Exxon, Chevron Rely on Record Prices for Gains as Output Drops

By Joe Carroll

July 30 (Bloomberg) -- Exxon Mobil Corp. and Chevron Corp. may report their lowest production since 2005, leaving investors reliant on record energy prices to drive profit gains at the largest U.S. oil companies.

Second-quarter output fell more than 5 percent, the most in at least a decade, at Irving, Texas-based Exxon Mobil, said Jason Gammel, an analyst at Macquarie Bank Ltd. in New York. San Ramon, California-based Chevron Corp. estimated July 10 that it pumped 3.4 percent less oil and gas than a year earlier.

While Exxon Mobil and Chevron will report record earnings this week, according to analyst estimates compiled by Bloomberg, the companies are having their largest stock declines since 1982 and 2002, respectively. Share drops wiped out $90 billion in market value this year, even as oil surged above $140 a barrel.

``They've been throwing a lot of money at new projects and it begs the question of how long is it going to be before we start to see production increase,'' said Barry James, who manages $2 billion, including Exxon Mobil and Chevron shares, as president of James Investment Research in Xenia, Ohio.

After its latest output decline, Chevron will need to pump 7.5 percent more petroleum in 2008's second half to meet its full-year forecast. An increase that big would be six times the biggest ever achieved by Chief Executive Officer David O'Reilly without an acquisition.

More than a third of Exxon Mobil's production drop stemmed from contracts with oil-rich nations that give governments and state-owned oil companies a bigger share of output when prices rise, Gammel said in a July 25 interview.

Spending Plans

Exxon Mobil is expected to report tomorrow that second- quarter net income rose 26 percent to $12.9 billion, the highest ever for a U.S. company without one-time gains, according to the average of seven analyst estimates compiled by Bloomberg. Chevron, which is slated to release earnings Aug. 1, probably netted $5.95 billion, an 11 percent gain, estimates indicated.

The companies held 1.4 percent of the world's proved oil and gas reserves at the end of 2007.

Exxon Mobil and Chevron budgeted almost $48 billion in capital spending this year, more than 75 percent of which is aimed at boosting production and stemming declines in reserves.

Chevron cut its 2008 forecast in February to 2.65 million barrels of oil equivalent a day, partly on the effects of price triggers in production-sharing agreements. The company fell more than 4 percent short of that pace in the second quarter.

Access Reduced

Countries such as Russia and Venezuela reduced or cut off foreign access to their oil riches, leaving international producers with fewer projects to pursue.

As Exxon Mobil and Chevron spend a combined $100 million a day to find and develop new deposits, they're funneling even more cash to stock buybacks and dividends. If it maintains its first-quarter pace of buybacks, Exxon Mobil will repurchase $38 billion of stock this year, or almost $104 million a day.

For Exxon Mobil, repurchasing stock is preferable to investing in oil and gas projects that won't produce at least a 30 percent return, James, the James Investment Research president, said in a July 25 interview.

``I like buybacks and in this environment, that's often the best investment they can make,'' James said. ``One of the things I really like about Exxon is that unless a project is going to really hit their target return, they won't do it.''

Investors want to know if the company's gas-export projects in Qatar will begin later this year as scheduled, Gammel said. The developments are slated to account for 42 percent of new output this year, Exxon Mobil's largest source.

Nigerian Project

Chevron may be close to starting its $5.4 billion Agbami development off the coast of Nigeria, the company's largest new project this year, Gammel said.

Exxon Mobil Chief Executive Officer Rex Tillerson, 56, and Chevron's O'Reilly, 61, declined through spokesmen to be interviewed for this article.

Each $1-a-barrel increase in oil prices boosts Exxon Mobil's earnings per share by 11 cents and Chevron's by 16 cents, according to William Featherston, an analyst at UBS Securities LLC.

Regardless of profit gains, the companies are struggling to show they can stop declines in output as crude prices slide from all-time highs. Oil futures closed yesterday at $122.19 a barrel on the New York Mercantile Exchange, down 17 percent from their high of $147.27 set on July 11. Exxon Mobil has dropped 14 percent this year in New York Stock Exchange composite trading. Chevron is down 11 percent.

The Standard & Poor's index of major U.S. oil companies has fallen 12 percent, the worst performance since 2002. Profits at Exxon Mobil and Chevron that year tumbled 25 percent and 66 percent, respectively.

``More important than how they did in the June quarter will be some sign of production growth going forward,'' said Robert Sweet, who helps manage $170 million at Horizon Investment Services LLC in Hammond, Indiana.

To contact the reporter on this story: Joe Carroll in Houston at jcarroll8@bloomberg.net.