ExxonMobil Profit Record: Investors Unimpressed

Shares fall 3% even after the oil giant broke its own quarterly profit record. Investors are concerned about future growth

by Steve LeVine

ExxonMobil (XOM) beat its own record for the highest profits ever by a U.S. company, but that wasn't good enough for Wall Street, which traded down the company's shares July 31. The trouble in part was expectations: Analysts surveyed by Thomson Reuters (TRI) thought Exxon would report earnings of $2.52 a share for the second quarter, but the $2.22-per-share profit announced was 12% below that. In all, Exxon reported profit of $11.68 billion, 14% more than the $10.3 billion, or $1.83 a share, in the same period last year.

Indeed, it was the second consecutive quarter in which ExxonMobil has missed analysts' expectations. In mid-afternoon trading, the company's shares were down around 4.7%, to 80.43.

Yet Chairman and CEO Rex Tillerson has been alerting Wall Street for months that returns this year would be "lumpy" before resuming a stronger course as new projects come on line in Qatar and elsewhere. So the first- and second-quarter misses are not what's primarily weighing on Exxon's shares.

Growth Concerns

Instead it is a widespread doubt about the company's ability to deliver growth, a malady afflicting all of Big Oil at the moment as access to producers such as Russia, Venezuela, and the Middle East is either reduced or blocked entirely. "Exxon, like most of its peers, is facing an uphill battle maintaining, let alone growing, its oil and gas production," says Fadel Gheit, an analyst with Oppenheimer (OPY).

Royal Dutch Shell (RDSA) also issued its second-quarter earnings, which were nearly as high as Exxon's though it is only half the U.S. company's size. Shell's profit was $11.56 billion, or $1.87 a share. That was 33% higher than Shell's profit of $8.67 billion, or $1.38 a share, in the same period last year. Still, Shell's share price fell 3.5%, to 70.16. Mark Gilman, an analyst with The Benchmark Co., cited a decline in oil prices as reason for the trouble with Big Oil's shares. The price of the main oil futures contract in New York dropped July 31 to $124.08, down $2.69 for the day. Exxon's "stock fell [Thursday] not so much due to the earnings but rather because of the market and the fact that the entire oil sector traded down in response to the decline in crude prices," Gilman said.

Exxon's earnings were affected by its oil and natural gas production. The company's second-quarter report included an 8% drop in oil and natural gas production; for the first half of the year, production was down only a tad better, at 7%.

The company attributed the fall in production to a combination of its loss of oil assets last year in Venezuela, labor trouble in Nigeria, and the impact of contracts that give more barrels to its foreign partners when oil prices rise.

Normally, Wall Street might disregard such production losses and chalk them off as extraordinary events. But not today: Nigerian rebel strikes and labor unrest have been frequent this year; and as for losing oil assets to assertive producing states, BP (BP) may be undergoing just such a process now in a Russian joint venture called TNK-BP.

Ho-Hum Reaction to Spending Increase

Wall Street also was not assuaged by the company's reporting of a 38% increase in spending on capital and exploration projects, to $7 billion in the quarter. For the first half of the year, Exxon spent $12.5 billion on capital and exploration, or 35% higher than the first half of 2007. Wall Street's ho-hum response was in part because these figures are not news and do not reflect a sudden observation that the Irving (Tex.)-based company needs to spend more to grow. Exxon, a company not known for sudden moves but highly contemplative strategies, has previously announced just these figures for 2008 spending.

Exxon's answer to the doubts? It has a dozen projects lined up that will add more than 400,000 barrels a day to its production total, and more projects in the queue behind those. The projects include one in the Gulf of Mexico, two Qatari projects called Qatargas II and RasGas, offshore Azerbaijan, and one dubbed Volve, in Norway.

One big question is whether those projects are already factored into Exxon's share price.

LeVine is a correspondent in BusinessWeek's Washington bureau.