Exxon's Profit Will Be Hard To Top

Feb. 2, 2007 (From The Wall Street Journal via Dow Jones Newswires)

Exxon Mobil Corp., after posting the largest annual profit in U.S. corporate history, now faces another big challenge: what to do for an encore.

The world's largest publicly traded energy producer and the largest public U.S. company by market value racked up a $39.5 billion full-year profit -- about $108 million a day, and the latest in a string of record Exxon profit reports. But its fourth-quarter net income dropped 4% from a year earlier, underscoring the industrywide challenges that rising costs and lower commodity prices present to matching previous fat profit reports.

Royal Dutch Shell PLC, the fourth-largest publicly traded oil company, saw its fourth-quarter profit rise 21% and posted $25.44 billion in full-year profit. But it continues to face supply challenges three years after slashing its tally of oil and natural-gas reserves due to an accounting scandal.

For Exxon, Wall Street is hoping its reach and breadth will help it continue to draw out new supplies of oil and natural gas and eke out fatter margins than its rivals on its so-called downstream business, which makes and sells refined products like gasoline. So even though Exxon might not break its own record in 2007, analysts said, the traditional foundation of its profitability -- skillful and budget-wise execution of hugely complex and expensive energy projects -- will help the company continue to churn out income and cash.

Investment bank Friedman, Billings, Ramsey & Co. projects the Irving, Texas-based company's net income to reach $35.9 billion in 2007 -- a drop from last year's levels, but still higher than 2005, according to a research note. "The focus is the same, the strategy is the same and therefore we expect the story to be the same," says Lanny Pendill, senior energy analyst for broker Edward Jones.

Exxon, Shell and their oil peers face a tough future. Many untapped oil and gas reserves are held by nations that don't want to let in Western oil companies. The companies also face industrywide cost inflation and pressure by governments seeking more for themselves in production agreements.

Cuts mandated by the Organization of Petroleum Exporting Countries also could have an effect on production during 2007. "We produce from several OPEC member countries," said Exxon Investor Relations Vice President Henry Hubble. "We really don't know exactly what those impacts would be."

Also, the future of some significant Exxon projects is still up in the air. The company has to successfully conclude negotiations for the transformation of the Exxon-operated Cerro Negro project -- which each day processes 120,000 barrels of heavy crude oil into synthetic crude -- into a joint-venture controlled by the Venezuelan government. Venezuelan officials said yesterday that its new joint ventures will become effective May 1, and if the foreign operators disagree with the terms, the government will take over the projects.

Even in this environment, Exxon is positioned to increase oil-and-gas production faster than its peers, an important measure of future profits. The company finished the year with a 4.2% increase in its combined oil and gas production, compared with a 1% drop for Shell. Other oil companies have yet to report.

Exxon's production growth is the result of "long-term planning and execution," says Daniel Barcelo, an energy analyst at Bank of America. He expects Exxon to raise its production at an annual rate of 4.5% from 2005 through 2010, well ahead of its peers.

Exxon reported fourth-quarter net income of $10.25 billion, or $1.76 a share, compared with $10.71 billion, or $1.71 a share, a year earlier. The latest quarter included a tax-related gain of $410 million. The fourth quarter of 2005 included a litigation-related gain of $390 million.

For the year, Exxon's net income was up 9.3%. Exxon distributed $32.6 billion to shareholders in 2006 through dividends and share purchases, up 41% from 2005.

The company's fourth-quarter production of oil and natural gas increased by 6%, reflecting new output from major investments like Sakhalin-1 in Russia's far east. This contrasts with Shell's treatment on Sakhalin Island. Pressure from Moscow forced it to dilute its stake in the massive Russian Sakhalin-2 project, which Shell said yesterday could cut some 1.1 billion barrels of oil equivalent off its fully consolidated reserves in 2007.

Shell also said Nigeria's unrest was hurting its production. The company said it expects overall oil-and-gas production in 2007 to be in the range of 3.3 million to 3.5 million barrels of oil equivalent a day "in the event that Nigerian volumes remain deferred for the rest of the year." Shell's average production in 2006 was 3.47 million barrels of oil equivalent a day.

Still, the company pleased investors by raising fourth-quarter production. Production of oil and natural gas, the cornerstone of the company's earnings, was 3.65 million barrels of oil equivalent a day in the fourth quarter, up from 3.50 million in the same period of 2005. For the year, it produced 3.47 million barrels of oil equivalent daily, down 1.3% from a year earlier.

Shell said its reserves replacement ratio for group companies and equity-accounted entities in 2006 is expected to be 150% including oil sands, a figure it said compares with a ratio of 78% in 2005. The ratio provides an indication of an oil company's future growth. Shell Chief Financial Officer Peter Voser said the company added reserves of two billion barrels of oil equivalent in 2006, largely from its Canadian oil-sands reserves and some reserves from its Qatar gas-to-liquids, or GTL, project on which it gave the go-ahead last year.

Mr. Voser said oil sands had been booked as mining reserves under existing Securities and Exchange Commission rules, but the SEC had agreed to let it record GTL resources as hydrocarbon reserves.

Fourth-quarter 2006 net income was $5.28 billion, or 83 cents a share, compared with $4.37 billion, or 66 cents a share, posted for the fourth quarter of 2005. The quarterly results reflected a net gain of $515 million related to asset divestitures and the valuation of natural-gas contracts. Shell's numbers conform to international financial reporting standards, which differ from U.S. generally accepted accounting principles.

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