Oil Production Growth Misses Estimates for Major Firms

Production growth for many oil companies fell below analysts' expectations in the second quarter as high oil prices resulted in decreased supplies for firms with overseas production-sharing contracts.

Oil producers with major operations overseas have production-sharing agreements with foreign governments. When oil prices rise, companies receive a smaller share of the oil produced, says Pavel Molchanov, an analyst at Raymond James & Associates Inc.

"It's hard to forecast volumes under PSCs (production-sharing contracts) because the specific contractual terms are not publicly disclosed, so analysts have to do a bit of guesswork," Molchanov says. "But that explains why most companies have come in below expectations on volumes."

Exxon Mobil Corp. reported July 28 earnings of $2.18 per share, falling short of analysts' forecast of $2.33 a share. The company's oil production increased 10% in the second quarter. Excluding the impacts of entitlement volumes, OPEC quota effects and divestments, production was up more than 12%.

Oil and gas production fell 2% for Royal Dutch Shell Plc in the second quarter, the company said July 28. Excluding the impact of divestments, production rose 2% over the year-earlier period.

But oil production profitability continues to be strong as prices remain high. Shell's second-quarter profit nearly doubled to $8.66 billion on higher oil prices.

Refining profitability has been strong, particularly in the United States because of a supply glut at the storage hub in Cushing, Okla., Molchanov says. A barrel of crude from the North Sea in Europe costs about $20 a barrel more than crude oil delivered from Cushing.

"What that means is companies that have refineries in the United States, particularly in the midsection of the United States are able to use those discounted crudes and capture very juicy margins," Molchanov says.

Meanwhile, natural gas prices remain weak in the United States. Exxon's XTO Energy purchase last year continues to dilute the company's profits. Overseas is a different story, particularly in Poland where gas prices are nearly double average U.S. rates. Exxon is currently drilling in Poland and plans to use XTO's expertise to help the company develop an international gas franchise, Molchanov says.

In the third quarter, Molchanov says he expects commodity pricing will result in a slightly lower performance than the second quarter for most oil companies.