For Exxon Mobil and Shell, Earnings Fall With Energy Prices

By CLIFFORD KRAUSS and STANLEY REED

A version of this article appeared in print on July 27, 2012, on page B3 of the New York edition

HOUSTON — Exxon Mobil and Royal Dutch Shell, the biggest oil companies in North America and Europe, reported disappointing earnings on Thursday, attributing the results largely to lower global energy prices resulting from weakening economies.

The results came as no surprise to energy analysts, who noted that international benchmark prices for oil had declined by more than 7 percent in the second quarter, compared to the same period last year when turmoil in North Africa and the Middle East caused a spike in oil prices.

Natural gas prices in the United States have also plummeted by more than 50 percent over the last year. That has particularly hurt Exxon Mobil, which bought the gas driller XTO three years ago for $41 billion to expand its domestic gas production. The warm winter decreased demand for gas, and Exxon Mobil responded by slowing its exploration and production plans.

Oil prices have been recovering in recent weeks because of rising tensions in the Persian Gulf region, leading some experts to predict better results in the current quarter.

This was the second quarter in a row in which Exxon Mobil fell short of Wall Street expectations. The company reported a jump in net income, but after some accounting adjustments related to asset sales in Japan and elsewhere, the company profits fell 22 percent from last year’s second quarter, to $8.4 billion. Overall production of oil and gas declined by 5.6 percent.

Company spokesmen noted slumping economic activity, particularly in Europe, as a primary reason for declines in prices and sales. But they stressed that several long-term projects should assure the company’s future, including an agreement with Rosneft to develop oil reserves in Western Siberia and a planned expansion of petrochemical production in the Gulf of Mexico region.

“Despite global economic uncertainty, we continue to invest throughout the business cycle, taking a long-term view of resource development,” said Rex Tillerson, Exxon Mobil’s chairman and chief executive.

There were some bright spots for the Texas-based company. Refinery profits increased by 14 percent, while net income for the chemical manufacturing business improved by 21 percent. Both units benefited from the lower gas and oil prices, the vital feedstocks for refining and chemical production.

But independent analysts viewed the results mostly with disappointment.

“Production growth remains fleeting for them,” said Brian Youngberg, a senior energy analyst at Edward Jones. “The XTO acquisition has not benefited them yet, but I think it can in the future.” Mr. Youngberg predicted that Exxon Mobil’s production volumes would improve by next year with the ramping up of new oil and gas production projects in Canada and off the coasts of Nigeria and Angola.

In contrast, Royal Dutch Shell, which is based in The Hague, reported higher production of oil and gas but said that profits for the quarter declined by 13 percent from the similar period in 2011, to $5.7 billion.

“Our profits have fallen with energy prices, but our growth strategy is delivering to the bottom line,” said Shell’s chief executive, Peter Voser, who pointed to low North American gas prices and weaker oil prices as reasons for the quarterly decline.

Stuart Joyner, an analyst at Investec in London, said that Shell’s reported earnings were “dreadful” and well below what analysts expected. He said that the disappointing results were an indication that Shell was having difficulty controlling costs of materials and contractors. He said costs in the industry were going up 15 percent a year.

“They are facing a tsunami of costs, crucifying margins,” he said.

Keeping expenses under control is critical for Shell because it is in the midst of one of the largest capital spending programs in the oil industry as it tries to ensure future oil and gas flows and revenue streams. The company is spending $32 billion this year on projects like the giant Pearl gas-to-liquids plant in Qatar, which converts huge volumes of natural gas to fuels like diesel. It is also making major investments in liquefied natural gas projects in Australia and hopes soon to begin exploration drilling for oil off Alaska after years spent securing permits.

Mr. Joyner noted that Shell’s cash flow in the quarter of $9.5 billion, excluding movements in working capital, was less than the combined $10.9 billion in capital investment and dividend distributions that it reported.

The company said it had made $1.8 billion in asset sales during the period, which helped cover its capital costs.

Shell said that it produced 3.1 million barrels a day of oil equivalent in the quarter. That was a 2 percent increase over the similar period in 2011.

The company, which is one of the leading producers of natural gas, is looking for a way to participate in the giant new gas discoveries off East Africa. It recently dropped out of the bidding to acquire Cove Energy, a small British company that has a stake in a discovery off Mozambique.

Shell is also working on what could be major investments in North American gas. The company, in partnership with Korea Gas, Mitsubishi Oil and PetroChina, is examining the feasibility of building a liquefied natural gas export plant near Kitimat, British Columbia. Shell has a 40 percent share of the project. In addition, Shell is studying the possibility of building major gas operations in the United States, where it is already a major investor.

Shell is also well positioned in China, the other world-leading energy consumer along with the United States. On Wednesday the company announced an extension of its showcase China onshore gas joint venture, known as Changbei, with CNPC, China’s largest oil company.