happened with Exxon, BP, Chevron, Conoco Philips - all of these companies. But Exxon is one of the most exposed to production-sharing contracts.”
Excluding last year’s loss of its Venezuelan assets, a labor strike in Nigeria and lower volumes because of production-sharing contracts, Exxon Mobil said production was down about 3 percent in the most-recent quarter.
To offset declining production, Exxon Mobil stepped up its investment in new exploration and development. The company spent $7 billion looking for more oil, up 38 percent from the second quarter of 2007.
"Hopefully they're increasing capital spending because they're seeing more opportunity in the marketplace right now based upon the high price and they want to expand their capacities,” said Jason Gammel, an oil industry analyst at Macguire Research. “That's what they need to do in order to bring prices down over the longer term: get more production in the system, get more refining capacity in the system.”
Like its competitors, Exxon Mobil said it took a beating in the second quarter from lower global refining margins. Earnings from refining and marketing fell 54 percent in the quarter to $1.55 billion.
For the first six months of 2008, Exxon Mobil said it earned $22.57 billion, or $4.25 a share, from $19.54 billion, or $3.45 a share, in the first half of 2007. Revenue rose to $254.9 billion from $185.5 billion.
