Exxon Mobil Corp. (XOM) and Royal Dutch Shell PLC (ADR: RDS.A, RDS.B) announced record quarterly income of more than $10 billion yesterday (Thursday).  But continued production problems and declining output caused both companies to miss analyst expectations, and concerns about reduced U.S. consumer demand weighed on shares.

Exxon Mobil reported that second-quarter income rose 14% to $11.68 billion, marking the highest one-quarter earnings level ever for a U.S. company. The profit, which amounted to $2.22 per share, was up from $10.26 billion, or $1.83 per share, for the same period last year.

Meanwhile, Royal Dutch Shell also was able to breakthrough the $10 billion level when it reported second-quarter income increased 33% from $8.67 billion to $11.56 billion.

On July 11, oil futures hit an intraday high of $147.27, but since then have dropped to the low $120s-level. Oil for September delivery closed at $124.08 yesterday on the New York Mercantile Exchange.

But even high oil prices couldn’t help the two companies beat analyst expectations, causing both stocks to take a hit. Exxon Mobil shares dropped $3.95, a decline of 4.68%, to close at $80.43, while Shell’s A-shares shed $2.90, a decline of 3.94%, to close at $70.79.

“If oil prices are going up $20 and $30 a barrel a quarter like they have been, it hides a lot of flaws,” Brian Gibbons, an analyst at New York-based CreditSights Inc. told Bloomberg News. “The question on everyone’s mind is, how [does Exxon] expect to grow production given the restrictions on access to reserves?”

Oil Production Problems

Production is down at both Exxon Mobil and Shell as their current oil fields mature. Both are spending billions on research and development of new fields, as well as projects such as tar sands fields, which were previously considered unprofitable. But it could be several years before these new explorations pay off.

Exxon Mobil’s oil and gas production declined 7.8%, Bloomberg reported, due in large part to state seizure of company assets in Venezuela.

Shell has had tremendous difficulties with its Nigerian holdings, as continued attacks by the Movement for the Emancipation of the Niger Delta, or MEND, have had a serious impact on the region’s production.

In June, Shell was forced to shut down a site that had produced 220,000 barrels per prior to an attack. And earlier this week, the Dutch oil company declared force majeure on its Nigerian exports after yet another attack.

“We had just this Monday the close-in of Nembe Creek, which is an additional 40,000 barrels per day,” Shell Chief Executive Officer Jeroen Van der Veer said, Reuters reported. “It’s too early to say how long that will last.”

Shell’s production slumped 1% in the quarter, to 3.05 million barrels of oil a day, MarketWatch reported.

Dip in Oil Demand

At the same time, oil majors are faced with declining demand as high oil prices are forcing budget-conscious consumers to change their habits to reduce oil use.

“People have changed their driving patterns because of high prices,” Lynn Westfall, chief economist at Tesoro Corp.’s (TSO), a San Antonio refiner said, DowJones reported. “The earliest would be next year sometime before we might see a reversal.”

U.S. demand for gasoline declined 3.2% in the month ending July 25, the Energy Department announced. Tesoro’s Westfall said the decline was due to changing driving habits, rising unemployment and the increased popularity of more fuel-efficient car models.

In many ways, these changes in consumer preferences are more than just a short-term fix. With oversized sport-utility vehicles going the way of the dodo, some of that consumer demand is unlikely to ever return, even if gas prices eventually come down from their current highs.

News and Related Story Links:

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• Reuters:
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• Reuters:
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• MarketWatch:
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Soaring sales in its oilseeds businesses helped Archer Daniels Midland Co. (ADM) overcome fiscal-first-quarter sluggishness in its traditionally strong ethanol business, enabling the worldwide-food-processing powerhouse to surprise Wall Street.

The Decatur, Ill.-based ADM saw its shares soar Tuesday after reporting that profits for the quarter ended Sept. 30 were $441 million, an increase of 9.4% over profits of $403 million reported for the comparable quarter the year before. The company earned 68 cents per share – a stunning 15% better than the Wall Street consensus of 59 cents.

Net sales and other operating income increased 36% to $12.8 billion. The worldwide commodities boom which increased ADM’s selling prices accounted for about 75% of the increase, while higher sales volumes – principally vegetable oil and wheat – accounted for the remaining 25%, ADM said in its earnings report.

Increased sales were spearheaded by the company’s oilseed-processing business, which more than compensated for sluggishness in the ethanol market where ADM has been such a strong player. Oilseeds processing sales reached $209 million, a jump of 22.9% from sales of $170 million in the comparable quarter last year.  The division processes oils and fats from plants, which in turn can be used in food and fuel. An increased demand for protein meal and oil has driven demand worldwide. 

"Where excellent first quarter earnings of a year ago reflected steep growth in the ethanol market, our record first quarter earnings this year demonstrate our strengths in sweeteners and starches, oilseed processing, and our global capabilities in grain merchandising and handling," said ADM Chief Executive Officer Patricia Woertz.

An increase in the price of corn has coincided with a decline in the value of ethanol, doing significant damage to a once profitable market. Corn, which traded as low as $3.09 a bushel earlier this year, now trades for over $3.70.

"In the United States, the federal government is the market-maker for ethanol, utilizing tax credits, sugar tariffs, and mandates for ethanol use," said Ann Gilpin, an analyst at Morningstar.

Added Gilpin: "As a result of these incentives, a rush of ethanol producers have come online, and the influx has led to a glut, which has pulled down ethanol prices."

Shares of ADM closed down 42 cents each, or 1.14% , $36.47 yesterday.

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