ExxonMobil: Poised for a New High


Thanks to high gas prices, the oil giant is expected to beat its own record for the best quarter ever. How long will the profit party last?

ExxonMobil (XOM), the world's largest integrated oil company, may draw the ire of consumers as they pay more at the pump, but quarter after quarter it continues to please shareholders. Having profited richly as gas prices reached historic peaks this spring, the company is expected to announce its most profitable quarter ever when it reports earnings on July 26.

Exxon is expected to beat its own record of the most profitable quarter in history for any U.S. company—the $10.71 billion reached in the fourth quarter of 2006. Analysts say the company could report upwards of $11 billion for the second quarter of 2007. The company may even eclipse its own record for annual earnings in 2007, set in 2006 at $39.5 billion.

Raised Forecasts

"Exxon has a successful recipe, and continues to use it," says Fadel Gheit, senior energy analyst for Oppenheimer & Co. in New York. "Good exposure to refining, a strong chemical business, record levels of share buybacks, and a relentless focus on cost-effective operations set it apart."

As an integrated oil company, Exxon's profits come from three main segments: exploration and production (70%), refining and marketing (20%), and chemicals (10%). Exxon has more exposure to refining and marketing than other integrated oil companies, and in recent quarters, this segment has been the company's gold mine. As gas prices reached an historic peak in the second quarter of 2007, refining margins exploded, topping out at about $45 on July 10. (Refining margins are based on the difference between the price of a barrel of unrefined crude oil and the price of a barrel of gasoline.)

Bank of America (BAC) analyst Daniel Barcelo expects Exxon's refining and marketing profits to reach $3.27 billion for the second quarter, surging from $1.91 billion last quarter. Barcelo projects exploration and production profits of $7.12 billion and $0.9 billion in chemicals. Amid such rosy projections, a number of analysts including Oppenheimer's Gheit raised their second-quarter earnings forecasts, from $1.79 per share to $1.90 per share, over the past two weeks.

Surging Crude Prices

Meanwhile, other integrated oil companies are not boasting the same level of profits. On July 23, BP (BP), Europe's second-largest oil company, reported that second-quarter net income rose 1.5%, to $7.38 billion. BP faced persistent stoppages in key refineries, preventing the company from taking advantage of refining margins, but it was able to cushion the blow with the sale of a refinery and a pipeline.

Exxon was able to profit from its rivals' troubles. Refinery outages at companies throughout the industry, particularly at key BP refineries, kept gasoline inventories low and sent prices up at the pump. Retail gasoline prices hit an all-time record in May, peaking at an average of $3.23. In recent weeks oil companies and refiners have managed to put more product on the market, which has eased gas prices and deflated refining margins.

With gas prices leveling off, some analysts think Exxon may see its profits peak in second quarter of this year. "To call refining margins excessive is to use tremendous understatement," says Tom Kloza, chief oil analyst for the Oil Price Information Service, an energy consulting firm. "No one can possibly project that what they saw in the second quarter will continue to the third and fourth."

But even if refining margins slim down, Exxon stands to profit from crude oil prices in its exploration and production segment. Amid geopolitical tensions and Energy Information Administration reports of a long-term increase in demand for oil, crude prices have surged in recent weeks, closing at $73.33 on July 24.

Top Banana

"If oil prices stay high or inch higher, Exxon's third-quarter profits could hit an all-time high for any company in history," says Gheit. "A few dollars added to the price of crude means another $500 million in annual profits."

But Exxon's stellar near- and medium-term performance may be masking long-term problems in exploration and production. Worldwide, the vast majority of oil supplies are controlled by national governments, which are increasingly restricting access to private industry (see BusinessWeek.com, 6/28/07, "The Problem's Not Peak Oil, It's Politics"), forcing companies such as Exxon into harder-to-access projects like oil sands drilling in Canada. On June 26, Exxon was forced out of a major project in Venezuela by Hugo Chávez's government (see BusinessWeek.com, 6/26/07, "Two Oil Giants Exit Venezuela"), and access problems persist in areas of Russia and Nigeria.

In the meantime, however, Exxon will continue doing what it does best: profiting from the commodity pricing environment and running an efficient machine. "They're a superbly managed company, and unless there's a major breakthrough in hydrogen and oil prices plummet, they'll remain on top," says Kloza. "In the future profits may be more temperate, but they'll remain more than comfortable."

Herbst is a reporter for BusinessWeek.com in New York.

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