EARNINGS WRAP: Global refiners slug through high oil prices, rising operating costs

(Editor's note: Additional financial reporting information compiled by Bloomberg News.)

By Stephany Romanow

The third-quarter financials for many international integrated oil and gas companies are a mixed bag of economic news and performance. Market conditions have changed significantly from the same time last year. High oil prices and rising operating costs have cut earnings for the refining and petrochemical segments of the international companies.

Risks from social/political conditions and environmental accidents are also taking a toll on balance sheets:


ExxonMobil, the biggest oil company by market value, lifted production for the first time in more than two years as net income slumped 18% on dwindling refining returns.

Exxon’s oil and natural gas output rose 1.5% to the equivalent of 4.02 million bpd, the first increase since the second quarter of 2011, according to data compiled by Bloomberg. Crude prices also climbed, raising costs and contributing to an 81% drop in profit at the company’s refineries.

Profit from processing crude into fuels fell to $592 million during the quarter from $3.19 billion (B) a year earlier, according to the company’s statement. Returns from oil and gas sales rose 12% to $6.7 B and chemical profit climbed 30% to $1.03 B.

US profit margins from refining oil into products such as gasoline and diesel declined 43% to an average of $17.54/bbl during the July-to-September period as the cost of US crude feedstocks rose. It was the first time that the average quarterly spread fell below $20 since late 2010, according to data compiled by Bloomberg.

The company has been processing output from its Kearl oil-sands development in western Canada at plants in Joliet, Illinois; Baton Rouge, Louisiana; and Sarnia, Ontario, according to David Rosenthal, vice president of investor relations. Some of the Kearl production has been sold to other refiners, he said.

ExxonMobil CEO Rex Tillerson is seeking to revive production growth and curb cost increases amid stagnant energy demand in the world’s largest economy and shrinking access to the world’s remaining untapped crude reservoirs. The company’s growth prospects include gas-export developments in Australia and Papua New Guinea, oil-sands production in western Canada and Arctic forays in Russia.

Tillerson has been telling investors and analysts since March that output from Exxon’s wells will decline by 1% this year before new projects boost production as much as 3% annually through 2017.


Royal Dutch Shell Plc, Europe’s biggest oil company, said third-quarter earnings missed analyst estimates as production and profits at refineries dropped. Profit excluding one-time items and inventory changes fell 32% to $4.5 B from $6.6 B a year earlier.

Oil and gas production dropped 2% worldwide because of disruptions in Nigeria and margins at oil refineries fell in the third quarter because of overcapacity in Europe, where fuel demand is falling. CEO Peter Voser, who steps down at the end of the year, said Shell would cut net spending next year by increasing the pace of asset sales.

“We are facing headwinds from weak industry refining margins, and the security situation is Nigeria,” Voser said “Shell has a strong project flow in place for 2014 and beyond.”

The company’s earnings from refining and marketing almost halved to $892 million in the third quarter from a year ago, Shell said. The company pumped 2.931 million barrels of oil equivalent a day (boe/d) in the quarter, about 2% lower than a year earlier, amid production interruptions in Nigeria. Net income fell 35% to $4.7 B.

Profits were reduced by $300 million by “the deteriorated security situation onshore Nigeria and a blockade of Nigeria LNG,” it said today. Shell also took a $176 million net charge in the quarter, “predominantly related to various offshore properties in North America.”

Shell’s refining head, Ben van Beurden, will succeed Voser next year. Among the large-scale projects, he will take on is the Libra field off Brazil, won by the company and its partners this month. Shell has forecast net capital expenditure of about $40 B this year and plans to invest as much as $130 B in 2012-2015.

Van Beurden will also seek to restore profit at Shell’s North American operations. Shell started selling US shale assets after booking a $2.1-B impairment this year. Shell in August scrapped a 4 million-bpd target for total output in 2017.

Shell took over the Coulomb North field project, which is pumping about 10,000 boe/d in the Gulf of Mexico, according to the company. It sold its interest in the downstream business in Ghana. Shell will proceed with the Carmon Creek project in Alberta, Canada, the company said in a separate statement. The project is expected to produce as much as 80,000 bbl.


BP Plc, Europe’s third-largest oil company, raised its dividend after third-quarter earnings fell less than expected.  Profit adjusted for one-time items and inventory changes dropped to $3.7 B from $5 B a year earlier, the London-based company said in a statement.

CEO Bob Dudley is trying to return BP to growth after divesting more than $60 B in assets in the wake of 2010 Gulf of Mexico oil spill. While BP still faces billions of dollars in fines and settlement payouts, Dudley is bolstering dividends and buybacks to gain investor confidence as the shares languish about 30% below the pre-spill level.

The company will sell a further $10 B of assets by the end of 2015 and give most of the proceeds to shareholders, favoring buybacks. BP is already about halfway through an $8 B buyback program, funded by a deal in which it sold its half of Russian venture TNK-BP and took a 20% stake in OAO Rosneft, the country’s biggest oil producer.

Reported output will drop as disposals shave off 150,000 bpd. Production was 3.17 million boe/d in the third quarter. Excluding Russia, output was 2.3% lower than a year earlier at 2.2 million bpd following asset sales. Adjusting for disposals, volumes rose 3.4% on higher output from fields in the North Sea and Angola.

