Thursday, November 5 2009

Exxon Mobil Corp, Royal Dutch Shell Plcand Eni SpA dashed hopes of an imminent turnaround for the oil industry, saying a sluggish economic recovery was weighing on energy demand and prices.

The three posted big drops in quarterly earnings last week after crude oil and natural gas prices plummeted and refining margins were squeezed to at times negative levels.

Exxon, the world’s largest oil company by market value, said net income fell a slightly larger-than-expected 68 percent in the third quarter compared with the same period in 2008, to US$4.73 billion.

Shell, Europe’s largest oil company, said it was cutting 5,000 jobs after net profit dropped 73 percent in the quarter to US$2.99 billion.

Italy’s Eni said it was cutting its production forecast for the year due to lower gas demand and project deferrals aimed at saving cash, as it unveiled a 58 percent drop in net profit.

The results and pessimistic outlook contrasted with London-based BP Plc’s third-quarter earnings last Tuesday, which, though lower, smashed forecasts by 50 percent, lifting sector shares on hopes the industry would weather the economic slump better than expected.

Shell and Eni’s cautious comments echo worries in recent days about the fragility of the economic recovery, after weak US new homes sales data which also weighed on crude prices.

“We see some indications that energy demand and pricing are improving, but the outlook remains very uncertain and we are not expecting a quick recovery,” Shell chief executive Peter Voser said in a statement.

Analysts at Citigroup said Shell’s results painted a disappointing picture and added Eni’s comments would boost worries about its ability to increase production.

Oil companies are tackling the downturn by slashing costs, which doubled as oil prices soared between 2004 and 2008.

Voser said Shell’s restructuring programme launched just before he took the helm in July had lowered costs by us$1 billion, excluding us$2.5 billion in savings related to foreign exchange moves, in the first nine months of 2009.

BP has said this week it had achieved savings of US$3 billion, including currency benefits, and was now targeting another US$1 billion by year-end

Operationally, the companies failed to shine, with Shell’s oil and gas production in the quarter flat compared with the same period in 2008 at 2.93 million barrels of oil equivalent per day (boepd), while Eni’s output dropped five percent.

Shell CEO Simon Henry refused to promise a return to output growth in 2010, despite a downward trajectory for this year and a target of two to three percent average annual growth between 2009 and 2012. Exxon said output rose three percent from the third quarter of 2008, after falling in recent years.

The output performance contrasts with an 18 percent rise in output at Chinese oil company CNOOC in the quarter, compared to the same period in 2008.

Western oil companies have faced stiff competition for oil fields in Africa, Latin America and Asia from Chinese and Indian state-controlled oil companies which have been charged with securing energy resources for their fast-growing economies.

In addition to a 40 percent drop in Brent crude prices and a 65 percent drop in UK and US gas prices, the companies’ earnings were hit by a collapse in refining margins.

Henry warned that the refining environment was unlikely to improve in the short or medium term, echoing comments from the CEO of Finnish refiner Neste Oil Corp, which also unveiled a big drop in profits.

Analysts expect oil companies to remain focussed on paring overheads.

“We believe we will see further cost reduction over the next 12 to 18 months well in excess of what we have seen,” said Gordon Gray, oil analyst at brokerage Collins Stewart.