By Joe Carroll and Edward Klump
Oct. 30 (Bloomberg) -- Exxon Mobil Corp., PetroChina Co. and Royal Dutch Shell Plc are battling slumping fuel demand as oil majors seek to rebuild profits battered by the global fallout from the worst U.S. downturn since the Great Depression.
Exxon Mobil’s U.S. refineries lost about $2.3 million a day last quarter as gasoline and diesel prices fell. Shell, whose refining earnings declined 47 percent, said the plunge in demand will keep profit margins narrow in “the short and medium term” and a quick recovery in energy usage and prices is unlikely.
Oil companies around the world are slashing costs, cutting jobs and holding back on some new investment to halt the slide in earnings, even as they seek to fund renewable energy projects. Exxon Mobil cut its capital-spending estimate for 2009 by 10 percent as third-quarter profits at the Irving, Texas- based explorer and Shell hit their lowest level in six years.
“Low oil prices and tight refining margins are going to continue to haunt the majors this quarter and into the next quarter,” said Gianna Bern, president of energy consultancy Brookshire Advisory & Research Inc. in Flossmoor, Illinois. Crude oil has averaged $59 a barrel in New York this year, compared with $99.75 in 2008.
While fuel consumption slowed, crude producers pumped 3.68 million barrels in excess of worldwide demand during the third quarter, equivalent to the combined daily production of Kuwait and Libya, according to the International Energy Agency in Paris. Oil futures in the period slid almost $50 a barrel from their year-earlier average and natural gas hit a seven-year low.
Global Demand
Exxon Mobil, the world’s biggest company by market value, reported a fourth straight drop in profit yesterday after demand slumped for fuels to run cars, factories and airplanes. Its third-quarter net income fell 68 percent from a year earlier to $4.73 billion.
Shell posted a 62 percent decline in net income to $3.25 billion and Chief Executive Officer Peter Voser said the outlook “remains very uncertain” given forecasts that demand for crude will fall the most this year since 1980. Shell is cutting 5,000 jobs, equivalent to about 5 percent of its workforce, and has reduced operating costs by about $1 billion.
“What we’re hearing from the oil chiefs is that the economy has hit bottom but the jury’s still out on how robust of a recovery we’ll see,” said Haag Sherman, who manages $7.5 billion as chief investment officer at Houston-based Salient Partners.
PetroChina, the world’s second-most valuable company, on Oct. 28 posted a 24 percent drop in third-quarter profit to 30.8 billion yuan ($4.5 billion), missing analysts’ estimates. Houston-based ConocoPhillips, the third-largest U.S. oil company, said the same day its profit plunged 71 percent to $1.5 billion.
Cost Cuts
Yesterday Italy’s Eni SpA said its earnings slumped 58 percent to 1.24 billion euros ($1.82 billion) and it will fall short of its full-year production forecast.
Even as profits slid in the third quarter, analysts pointed to some signs of improvement in the industry, at least for explorers. Crude oil on the New York Mercantile Exchange, which fell 42 percent to an average of $68.24 last quarter from a year earlier, has rallied 79 percent since the start of 2009 and hit a 12-month high of $82 on Oct. 21.
While London-based BP Plc said Oct. 27 that its net income fell 34 percent to $5.34 billion, it has beaten analyst estimates for the past three quarters. It posted third-quarter earnings excluding one-time items and inventory changes of $4.67 billion, boosted by exceeding its own cost-cut target by $1 billion. CEO Tony Hayward has also reversed two years of falling output after ramping up production in the Gulf of Mexico.
China Boost
PetroChina, the Beijing-based producer and refiner, may see its earnings rebound this quarter as China’s economy leads the world out of recession, boosting oil prices and demand for gasoline and diesel, analysts said.
“The fourth quarter will compare favorably,” said Gordon Kwan, the Hong Kong-based head of energy research at Mirae Asset Securities. Kwan forecasts PetroChina’s net income will climb 63 percent from a year earlier to 34 billion yuan in the three months ending Dec. 31.
In contrast China Petroleum & Chemical Corp.’s profit fell from a record in the second quarter and may decline further as government-set fuel prices lag behind a rebound in crude oil costs, analysts said. Asia’s biggest oil refiner yesterday reported a third-quarter net income of 16.55 billion yuan, missing estimates.
‘Off The Floor’
“If you look at the whole picture for all the Big Oils, the only thing that’s really helped them is that the oil price has come off the floor,” said John Parry, an analyst with IHS Herold in Norwalk, Connecticut. “You’re still a long way from catching up to where the industry was back in ‘07 and ‘08.”
While the U.S. economy grew in the third quarter for the first time in more than a year, expanding 3.5 percent, it was propelled by stimulus-driven gains in consumer spending and home building. Even as oil companies may reap benefits from state support for the economy, they could also face higher costs from government policy measures.
“The bleeding is over, but the industry still has a lot of worries, for instance the carbon tax and some of the other issues that are going to come into play with some of their operations,” Parry said. “We’re seeing much tougher concession terms on the part of the host governments.”
Carbon Capture
Alternative energy investment is also claiming resources from the industry. Shell over the last five years has spent about $1.7 billion on renewable energy sources and carbon capture and storage, or CCS, according to its 2008 sustainability report.
Shell said in May that it will boost spending on biofuels this year and next to create a “commercial-size” renewables business. The company said earlier this year it will focus on biofuels and CCS at the expense of solar and wind energy.
“Renewables will have long-term impact, they’re dependent on the high price of oil and many are dependent on subsidies,” said Manouchehr Takin, a petroleum analyst at the Centre for Global Energy Studies in London. “Renewables first have to be developed into real, profitable ventures and that takes time.”
For Related News and Information: Stories on Exxon Mobil earnings: XOM US
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