Brent crude prices averaged $109.65/bbl in the period, just 23 cents higher than a year earlier, while BP’s refining marker margin, a generic measure of profitability, dropped to $13.62/bbl from $23.15. Profit from BP’s refining arm plunged to $1 B from $3.4 B.

Capital expenditure this year will be $24 B to $25 B and stay at that level next year. It will range from $24 B to $27 B through 2020 according to BP. The ratio of net debt to net debt plus equity was 13.3% at the end of the third quarter, while the effective tax rate was 31%.

While Dudley is trying to keep a lid on spending, the company is increasing investment in exploration.The company cut that figure to $9.2 B and said that $19.3 B of the $20 B trust fund it set up after the spill has been paid out or assigned.

Separately, BP is in the middle of a three-phase trial with the US government over liability for the spill, which may lead to as much as $17 B in fines under the Clean Water Act. The trial’s final stage probably will not start until next year. BP today adjusted its provision for the disaster to $42.5 B.


ConocoPhillips, the largest US independent oil and natural gas producer, increased third- quarter profit 38% after selling assets. The company has been overhauling its business since announcing in 2009 a plan to sell assets and boost returns. It had a gain of $749 million in the quarter from disposals including the Clyden oil-sands lease in Canada and a midstream holding in Trinidad and Tobago. The company closed the sale of its stake in the Kashagan project in Kazakhstan for about $5.4 B.

The explorer is looking to areas such as the Eagle Ford and Bakken formations in the US to increase oil output, and it has projects planned in locations such as Canada and the North Sea. ConocoPhillips spun off the refining, chemical and pipeline assets as Phillips 66 in April 2012.

Third-quarter production from continuing operations was the equivalent of 1.47 million bpd, the same as a year earlier. The company trimmed its daily forecast on that basis for all of 2013 to a range of 1.505 million bbl to 1.515 million bbl, compared with an earlier estimate of as much as 1.53 million bbl.

ConocoPhillips said its fourth-quarter production forecast is unchanged, except for about 50,000 boe/d in disruptions in Libya. Revenue rose 5.1% from a year earlier to $15.5 B in the quarter.


Chevron Corp., the second-largest US energy producer by market value, said shrinking refining profit eroded gains from higher oil prices and the company’s biggest production increase since 2010.

Profit from processing crude oil into fuels tumbled 45% during the third quarter to $380 million amid rising feedstock costs and repairs at a California plant that crimped gasoline and diesel output. The refining slowdown overshadowed a 2.7% rise in oil and natural gas production led by fields from Kazakhstan to Pennsylvania.

Chevron posted net income of $4.95 B compared with $5.25 B a year earlier, according to the company.

Chairman CEO John S. Watson is spending $36.7 B in a push to raise oil and natural gas production that for the first nine months of this year has lagged his full-year goal of pumping the equivalent of 2.65 million boe/d. The third-quarter output boost was the largest since mid-2010.


Total SA, Europe’s second-largest oil producer, reported a 19% decline in third-quarter profit as refining margins in Europe dropped.

Profit, excluding changes in inventories, fell to 2.72 B euros ($3.7 B) from 3.36 B euros a year earlier, the Courbevoie, France-based company said. Production advanced 1% to 2.3 million boe/d after Total resumed output at the North Sea Elgin platform and the Ibewa field in Nigeria. New fields were started in Kazakhstan and Norway.

“The refining environment remains very difficult right now,” Chief Financial Officer Patrick de la Chevardiere said on a conference call. “Margins are extremely weak, we still have an endemic problem of overcapacity” in Europe.

Total has pledged to boost production to reach 2.6 million boe/d in 2015 and about 3 million boe/d two years later. The French company has also promised to explore more aggressively for new deposits and start up almost twice the number of projects in the next three years than the previous three.

“The group is improving the outlook for sustainable post-2017 production growth under terms consistent with its strict return criteria while confirming its commitment to reduce near-term investment,” CEO Christophe de Margerie said in the statement.

Total wrote down the value of US assets for about $500 million due to a lower natural gas prices and another $200 million for Syrian assets that the company “has little chance of recovering,” according to de la Chevardiere.

De Margerie had promised output growth of 2% to 3% this year. “We are expecting an increase in 2013,” he said, adding that the magnitude will depend on Kashagan and Angola liquefied natural gas output. The drop in third-quarter results was due in part to a 42% fall in adjusted net operating income from refining and chemicals as well as an increase in spending on exploration.

Total spent $400 million more in the most recent quarter on exploration compared with the same period last year due to a more “aggressive” push to uncover new deposit.

Total and partners won an auction earlier this month for the Libra field, Brazil’s biggest crude discovery holding that has as much as 12 B bbl of recoverable resources.

As Total develops so-called mega-projects, de Margerie is also carrying out a series of asset sales to help pay for them. About $15 B of assets will have been sold by the end of the year as part of a target for $15 B to $20 B from 2012 to 2014, de la Chevardiere said. The sale of a stake in the offshore Nigerian Usan field along with one in its Congo operations should be completed by the end of the year for a total of $3.5 B. He also confirmed a pledge that spending will peak this year. Total expects capital expenditure to fall to $24 B to $25 B in 2015 to 2017 compared with $28 B to $29 B this year.

News reports from Bloomberg were used in the compilation of this article.

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