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Exxon profit disappoints even with high oil prices

Exxon Mobil Corp  posted a $10.89 billion Q1 profit on Thursday, but still managed to disappoint investors as weak production volumes and low refining margins blunted the impact of record-high crude prices.

Earnings rose 17% year over year, and were the second-highest in US history, but still fell short of Wall Street expectations, and its shares dropped 3.6%. Exxon’s near-record profits brought sharpened scrutiny from politicians and consumer groups, who are upset about sky-high gasoline prices at the pump.

Benchmark US oil prices averaged a record of nearly $98 a barrel during the quarter, up about 70% from a year earlier. Exxon posted record earnings of $40.6 billion in 2007, with revenue higher than the gross domestic product of Turkey, the world’s 17th-largest economy. If oil prices stay above or around $100 for the remainder of 2008, the company could beat that mark. A steep drop in profit margins for gasoline cut into Exxon’s earnings as the company, like other refiners, struggled to pass on higher crude costs to customers. First-quarter gasoline prices rose 33% year over year in the United States -- less than half crude’s rise. Exxon’s oil and gas production also fell 5.6% in the quarter. Chris MacDonald, portfolio manager at WHG Funds, said the production decline was “kind of shocking.” “It makes the future seem kind of dire, because this quarter they really got bailed out by high oil prices ... It kind of shows that you’re at the limit of big new finds.”

The company has been criticized by analysts and investors for laying back on capital spending while going full bore on share buybacks. Exxon spent $31.8 billion to buy back shares in 2007, while shelling out $20.9 billion for capital expenditures. In 2008, the company expects to increase its capital spending to around $25 billion. “It seems that they are more of a share buyback machine that also happens to produce energy,” MacDonald said.

Earlier this week, European oil majors BP Plc and Royal Dutch Shell Plc posted big Q1 earnings gains as the crude oil surge was an even bigger boon for them than expected. Both companies had flat production during the quarter.

 
REVENUE OF $117 BILLION
The world’s largest publicly traded company earned $2.03 a share in the Q1, up from net income of $9.28 billion, or $1.62 a share, in the same period last year. But analysts, on average, expected profit of $2.11, according to Reuters Estimates. Revenue rose to $116.85 billion from $87.22 billion. The company also had a whopping 49% effective income tax rate in the quarter, up from 44% last year, which also weighed on earnings. Earnings at its exploration and production segment increased 45% to $8.79 billion, while refining profits dropped 39% to $1.17 billion.

The company said its production shortfall resulted in part from production-sharing contracts that give host countries a larger share of oil and gas produced as commodity prices rise. The decline of older fields and the loss of operations that were nationalized by Venezuela last year also hurt.

Exxon reached a deal with a Nigerian oil union on Thursday after an eight-day old strike had shut down virtually all of the 800,000 barrels per day of production in the country, which could hit the company’s Q2 output figures. “The question is going to come, and you always have to ask it every year: Are they seeing any acceleration in mature field declines? Because slowly the majors are beginning to see this to some degree,” said James Halloran, energy analyst with National City Private Client Group in Cleveland. Halloran is concerned because very little of the volume shortfall appears to be one-time items such as maintenance. Earnings at Exxon’s chemicals unit dropped 17% to $1.03 billion.

 
“DEVASTATING CHOICES”
“There is something seriously wrong with our economy when Exxon’s record $11 billion in quarterly profits are seen as a disappointment by Wall Street,” Democratic presidential hopeful, New York Sen. Hillary Clinton, said in a statement. “But on Main Street, middle-class families are facing devastating choices every day between buying groceries and filling up their gas tanks to get to work.” Exxon shares closed down $3.37 at $89.70 on the New York Stock Exchange. The stock is off more than 4% this year, underperforming the Chicago Board Options Exchange’s oil index, which is nearly flat over the same period. (Reuters)