Exxon’s $10.9 Billion in Profit Disappoints Street
Prices at the Pump Aren’t Keeping Pace with Rising Oil
Houston-based ExxonMobil, the No.1 publicly traded oil company in the
world, rode record crude oil prices to $10.9 billion in first-quarter
earnings Thursday, despite lower production of oil.
ExxonMobil’s 17% increase in quarterly earnings from a year ago
continues a string of eye-popping earnings announcements from big oil
companies in the USA and the United Kingdom this week, including BP, up
60%; Shell, 25%; and Conoco, 17%. Chevron announces its earnings today.
"A rising tide lifted all ships," says Fadel Gheit, an oil industry
analyst at Oppenheimer. "The gains from higher oil prices more than
offset the lower production volume."
Still, Exxon’s results fell short of Wall Street expectations, and its
profit was $1 billion below the record it set in last year’s fourth
quarter. Exxon’s net income rose to $2.03 a share, while analysts had
expected $2.13 a share.
Exxon’s share price fell 3.6% to close at $89.70 in trading Thursday on the New York Stock Exchange.
As energy experts and scientists debate whether the world is running
out of oil or not, Exxon says it’s spending more on exploration.
In a statement, Exxon CEO Rex Tillerson said, "Spending on capital and
exploration projects was $5.5 billion in the first quarter, up 30% from
last year, as we continued to actively invest in projects to bring
additional crude oil, natural gas and finished products to market."
Analysts say Exxon’s lower numbers were caused by everything from the
weak U.S. dollar, which means the rest of the world is paying much less
per barrel of oil than U.S. oil companies are, to gas prices at the
pump not rising as quickly as the cost of crude oil, which squeezes
profit margins for U.S. refinery operations.
"It’s not a pretty environment to be operating in," says Justin
Perucki, an oil analyst at Morningstar, the investment research firm in
Chicago. "The U.S. is feeling the brunt of the pain."
While Exxon’s earnings may have disappointed Wall Street, record
profits by oil companies and rising fuel prices have ignited a huge
backlash from some politicians and consumer activists. They’re calling
for a windfall profits tax and other measures to rein in what they
believe to be excessive profits.
Last year, ExxonMobil’s record $41 billion in earnings was the highest
ever for a U.S. corporation. At the same time, oil prices this year
have nearly doubled from 2007, at times rising well above $100. Drivers
also are outraged over retail gas prices approaching $4 around the USA.
Consumer Watchdog, a non-profit consumer advocacy group in Santa
Monica, Calif., says record oil company profits are hurting the U.S.
economy and consumers.
"With gasoline prices topping $4 a gallon in some cities and averaging
$3.60 nationwide, nobody is surprised to see the latest string of
outrageous profits posted by Big Oil," John Simpson, consumer advocate
at Consumer Watchdog, said in a statement. "People are driving less,
but for every trip they cancel, rising prices at the pump more than
wipe out their savings."
The consumer group urged the federal government to stop buying
market-priced oil for the U.S. Strategic Petroleum Reserve, which it
contends worsens speculative trading on the crude oil futures market
and drives up prices.
"Purchases for the reserve at these record oil prices come straight
from the pockets of taxpayers," says Judy Dugan, research director at
Consumer Watchdog. "And by taking oil off the market, they fuel
Rayola Dougher, senior economic adviser at API, the trade group for the
U.S. oil and natural gas industry, says prices aren’t set by oil
companies but by the marketplace of buyers and sellers. Global oil
production in many regions is flat, while worldwide consumption rises
1.3 million barrels of oil a day, Dougher says. Unless oil supplies
increase and consumers buy less gas, prices could stay high. "The line
between supply and demand has become very, very thin," Dougher says.
Dougher concedes that while oil companies are making large profits,
they’re also spending "10 times as much bringing these products to
market and making those investments for the future."
Even with record profits, the U.S. oil industry faces steep challenges, according to Gheit and Perucki. Those include:
– Strong competition from state-backed oil giants in Russia, China and India.
– A long economic slump that could lead to higher prices for steel, energy and other refinery costs.
– Gheit says high prices have forced the oil industry and governments
to use new technology and search harder for new oil fields and other
– "Higher oil prices have unleashed a lot of resources that were not
economic before," Gheit says. "That is a blessing in disguise."
– High gas prices steer buyers from trucks.