What’s Hurting Oil and Gas Profits?

Oil BarrelsExxon Mobil (NYSE:XOM) posted third-quarter 2012 earnings on Thursday that attracted mixed reaction from investors. Earnings per share dropped 2 percent to $2.09, but beat expectations by $0.13. Revenue dropped almost 8 percent to $115.71 billion, but beat expectations by $3 billion. The stock price ticked up on Thursday after the news, but settled back down on Friday.

“Third quarter results reflect our ongoing commitment to help deliver the energy needed to underpin economic recovery and growth while maintaining our strong focus on safety and environmental performance,” commented Exxon Mobil chairman Rex Tillerson in the earnings report.

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What is hurting Exxon Mobil is that the price of energy has come down, while supply surges and demand remains soft. Natural gas prices in the United States have dropped roughly 30 percent for the year while inventories are up over 50 percent. Development of gas fields in North America has sky rocketed. Major players totally out-supplied an uptick in demand for energy, and the result has been reduced revenue. The global energy market has become so wonky that there are projects in North America eying liquid natural gas exports as a growth opportunity. A revival in the Chinese economy is one of the few things that could turn earnings around in the coming quarters.

Exxon Mobil seems to be increasingly shy about doing its own exploration and drilling, instead opting to buy new deposits. This is good news for companies like British Petroleum (NYSE:BP), which seems willing to scout and sell. As Christopher Helman at Forbes points out, “It’s becoming clear that only through JVs with giant state-controlled companies in the likes of Russia or Qatar that Exxon can generate meaningful growth.”

Royal Dutch Shell (NYSE:RDSA)(NYSE:RDSB) reported that adjusted third-quarter earnings dropped 5.7 percent to $6.6 billion.

“Our earnings were driven by lower oil and gas prices, and lower chemicals margins, which offset the benefits of our operating performance, underlying growth in oil and gas production, and higher results in Integrated Gas and Oil Products,” commented CEO Peter Voser in the press release. He added, “I am pleased with our progress in a difficult industry environment. There is more to come from Shell.”

In the company’s earnings call, CFO Simon Henry said, “We’re running about 100,000 barrels a day below the outlook we gave back in February. This was for around 3.4 million barrels a day this year.” The lag is due to asset sales and a slowing down of North American drilling, compounded by difficulties in Nigeria.

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