The oil and natural-gas production boom sweeping the U.S. may be good
for the country's economic health, but it hasn't recently been much help
to energy giant Exxon Mobil Corp.
Lackluster second-quarter financial results from Exxon's U.S.
oil and natural-gas production cast a shadow on the record global
profit the company reported Thursday.
With its 2010 purchase of natural-gas driller XTO Energy,
Exxon became the biggest gas producer in the country -- shortly before
natural-gas prices began heading toward 10-year lows. Exxon, based in
Irving, Texas, said it believes its $31 billion purchase was a strong
strategic move and is optimistic that natural-gas prices will rebound.
But analysts continue to question the deal as it weighed on
the company's U.S. earnings and appears set to do the same for more
quarters to come. Exxon spent about 29% of its capital expenditures on
U.S. drilling operations but generated only 4% of its profit in this
segment.
Exxon reported second-quarter net income of $15.9 billion, up
from $10.68 billion a year earlier and a quarterly record for the
company. It appears to be a record for any U.S. company under current
accounting rules, according to Howard Silverblatt, a Standard &
Poor's analyst.
About $7.5 billion of that profit, however, came from asset
sales -- including the disposal of some of Exxon's Japanese refining
business -- and tax-related losses. Without those items, profit totaled
$8.4 billion, or $1.80 per share, below most analysts' estimates.
Revenue rose 1.5% to $127.36 billion.
Exxon's U.S. exploration-and-production business reported
profit down 53% to $678 million because of lower natural-gas and oil
prices.
Exxon's XTO acquisition was meant to bolster its reserves and
give it exposure to the growing business of extracting natural gas from
shale formations in the U.S. Natural-gas prices have fallen due to
excess domestic production, dipping below $2 per million British thermal
units earlier this year before rebounding to just above $3.
The company said earlier this year it had made the purchase
knowing that gas prices would decline, but Exxon CEO Rex Tillerson told
analysts this spring he hadn't expected the persistence of the U.S.
economic slump, which dented demand for natural gas.
Analysts have raised concerns about whether Exxon would have
to write down the value of its natural-gas reserves given persistently
low prices, as Encana Corp. of Canada did Wednesday to the tune of $1.7
billion.
David Rosenthal, Exxon's vice president of investor relations,
said Thursday the company erred on the conservative side when valuing
its reserves and didn't anticipate the need to revise them.
Other major oil and gas companies have been hurt by lower
prices, but few of the big diversified companies appear to be feeling
the impact as much as Exxon, which reduced gas as a percentage of its
overall energy production to under 47% in the second quarter, down from
over 51% in the first quarter.
Chevron Corp., which reports earnings Friday, has just 31% of
its U.S. production from natural gas, while BP
PLC, which reports Tuesday, has 42%. About 45% of Royal Dutch Shell
PLC 's U.S. production is natural gas; the company reported Thursday
that its net profit fell 53% to $4.06 billion because of poor global
economic conditions and lower oil and gas prices.
Exxon emphasized that it was ramping up oil projects in the
U.S., including in North Dakota's Bakken Shale, where it is now
producing about 32,000 barrels of oil equivalent per day, double the
output from a year ago.
The company continues to invest heavily in the U.S. despite
declining production revenues. It spent $2.66 billion in the second
quarter on oil-and-gas exploration in the U.S., down from $4.08 billion
in the same quarter last year when Exxon expanded its stake in the
Marcellus Shale, but up 23% from the third quarter of 2011.
Companies need to continue to invest in production, even when
prices are weak, said Fadel Gheit, an analyst with Oppenheimer & Co.
"Most large companies are facing an uphill battle,
maintaining, let alone growing production," Mr. Gheit said. "Replacing
reserves at a competitive cost is the most critical issue facing these
companies."
Exxon stock closed up 1.3% at $86.52 on the record global
profit, lifting its market capitalization to $404.6 billion.