Shell, Exxon Mobil Earnings Tumble as Slump in Refining Business Continues

Exxon Mobil Corp. and Royal Dutch/Shell reported sharply lower quarterly earnings Thursday, stung by the depressed business of producing gasoline, heating oil and other fuels.

Both companies, although based on different continents, produce, refine and sell oil around the world, and their second-quarter results make clear just how much the oil industry has been hurt by stumbling economies in recent months.

For the quarter, Exxon Mobil’s profit fell 41% and Shell’s declined 38%.

Exxon Mobil, the world’s No. 1 publicly traded oil company, saw its stock price fall almost 8.5% after it reported net income of $2.64 billion, or 39 cents a share, falling short of analysts’ average estimate by a hefty 7 cents a share. The shares closed at $33.65, down $3.11, on the New York Stock Exchange.

Shell shares also tumbled, dropping 7% in London after it too reported profit below the expectations of most analysts. Shell, the world’s No. 3 publicly traded oil company, said net earnings fell to $2.20 billion, adjusted to reflect current oil prices.

The earnings reports, which followed declines posted this week by London’s BP and San Francisco-based ChevronTexaco Corp., sent stock prices of most top oil companies lower Thursday. The Standard & Poor’s index of major oil companies fell 7.44%.

Shell Chairman Phil Watts described the refining business as the “worst in living memory.”

Already under pressure from weak economies, demand for refined fuels such as heating oil and jet fuel has been further undercut by the lingering effects of a mild winter in the United States and the slowdown in air travel that followed the Sept. 11 attacks.

Strong crude prices have made matters only worse, squeezing the profit margin between unrefined crude and the petroleum products produced from it.

Oil prices were down slightly from a year earlier in the second quarter, but at an average of $26 a barrel they were still well above historical standards thanks to a built-in “war premium.”

The “war premium” came amid President Bush’s war on terrorism and the Israeli-Palestinian conflict. Additional strength was found in tough supply curbs by the OPEC producer cartel.

Even as oil prices found support, natural gas prices saw a big drop from a year ago and undercut profits from the exploration and production divisions at Shell and Exxon Mobil. Over the course of the second quarter, U.S. natural gas prices were down by an average of 22% from a year earlier.

At Irving, Texas-based Exxon Mobil, which saw its exploration and production earnings fall about 25%, it was the fourth consecutive quarter of lower overall year-on-year earnings, after a string of record-breaking results.

“The earnings power of this corporation in this environment is clearly not as strong as we thought,” said Gerard Klauer Mattison & Co. analyst Michael Young.

That could be bad news for investors. The company’s stock has fallen in recent months but has avoided the devastation that has hit some other blue-chip U.S. companies.

Over the last 12 months, Exxon Mobil shares have outperformed those of Shell, which has been hit by its recent removal from the S&P; 500 index and concerns about its prospects for raising production.

Lex Werkheim, asset manager at Eureffect brokerage in Amsterdam, said of Shell’s results, “The company is very dependent upon crude oil prices, refinery margins and the U.S. dollar, and all three worked against them in the second quarter.”