Cheap Oil Proves a Boon to Exxon, Chevron Refineries


The cheapest crude in 2 1/2 years has the world’s two biggest oil producers glad they held onto their refineries when rivals were shunning the business.

Exxon Mobil Corp. and Chevron Corp. surprised investors and analysts with higher quarterly profits as slumping crude prices made it cheaper to manufacture gasoline, diesel and jet fuel. The results showed the benefit of the so-called integrated model pioneered by John D. Rockefeller in the late 19th century that combined oil fields with refineries to squeeze more value from each barrel, said Brian Youngberg, an analyst at Edward Jones in St. Louis.

“What we’re seeing is the integrated model providing outstanding earnings,” he said in an interview yesterday.

Exxon’s refineries made $1 million in profit every two hours during the third quarter -- a 73 percent increase from a year earlier. Chevron more than tripled its profit from turning petroleum into fuels, helped by a U.S. refining network stretching from the Pacific Ocean to the Gulf Coast that processed enough crude during the quarter to fill 42 supertankers.

The refining business benefits from lower crude prices in a number of ways, said John Auers, vice president at Turner Mason & Co., a Dallas-based consulting firm. Refiners make some products, such as asphalt, that are insulated from oil price fluctuations. U.S. refiners are free to export their fuels to higher paying foreign markets. Also, cheaper gasoline can encourage people to drive more.

Refining Counterweight

For both companies, the refining boon more than made up for gloomy returns from oil and natural gas production as tumbling crude prices and faltering output dented profits from those businesses.

The question is how long they can continue to outrun falling oil prices. Refining profit margins already are shrinking as gasoline and diesel prices are dragged lower by the crude from which they’re derived. Fuel-price declines tend to lag a downturn in crude markets.

Exxon and Chevron make the lion’s share of their revenues from oil and gas exploration and production, where profits fell in the quarter by 4.4 percent and 8.6 percent, respectively. And if crude prices rebound, profit from making gasoline and diesel will typically plunge.

Stung by the volatility of operating refineries, Marathon Oil Corp. spun off its plants in July 2011. At the time, then-Chief Executive Officer Clarence Cazalot said in an interview that the integrated model had been a failure for his company, partly because its oil wells were too far away from its refineries.

Refining Spinoffs

ConocoPhillips followed suit 10 months later, spinning off its refineries to create a company now known as Phillips 66.

Booming production from North American oil fields has helped drive down energy prices globally. U.S. crude lost 25 percent of its value since touching this year’s peak of $107.73 a barrel on June 20. West Texas Intermediate settled at $80.54 in New York. The current four-month slide is the longest such streak since July 2008 to January 2009.

The profit margin on processing crude into motor fuels and other products rose more than 4 percent during the quarter to an average of $18.29 a barrel, according to data compiled by Bloomberg. Since the beginning of the current quarter, that margin has contracted to $13.69 a barrel, a 25 percent reduction.

Exxon’s third-quarter net income was $8.07 billion, or $1.89 a share, from $7.87 billion, or $1.79, a year earlier, the Irving, Texas-based company said in a statement yesterday. The per-share result was 18 cents more than the $1.71 average of 20 analysts’ estimates compiled by Bloomberg.

Model Leverage

“This really shows the leverage of the integrated business model,” Stephen Hoedt, senior research analyst at Key Private Bank in Cleveland, said in an interview. “Their refineries provide a counterweight to lower crude-oil prices.”

Exxon and Chevron are direct descendants of the Standard Oil empire that Rockefeller assembled beginning in the late 1800s that was split apart by the U.S. Supreme Court during the second decade of the 20th century.

Exxon’s refining profit climbed to $1.02 billion from $592 million a year earlier even though the company processed less oil in every region where it operates refineries except Europe. Sales of gasoline and the family of fuels that includes diesel and kerosene increased, although demand for fuels used in airplanes and cargo ships declined during the quarter, Exxon said.

Refining Profit

Exxon’s $432 million increase in refining profit more than offset the $297 million decline in earnings from its oil and gas business.

For Chevron, profit rose to $5.59 billion, or $2.95 a share, from $4.95 billion, or $2.57 a share, the San Ramon, California-based company said in a separate statement yesterday. Excluding one-time gains and losses, the per-share result exceeded the average of 20 analysts’ estimates by 43 cents.

Chevron reaped another $1.01 billion from its refineries compared with a year earlier, more than making up for the $443 million drop in oil and gas proceeds.

Chevron’s refineries processed an average of 1.76 million barrels of crude during the July-to-September period, a 2.5 percent increase from a year earlier, according to the statement. In the U.S., so-called refinery throughput jumped by 11 percent.

Exxon gained 2.4 percent to $96.71 yesterday in New York, the biggest climb in more than eight months. Chevron rose 2.4 percent to $119.95.

Falling Prices

Exxon Chairman and CEO Rex Tillerson’s search for big oil discoveries may be hindered by collapsing crude prices, which erode cash flow needed to pay for exploration costs such as floating drilling rigs that rent for upward of $600,000 a day.

Boosting Exxon’s oil and gas production has been a perennial problem for Tillerson -- the company has seen output declines in more than half the quarters since he became CEO in January 2006, according to data compiled by Bloomberg.

Russian Freeze

Exxon is looking for the next frontier in oil exploration after sanctions forced the company to halt its venture with Russia’s OAO Rosneft last month on a billion-barrel discovery in the Arctic Ocean off Siberia.

The sanctions forbidding American companies from helping Russia drill Arctic, deep-water and shale wells were imposed to punish President Vladimir Putin’s regime for its support of Russian-speaking separatists in eastern Ukraine. The U.S. has said the measures won’t be relaxed until Putin withdraws support for the Ukrainian rebels.

As for Chevron, the second-largest U.S. oil producer by market value warned investors in August that full-year output will be 1 percent to 2 percent below the company’s previous estimate. Chevron is counting on new gas-export and deep-water oil developments from Australia to Angola to revive production during the next two years, Chairman and CEO John Watson said in a September interview.

Watson has so far shrugged off any long-term impact from the slump in world oil prices, which have fallen 25 percent from this year’s high in late June. The company is in the process of assembling its 2015 capital projects budget and plans to announce it in December, Chief Financial Officer Patricia Yarrington said during a conference call with analysts yesterday.

The company leading the Gorgon liquefied natural gas development in Australia -- the most-expensive of its kind ever -- only invests in projects that can turn a profit even during bear markets, Watson said during the interview.

(Corrects spelling of Stephen Hoedt in fourteenth paragraph in story published Nov. 1.)
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