EARNINGSAugust 1, 2013, 8:14 p.m. ET
Shale-Boom Profits Bypass Big Oil
Shell, Exxon Came Late to the Party, Then Made Massive Investments
By DANIEL GILBERT, JUSTIN SCHECK and TOM FOWLER CONNECT
Billion dollar write downs and falling profits from two of the biggest oil companies could mean a limit to how big oil companies can get. Heard on the Street’s Liam Denning joins MoneyBeat. Photo: AP.
Some of the world’s biggest energy companies are struggling to make money from massive bets on the shale boom in North America, where deposits of oil and gas are proving abundant but not always profitable.
Royal Dutch Shell PLC, which has had a tough time coaxing crude oil from dense rock formations, said Thursday its shale holdings in the U.S. are worth $2.2 billion less than it had previously determined. The write-down helped push the Anglo-Dutch oil giant’s second-quarter earnings down 60% from a year earlier. The company said it would explore selling some of its U.S. shale properties.
Heard: Big Oil’s Rodent Problem
Exxon Mobil Corp., the world’s largest publicly traded energy producer, is still feeling the effects of its plunge into U.S. shale gas in 2010, which left it with a big exposure to persistently low natural-gas prices.
Rising expenses and falling oil-and-gas production contributed to a 57% drop in quarterly earnings for the Irving, Texas, company. Its profit per barrel of oil and gas fell 23% from a year earlier.
Shares in both companies declined Thursday, with Shell’s class A shares dropping more than 5% to $64.47 in trading on the New York Stock Exchange. Exxon’s stock dropped a little more than 1% to close at $92.73.
U.S. oil production has soared to levels not seen in decades, and profits at some smaller energy companies have surged. But big international oil companies, which were late to exploit shale rocks, haven’t capitalized on the boom in the same way.
Exxon and Shell have spent billions to acquire companies and drilling rights to shale discovered by others at a lower cost. Their sheer size—Exxon produces nearly as many barrels of crude a day as the entire state of Texas—also makes it harder for them to replace the reserves they deplete and increase their output.
As for shale, “they bought in late in the game, and it’s hit or miss,” said Ken Medlock, senior director of the Center for Energy Studies at Rice University in Houston. “Whether or not it pays off is going to be highly dependent on what happens to commodity prices.”
Along with Chevron Corp., Exxon and Shell are investing at record levels to find and produce energy, aiming to spend a combined total of about $111 billion this year, 8% more than in 2012. They are adjusting to a world in which countries with some of the richest oil deposits—from Iraq to Mexico—have limited their access, adding to the difficulty of expanding production.
Exxon and Chevron are sticking to aggressive goals to increase their slumping production over the next four years, by about 14% and 26%, respectively, from 2012 levels.
But Shell said it would stop setting targets for how much oil and gas it hopes to pump and just focus on profits. “If we are solely focused on a volume-related target, we may make less profitable long-term investments,” Simon Henry, Shell’s chief financial officer, said in an interview.
In Big Oil’s hunt to add to its reserves, North America emerged as a bright spot in recent years. Smaller companies like EOG Resources Inc. and Chesapeake Energy Corp. capitalized on drilling sideways through shale, breaking it up with a high-pressure stream of water, sand and chemicals, allowing oil and gas to flow.
The Energy Information Administration said Thursday that exploration and production companies operating in the U.S. raised their oil reserves by nearly 3.8 billion barrels in 2011, the largest single-year increase since the government starting publishing the data in 1977. The EIA now estimates the U.S. has about 29 billion barrels of oil that companies can recover at a profit, the most since 1985.
Natural-gas reserves also expanded to 348.8 trillion cubic feet, the EIA said, a 9.8% annual jump that ranks as the second-largest increase on record.
The boost in domestic oil production is providing a “major economic benefit” by reducing the amount of crude the U.S. has to import, according to U.S. Energy Secretary Ernest Moniz.
That hasn’t necessarily translated into corporate profits, however.
Shell has tried for months to boost the profitability of its U.S. shale assets. Since U.S. gas prices remain low, Shell said early this year that it would try to shift its North American production toward more profitable oil.
The strategy hasn’t panned out. Finding shale oil turned out to be tougher than finding gas, the company said. Its overall exploration and production operations in the Americas sustained a loss in the second quarter, partly because of higher costs. And, with current oil and gas prices, the business will likely continue losing money at least through the end of this year, Shell said.
Exxon, which spent $25 billion in 2010 to buy shale-gas specialist XTO Energy Inc., said an increase in natural-gas prices in the U.S. last quarter helped increase its domestic profits by 62% to just over $1 billion. But its XTO investment diluted its profits and isn’t making up for the company’s problems increasing oil-and-gas production around the globe; its overall production fell 1.9%, the eighth quarter in a row of year-on-year declines. Profits from producing energy dropped 25% in the quarter to $6.3 billion.
But the steep drop in Exxon’s overall profit for the second quarter was due in part to a tough comparison; asset sales and tax breaks helped drive earnings to a record in 2012.
Chevron, which reports earnings Friday, has taken a more moderate approach to investing in shale resources in the U.S. and Canada. But late Thursday, Chevron said that a subsidiary had acquired drilling rights to 67,900 acres in a shale formation in Western Canada, adding to its holdings there. The company didn’t disclose a purchase price.
—Ryan Tracy contributed to this article.
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