Exxon Mobil Corp. and Chevron Corp., the largest U.S. energy producers, are boosting profits with oil refineries that some analysts and investors urged them to divest as recently as last year.
Earnings from processing crude into fuels such as gasoline and diesel more than made up for lagging returns from oil and natural gas exploration during the final three months of 2012, Exxon and Chevron reported today. Fuel refining helped propel fourth-quarter net income to a five-year high of almost $9.95 billion for Exxon and a record $7.25 billion for Chevron.
Exxon, the world’s biggest refiner, and Chevron, operator of fuel plants from South Korea to Mississippi, have resisted the trend among peers such as Marathon Oil Corp. and ConocoPhillips of spinning off refineries to focus on oil drilling. The persistence is paying off: Exxon posted the second-highest annual profit in U.S. history last year, surpassed only by its own all-time high from 2008, according to data compiled by Bloomberg.
“Even though refining has long been seen by some as a drag on earnings, it has now been vindicated,” said Ernie Cecilia, who helps manage $6.7 billion as chief investment officer at Bryn Mawr Trust Co. in Bryn Mawr, Pennsylvania. “We like integration.”
Arjun Murti at Goldman Sachs Group Inc. was among analysts who questioned Exxon’s dedication to the so-called integrated model during a presentation by Exxon Chief Executive Officer Rex Tillerson last March in New York. Tillerson defended the arrangement that joins refineries to chemical plants and oil production, saying it enables the company to capture the “highest value of each molecule.”
“There’s no doubt in my mind that the integrated model adds incremental value to everything we do,” Tillerson said during the event.
Exxon’s full-year net income rose 9.3 percent to $44.88 billion, just $340 million shy of the U.S. profit record the company set in 2008 when it raked in $45.22 billion.
Chevron earned $26.2 billion in 2012, the second-highest result in company history, according to data compiled by Bloomberg. The year was 2.7 percent below Chevron’s biggest-ever profit of $26.9 billion, posted in 2011, according to data compiled by Bloomberg.
Exxon rose 7 cents to $90.04 at the close in New York. Chevron increased 1.2 percent to $116.50.
Today’s announcements by the giants of the U.S. energy industry capped a week in which refining companies that don’t explore for crude or make chemicals disclosed outsized profits.
Valero Energy Corp., the world’s biggest so-called independent refiner, on Jan. 29 posted a 20-fold increase in fourth-quarter net income as expanding supplies of crude from U.S. shale formations reduced input costs. The San Antonio-based company’s shares surged 13 percent that day for the largest daily advance in 15 months.
Marathon Petroleum Corp., the Findlay, Ohio-based refiner spunoff by Marathon Oil in June 2011, reported a $755 million profit during the quarter after a $75 million loss a year earlier, according to a Jan. 30 statement.
U.S. refinery margins rose 46 percent during the October-to-December period, in part because rising production from North American shale pressured domestic oil prices. Crude futures traded in New York declined by 6.2 percent during the quarter to average $88.23 a barrel, bucking the international trend that saw the global benchmark rise 1 percent to average more than $110.
Exxon’s refineries earned $1.77 billion during the period, a four-fold increase from $425 million a year earlier. That profit growth occurred even as the Irving, Texas-based company lowered the amount of crude it processed by 7.9 percent to 4.837 million barrels a day compared to the same period of 2011.
The glowing refining result offset a 12 percent drop in Exxon’s oil and gas earnings to $7.76 billion. Oil and gas output from the company’s wells fell 5.2 percent to the equivalent of 4.293 million barrels of crude a day from 4.53 million a year earlier, according to today’s statement.
Exxon’s crude production, which is six times more valuable than gas on an energy-equivalent basis, fell 2.1 percent to 2.203 million barrels a day from 2.25 million during the year-earlier period. Chemical earnings climbed to $958 million from $543 million, according to the statement.
Chevron said its refining unit returned to profit after recording a loss a year earlier. The San Ramon, California-based company’s fuel plants earned $925 million during the period, compared with a $61 million loss in the fourth quarter of 2011.
Chevron processed 1.62 million barrels of crude and other feedstock a day at its plants around the world during the October-to-December period, a 3.3 percent increase from 1.57 million a year earlier, according to the statement. Processing rates at the company’s U.S. refineries dropped 8 percent to 702,000 barrels a day from 763,000 a year earlier due to the lingering impact of an August fire that shut a crude unit at a California facility.
Chevron also benefited from a $1.4 billion gain attributed to a gas-field swap with Royal Dutch Shell Plc in Australia, according to a statement from the company today.