Bloomberg News

Record Profit Eludes Big Oil as Costs Outpace Brent Gain

January 29, 2013

Record Profit Eludes Big Oil as Costs Outpace Brent Gain

Slipping output, a slump in U.S. fossil-fuel prices and more production from high-cost frontier regions such as ultra deepwater fields off Brazil undercut returns. Photographer: Rich Press/Bloomberg

The world’s biggest oil companies are failing to convert the highest Brent crude prices ever into record profits as production costs climb and U.S. natural gas prices languish.

The London-traded benchmark for two-thirds of the world averaged $111.68 a barrel in 2012, up 0.7 percent from a then- record in 2011 and more than double the price in 2006. At the same time, oil and gas producers have lagged behind other industries in stock markets as profit growth failed to keep up. The MSCI World Oil & Gas Index (MXWO0EN) lost 0.5 percent last year, compared with the broader World Index that has risen 13 percent.

“Even though Brent prices are up, so are the costs of producing that crude, and gas is a big drag,” said Jason Gammel, an analyst at Macquarie Capital Europe Ltd. in London. “That has negative effects on profitability.”

Slipping output, a slump in U.S. fossil-fuel prices and more production from high-cost frontier regions such as ultra deepwater fields off Brazil undercut returns. Exxon Mobil Corp (XOM:US), Chevron Corp. (CVX:US), Royal Dutch Shell Plc (RDSA) and BP Plc (BP/) all will report earnings for 2012 that are lower than highs reached since 2007, according to analyst estimates compiled by Bloomberg.

Shell is the first to report, on Jan. 31. Adjusted annual profit will climb 6 percent to $26.2 billion, helped by higher output from gas projects in Qatar, according to the mean of 25 analyst estimates. Exxon and Chevron report the following day, and BP publishes its earnings on Feb. 5.

Exxon, the world’s biggest company by market value, may say that adjusted annual earnings (XOM:US) fell 10 percent. BP’s annual adjusted profit may have dropped 21 percent to $17.2 billion, a survey of 24 analyst estimates shows.

Share Performance

Exxon shares rose 2.1 percent last year, followed by Chevron which gained 1.6 percent. Shell retreated 11 percent, while BP lost 7.8 percent. Shell has recovered 9 percent so far this year, and BP has advanced 12 percent. Exxon and Chevron have also gained at least 5 percent since Jan. 1.

The cost of building and operating facilities to pump oil out of the ground rose to a record in the six months ending Sept. 30, IHS reported last month. Deepwater drilling rigs are becoming more expensive with rising labor and fuel costs, the consultant said.

While Brent crude prices rose last year, the average cost of New York-traded West Texas Intermediate retreated to $94.15 a barrel from $95.11. U.S. natural gas prices declined to $2.83 per unit, the lowest since 1999.

The drop in gas prices comes as companies shift to produce more of it. Shell, the world’s largest provider of liquefied natural gas, had higher gas output than oil for the first time last year.

Shell CEO

“High prices are not everywhere,” said Shell Chief Executive Officer Peter Voser in an interview in Davos, Switzerland, on Jan. 25. “We have got a mix of gas and oil. Henry Hub went the other way,” he said, referring to the U.S. benchmark price. “In America, you have the WTI effect and Canadian prices are very low and that has affected our profitability.”

Brent crude was little changed today at $133.97 a barrel. WTI rose 1 percent to $97.40 in New York.

Shell and Chevron are the only top five oil companies that won’t see production declines in the fourth quarter, according to Banco Santander SA analyst Jason Kenney in Edinburgh.

BP, Europe’s second-biggest oil company, has pared back its global business as it sold assets in the wake of the 2010 Gulf of Mexico oil spill. The company is close to its $38 billion target for disposals and faces a trial for civil penalties from the spill that is due to start Feb. 25 in New Orleans.

Russia Deal

BP in October swapped its holding in Russian venture TNK- BP, responsible for about a quarter of its output, for a 20 percent stake in OAO Rosneft (ROSN) in a deal that has yet to complete. BP’s shares remain about a third lower than before the Gulf spill three years ago.

At Exxon, CEO Rex Tillerson has stepped up acquisitions and capital spending to reverse the longest stretch of quarterly production slides in 13 years.

Analysts expect Exxon’s 2012 profit to fall short of its best year in 2008, when Brent crude prices ranged from $36 to a record $147 and averaged $98.52 a barrel. Prices are holding up in 2013, averaging $111 this month.

“Oil prices have been much stronger than we might have thought so far this year,” said Iain Armstrong, an analyst at Brewin Dolphin in London. “The important thing now is to get your operations on stream.”

To contact the reporter on this story: Brian Swint in London at bswint@bloomberg.net

To contact the editor responsible for this story: Will Kennedy at wkennedy3@bloomberg.net


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Companies Mentioned

  • XOM
    (Exxon Mobil Corp)
    • $97.43 USD
    • 1.14
    • 1.17%
  • CVX
    (Chevron Corp)
    • $124.96 USD
    • 0.72
    • 0.58%
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