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Oil firms see no quick recovery as profits plunge

Falling oil and gas prices hit profits at oil majors Exxon Mobil, Royal Dutch Shell Plc and Repsol in the second quarter, prompting the industry to cut costs and lower investments.

Shell CEO Peter Voser said the industry was grappling with a combination of weak demand for energy, excess capacity, and high industry costs, with no early respite expected.

Net income excluding inventory adjustments plunged about two thirds at both companies, repeating a tale told earlier in the week by a string of energy companies including BP and ConocoPhillips, and reflecting the sharp drop in oil prices from their July 2008 peak of $147 a barrel.

Tighter refining margins also took a toll, helping knock 58% off net income at Finnish oil refiner Neste Oil.

The drops would have been worse, but for foreign exchange gains after the dollar strengthened, but even so, both companies outperformed analysts' expectations.

Echoing comments from his counterpart at British rival BP on Tuesday, Voser, who took office earlier this month, gave a somber outlook for energy demand and prices.

“We are not banking on a quick recovery,” he said in a statement.

Dealers said investors were concerned about weak cashflows at the companies which pushed up debt levels. However, Shell's CFO insisted the company had the strength to continue growing the dividend.

Hague-based Shell, the world's second-largest non-government-controlled oil company by market value, is aiming to tackle the tough environment by extracting billions of dollars of cost savings in coming years.

It said it achieved $700 million in cost savings in the first half of the year compared with the same period in 2008. BP said it saved over $1 billion in the first half of the year, when calculated on a similar basis.

Since July 1, Shell has cut 20% of senior management positions and said there would be “substantial further staff reductions.” It also said its capital investment budget would fall 10% next year to $28 billion.

Analysts at Petercam said that should not affect its production growth target of 2%-3% between now and 2012.

Repsol said it had put in place “an extraordinary savings plan” that would slash over 10% of its planned 2009 spending, while Exxon said it continued its investment program.

Exxon said oil and gas production fell 3% in the quarter compared with the same period of 2008, while Shell, Europe's largest listed company, said output dropped 5.3%.

Repsol enjoyed a 1% lift in output compared with the same period of 2008, which was depressed by an oil workers' strike in Argentina. (Reuters)