EARNINGS WRAP: Big refiners score in Q2 from high oil prices, but warn of economic headwinds

(Editor’s Note: With the second-quarter earnings season nearing its close, HP is recapping the results from major market players in various segments. For a look at petrochemical results, click here.)

The second quarter of 2011 continued to be a boon for most US and global refiners, with high oil prices hitting a late April peak and leading to sharply higher margins.

Crude values were up about 40% on a year on year basis, as political unrest in the Middle East and North Africa pushed prices higher throughout the quarter.

But prices began to correct in May, as economic turbulence hit developed markets such as the US and Europe.

That led companies such as ExxonMobil to caution expectations for future growth. Moreover, other companies came in slightly below analyst expectations.

Here’s a rundown of how some of the top industry players performed.

Net income for ExxonMobil, the largest US oil company, rose 41% to $10.7 billion. Overall, that income was the highest since the company set a corporate net income record of $14.8 billion in the 2008 third quarter.

Revenue jumped 36% to $125.5 billion, topping projections of $119.2 billion.

The company credited much of its gains to fuel costs, which jumped to three-year highs during the quarter.

In response, ExxonMobil increased its production by 10% during the quarter. Earnings in the productions segment surged 60% to $8.5 billion.

Going forward, however, ExxonMobil vice president David Rosenthal cautioned that a sustained economic recovery “remains elusive”, noting that sluggish business investment, lower consumer spending and high debt are weighing on energy demand.

Earnings for Chevron, the No. 2 US oil company, were $7.73 billion – up 43% from $5.41 billion a year earlier.

Chevron said its profits from oil and natural gas sales rose 51% to $6.87 billion, as the price Chevron received for each non-US bbl of oil rose to $107/bbl, up from $71/bbl in the 2010 quarter.

With 74% of Chevron’s oil production located outside the US, Chevron capitalized on the premium for Brent crude oil.

Meanwhile, ConocoPhillips – the No. 3 US oil firm – saw second-quarter profit drop 18.3% to $3.4 billion, down from $4.2 billion a year ago.

However, those earnings came out ahead of analyst expectations. The year-earlier period was artificially inflated from large gains due to asset sales, the company said.

Revenues increased 34% year on year to $67 billion, also beating projections of $57.9 billion.

Conoco’s refining business swung to a $766 million profit after reporting a $279 million loss a year ago, owing to higher prices for gasoline, diesel, jet fuel and other refined products.

Valero, the largest US crude refiner, posted $135 million in operating income – the second-best quarterly performance in company history.

For all segments, Valero recorded a net income of $745 million in the second quarter, up 24% from $520 million a year earlier.

“Our earnings momentum continues to build,” said CEO Bill Klesse.

However, overall earnings came in shy of the $832 million projected by analysts. They attributed the shortfall to Valero losing money on refining fuel in Canada, where it relies on higher-priced imports of Brent crude oil.

Revenues were $31.29 billion, up 52.2% from $20.56 billion a year earlier.

Looking ahead, Klesse said that with crude oil prices “holding in a range and economic growth continuing, refined product demand will grow. Benchmark margins in the third quarter have increased from second-quarter levels, and the forward curve shows margins are strong into 2012.”

Marathon Oil reported a second-quarter profit of $996 million, up 40.5% from $709 million in the 2010 second quarter.

Revenues jumped 31.8% to $3.87 billion.

However, the company’s adjusted net income was 96 cents/share, falling short of analyst estimates of 99 cents/share.

“Our second quarter financial results, while solid, were negatively impacted by unplanned downtime at key international operations, which held our second quarter production to the lower end of guidance,” said CEO Clarence P. Cazalot Jr.

“These operations are all back operating at or above expected capacity,” he added.

Marathon completed the spinoff of its downstream business in the second quarter, and also announced a pending $3.5 billion acquisition of Eagle Ford shale assets in Texas.

Overall, Marathon has now seen its net income rise for three consecutive quarters.

The trend toward higher second-quarter profits extended globally, with Royal Dutch Shell nearly doubling its profits to $8.66 billion.

Shell attributed the gains to higher oil prices and new production from Canadian oil sands and natural gas in Qatar.

Profits at upstream operations were up 85% to $6.06 billion, but profits at downstream operations slipped 7% to $1.08 billion, reflecting lower refinery intakes and worse margins, the company said.

Global production fell 2% to 3.05 million bpd, Shell officials said. The company noted that its output in the US Gulf region was still about 50,000 bpd below normal, owing to the moratorium put in place following the Deepwater Horizon rig disaster.

Also impacted by the Deepwater Horizon incident was rig operator BP, which swung to a second-quarter net profit of $5.6 billion.

That’s up from a net loss of $17.2 billion a year earlier, when earnings were hit by a $32 billion charge for responding to the Gulf of Mexico crisis.

However, that $5.6 billion profit came in below analyst expectations. The company said fallout from the Gulf disaster was limiting production, still down 11% from pre-spill levels.

Even so, BP chief executive Robert Dudley was optimistic about his company’s future, noting that 2011 has been “an unusually good year” for gaining access to resources in locations such as Australia, Indonesia, Azerbaijan, the UK, the South China Sea and Trinidad.

“We expect the momentum of our recovery to build into 2012 and 2013 as new projects come on stream, particularly in higher-margin areas; as we complete current turnaround activity; as we return to work in the Gulf of Mexico; and as uncertainties reduce,” Dudley said.

BP said it expects to soon be approved by US regulators to again explore in the Gulf of Mexico.

Stay tuned to the HPInformer blog next week for a similar earnings recap of the global construction segment.

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