Lower Prices Slice Profits For Oil, Gas Companies
Drop in oil and gas prices is good news for just about everyone but the producers and sellers
Christian Kahn and Jonathan Fahey The AP Energy Writers
July 22, 2012NEW YORK (AP) -- For oil and gas companies, the math was simple in the second quarter: lower prices equal lower profits.
With U.S. gasoline prices averaging more than $3.40 per gallon (90 cents a liter) nationwide, and oil around $90 a barrel, it may be hard to believe oil companies are under duress. Most will report profits measured in the billions of dollars for the quarter.
But they earned less than a year ago -- In some cases a lot less. That's because they had to sell oil and gas at lower prices. The average price for oil was 8.8 percent less from April to June. Natural gas prices have been especially painful. The average price dropped 46 percent compared with last year's second quarter.
This has made many gas drilling operations unprofitable, so drillers have begun to cut back.
``We are all losing our shirts,'' said Exxon Mobil CEO Rex Tillerson in a speech recently. Exxon is the nation's largest producer of natural gas.
The cutback means companies that provide drilling services to oil and gas companies have had less work to do, which should equate to lower profits.
For refiners that buy oil and cook it into gasoline, though, the quarter was likely a good one. Many paid less for oil, but were still able to fetch high prices for their gasoline. And costs fell because they used low-priced natural gas to power some equipment.
Here's more on what to expect from energy companies in the second quarter:
OIL & GAS
The drop in the price of oil and gas is good news for just about everyone but the companies that produce and sell them. The top U.S. oil producers -- Chevron Corp., BP PLC, Exxon Mobil Corp., ConocoPhillips, Occidental Petroleum Corp., Royal Dutch Shell PLC, Anadarko Petroleum Corp. and EOG Resources Inc. -- are each expected to post lower profits in the second quarter, according to FactSet. Exxon and Chevron could each report next week that net income fell by more than $1 billion.
Oil prices fell because new supplies came online just as a slowdown in the global economy reduced demand. Libya restarted its pipelines and oil fields shut down by last year's rebellion. Saudi Arabia pumped more oil to make up for an embargo of Iranian oil. And U.S. production is the highest since 1998.
At the same time, the financial crisis in Europe, and weaker economic growth in the U.S. and China helped reduce demand for oil as drivers, shippers and travelers used less gasoline, diesel and jet fuel.
Altogether, drillers produced about 1.4 million barrels per day more than the market needed. This led to increased supplies and lower prices. The companies can't quickly cut costs, so the price drop can dramatically impact their bottom lines.