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Profit margins squeeze Shell and Exxon Mobil

Clifford Krauss,Stanley Reed
Richard Drew

HOUSTON -- Exxon Mobil and Royal Dutch Shell reported sharply lower third-quarter earnings Thursday because of weaker profit margins in refining and a sluggish global economy.

Despite relatively high oil prices and slowly improving natural gas prices in the United States, the results for much of the oil and gas sector this earnings season have been mediocre. Large companies have generally been slow to take advantage of the boom in domestic shale oil drilling, leaving the field open to smaller and more agile companies like Continental Resources, Apache and Pioneer Natural Resources.

Before the summer, domestic refining had lifted profits for big integrated companies like Exxon Mobil and Shell. But more recently, abundant gasoline supplies have narrowed the margins that refineries gain from the difference between the cost of crude oil and wholesale and retail gasoline prices. Similarly, in Europe refining margins have been razor-thin because of too much capacity for existing demand resulting from the weak economy.

Energy experts say there is little reason to expect that refining margins will improve over the next several months because of the continuing surge in U.S. oil production, which drove oil prices this week in New York to a four-month low and with them the price of refined products like gasoline and diesel.

The results for Shell, Europe's largest company by market capitalization, were particularly disheartening, with earnings excluding extraordinary items dropping 32 percent from last year's quarter to $4.5 billion. Net income of $4.7 billion was down 35 percent.

Exxon Mobil, the largest U.S. oil company, reported that its profits for the quarter were down 18 percent from last year despite slightly higher production. Revenue was down 2 percent, to $112.37 billion.

Exxon Mobil's third-quarter net income of $7.87 billion was slightly better than analysts' expectations. In a statement, the Exxon Mobil chief executive, Rex W. Tillerson, said: "Significantly weaker refining margins as a result of increased industrial capacity negatively impacted Exxon Mobil's downstream earnings."

The company's oil and gas production for the quarter increased 1.5 percent, while over the nine months of the year it was down 1.4 percent.

At Shell, the chief executive, Peter Voser, reiterated the challenges, saying in a statement: "We are facing headwinds from weak industry refining margins and the security situation in Nigeria, which continue to erode the near-term outlook."

The company said that shutdowns in Nigeria had trimmed production by 65,000 barrels a day and cost about $300 million. Other companies including Eni of Italy have been hurt by problems there that included deteriorating security and an extraordinary blockade of a liquefied natural gas facility by the Nigerian Maritime Administration over a payment dispute, Shell said. The company is beginning to put some Nigeria properties with as much as 100,000 barrels a day of production up for sale.

Voser has announced that he is leaving at the end of the year. He is to be replaced by Ben van Beurden, the current head of Shell's refining business. That unit reported that its earnings had fallen 43 percent to $900 million in the third quarter. Shell pointed to "global overcapacity and weak demand" as the main culprits.

Executives at both companies expressed optimism for a brighter future based on development of new international projects. Exxon Mobil is developing major projects in Canada, Australia and the Caspian Sea as well as the Russian Arctic that should increase company production of oil and gas.

"We're starting to deliver," David Rosenthal, Exxon Mobil's vice president for investor relations, told analysts. "Our main projects are on schedule and on budget."

Shell said it was gearing up for a new foray into the Arctic waters off Alaska, where it has spent more than $4 billion on leases but was forced to call a halt to exploration activities this year after accidents involving its drilling vessels and other problems last fall and winter. Simon Henry, the chief financial officer, said Shell would probably file a new exploration plan in a few weeks and had contracted a new drill ship called the Polar Pioneer.

Despite the setbacks in Alaska, Henry said it was "the most attractive single opportunity for the future" in its portfolio. He said Shell would focus on the Chukchi Sea, which he said was easy to access and was the main potential prize with possibly billions of barrels of oil. He said the company would likely steer clear for now of the Beaufort Sea, which he said was more difficult because the water is too shallow for most drill ships.


By CLIFFORD KRAUSS and STANLEY REED
The New York Times