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Volatile markets batter majors' numbers, especially BP

Volatile oil and gas prices dented earnings for the industry’s major players in the second quarter, with British supermajor BP reporting the worst of a set of disappointing results

Benchmark Brent crude futures fluctuated over the quarter and ended well down. In April, futures traded at more than $120 a barrel, before falling 25% to around $90/b by mid-June. In late July, Brent was trading at $106/b. US gas prices started the second quarter at $1.90/million British thermal units (Btu) – the lowest in a decade – although prices rose to $2.75/m Btu by the end of June. Henry Hub front-month gas contracts have continued to rise, reaching $3/m Btu.

US supermajor ExxonMobil was the first of the majors to report, booking a 49% year-on-year rise in profit, from $10.7 billion to $15.9bn. However, once a $7.5bn gain from divestments and tax-related items was stripped out, earnings were $8.4bn, a year-on-year drop of 21.5%.

In its results statement, ExxonMobil said lower prices reduced its earnings by $870m, while lower sales volumes cut them by a further $330m. Earnings from its exploration and production unit fell to $678m, a drop of $771m on the year-earlier quarter. Production also fell to 4.15m barrels of oil equivalent a day (boe/d), a 5.6% drop on the same period in 2011.

Chief executive Rex Tillerson spoke for his peers, though, when he told analysts in a conference call after the results were released: “Despite global economic uncertainty, we continue to invest throughout the business cycle, taking a long-term view of resource development.”

Shell also suffered in the quarter. Its second-quarter earnings fell by 28% to $5.7bn. In the same period last year, it booked earnings of $7.9bn. Analysts had expected the company to report earnings of between $6.3bn and $6.4bn. Production increased year-on-year, from 3.04m boe/d in the 2011 quarter to 3.1m boe/d. The Anglo-Dutch supermajor said that, leaving aside the poor global macroeconomic climate, its results had been hit by maintenance costs and shut-ins in the US Gulf of Mexico. Chief executive Peter Voser told analysts: “Shell’s second-quarter 2012 earnings declined from year-ago levels, with weaker oil and North American gas prices offsetting the benefit of increased upstream volumes and improved refining margins.”

Chevron also reported a drop in income, and said while it is likely to miss its 2012 production target of 2.68m b/d, strong refining margins are expected to lessen any impact. Production for the quarter totalled 2.62m boe/d, down from 2.69m boe/d a year earlier. Second-quarter net income came in at $7.2bn, a decline from from $7.7bn in the year-earlier quarter. The supermajor’s upstream segment saw its profits drop 18%, year-on-year, to $5.6bn. However, its downstream business reported an 80% increase in profit to $1.88bn.

French major Total also struggled, with net income down 42% year-on-year to $6.36bn. As well as price volatility, Total’s earnings were pulled down by the gas leak at the Elgin-Franklin field in the UK North Sea, the temporary shut-in of Nigeria’s Obite gas plant and a series of pipeline attacks disrupting output at the Yemen liquefied natural gas plant. Total average production for the quarter was 2.26m boe/d, down from the year-earlier’s 2.31m boe/d.

BP, however, was hit hardest. The British supermajor posted a 96% drop in adjusted profit, on the back of a series of asset write-downs, including the stalled Liberty development offshore Alaska. BP’s replacement cost profit, which strips out gains or losses from inventories, was $238m. In the second quarter of 2011, it was $5.41bn.

BP took an impairment charge of $4.8bn, including a write-down of its US shale-gas assets and US refineries. It has also increased its provision for costs from the Macondo disaster by $847m, bringing the total set aside to $38bn.

Production, excluding its Russian joint venture, TNK-BP, was down 7.4% to 2.3m boe/d. Chief executive Bob Dudley said this was largely due to “extensive planned maintenance”. Like most of its peers, maintenance has taken a proportion of the firm’s highly profitable Gulf of Mexico output off line. However, BP has warned it expects 2012 production to be flat.

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