Exxon Profits Drop 10%

Revenue soars to a record, but despite steep crude prices the lower margins for the company's refining and chemical segments hamper gains

Sky-high oil prices don't necessarily mean profits are gushing at the major oil companies. On Nov. 1, Exxon Mobil (XOM), the world's largest integrated oil company, reported a 10% drop in profits for the third quarter from a year ago. Lower margins for refining and chemical segments cut into profits despite rising crude oil prices.

Exxon reported a decline in net income to $9.41 billion, or $1.70 per share, from $10.49 billion, or $1.77 per share, in the third quarter of 2006. While revenues set a quarterly record at $102.34 billion, they failed to reach Wall Street analysts' expectations of $112.97 billion. Analysts had forecast earnings per share of $1.75.

Company shares tumbled more than 3% and contributed to a steep fall in the Dow Jones industrial average (BusinessWeek, 11/1/07), which was off more than 250 points at one point in early trading on Nov. 1. In midday trading, Exxon was off 2.5% at $89.69, down from a 52-week high of $95.27 set less than two weeks ago.

Downstream Earnings Fall

The dent in third-quarter profits contrasts with third-quarter results in 2006, when Exxon, of Irving, Tex., reported the second-largest quarterly profit ever for a U.S. company. Also last year, Exxon set a record for the biggest ever annual income, with earnings of $39.5 billion.

Because prices for gasoline have not been rising in tandem with oil prices, Exxon is losing heavily in its "downstream," or refining and marketing, segment. Downstream earnings fell 31% to $1.9 billion, while chemical earnings dropped 11% to $1.2 billion on lower margins.

Other oil refiners are also losing profits as declining refining margins, or the difference between the price of crude oil and refined product, shrinks. On Oct. 24, ConocoPhillips (COP) reported its third-quarter profit fell 5% (BusinessWeek, 10/26/07), largely due to lower refining margins.

Crude Prices Continue to Climb

In Exxon's exploration and production segment, what's known as "upstream" in the industry, high crude oil prices helped cushion the blow of lower production. Upstream earnings fell 3% to $6.3 billion because of a 2% drop in production, divestments, and a loss of the company's stake in Venezuela's Cerro Negro oil project that fell under national control.

Crude oil prices, which have been on a bull run throughout 2007, are benefiting oil companies' exploration and production businesses. The benchmark West Texas Intermediate crude price averaged $75.25 a barrel during the quarter, compared with $70.50 a year earlier. With U.S. inventories at their lowest levels in two years, crude oil prices settled at a record $94.13 on Oct. 31, and surpassed $96 in overnight trading Nov. 1.

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