Lower prices slice profits for oil, gas companies

NEW YORK — For oil and gas companies, the math was simple in the second quarter: lower prices equaled lower profits.

With gasoline prices averaging more than $3.40 per gallon 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 companies 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 & NATURAL GAS

The drop in the price of oil and natural 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.

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.

The warmest winter on record reduced demand for natural gas for heating. But U.S. drillers kept producing more of the fuel than ever. This led to a glut and fears that the nation's storage facilities would run out of room by this fall. Natural gas prices hit a ten-year low early in April. For the quarter natural gas prices averaged $2.35 per 1,000 cubic feet, compared with an average of $4.38 a year earlier.

Gas drillers cut back recently in hopes that prices will rise as production falls. Argus Research analyst Phil Weiss says that oil drillers may do the same.

In the meantime profits will take a hit. Devon Energy Corp.'s earnings are expected to fall by half, to 89 cents per share from $1.71 last year, according to FactSet. Chesapeake Energy Corp.'s profits are expected to slip to 10 cents per share from 76 cents per share, and Range Resources Corp. is expected to post earnings of 9 cents per share, down from 27 cents last year.

REFINERS

American refiners fared better in the second quarter. They were able to buy cheaper oil, while gasoline prices rose in some parts of the country.