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Exxon has some explaining to do

After reporting its best first quarter ever, it prepares to defend its profits, saying the industry is misunderstood.

By ASSOCIATED PRESS
Published April 28, 2006

DALLAS - Exxon Mobil Corp. didn't quite meet Wall Street's expectations by reporting an $8.4-billion quarterly profit Thursday.

But that tidy first-quarter sum, coupled with soaring gas prices, is still enough for lawmakers to draw another set of battle lines that will have the company defending its profits.

CEOs from Exxon and its industry peers already have appeared twice at Senate hearings and were asked to justify their profits shortly after reporting them to shareholders.

Kenneth Cohen, Exxon's vice president of public affairs, said he is bracing for another round of the trips to Washington that followed record third- and fourth-quarter reports.

"I think we are going to be very busy, based on everything I hear, everything I read," Cohen said. "I just hope for the opportunity to communicate the fundamentals of our business."

There's the rub.

Lawmakers think the profits are made on the backs of consumers, who are paying a national average of $2.91 a gallon, 68 cents more than they did last year.

Exxon says a strong commodities market combined with fortuitous planning and prudent management are producing record numbers.

Additionally, the company says its earnings reflect global operations, not just earnings in the United States. Of the $8.4-billion profit, Exxon earned $2.3-billion domestically, Cohen said.

Regardless of the profit source, Exxon turned in its best first quarter in the company's history, and analysts say there is more to come throughout the industry.

"This is only the beginning," said Fadel Gheit, analyst for Oppenheimer & Co. "Let me tell you, it gets better after that. Oil prices will add huge amounts to earnings, at least a billion dollars."

In the first quarter, net income rose 7 percent to more than $8-billion, or $1.37 per share, from $7.86-billion, or $1.22 per share, a year ago. Roughly three-quarters of that profit came from the company's upstream division, which produces oil and natural gas.

In January, Exxon posted the highest quarterly profits of any public company in history: $10.71-billion for the fourth quarter of 2005 and $36.13-billion for the full year.

Howard Silverblatt, a senior index analyst for Standard & Poor's, said the latest profit figure still places Exxon fifth historically among quarterly earnings. Exxon also holds the first, second and fourth spots; Royal Dutch Shell PLC has the third spot.

Lawmakers seem to direct most of their energy sector ire toward Exxon because of the enormous numbers.

New Jersey Democrat Robert Menendez weighed in before Exxon completed its conference call with analysts Thursday morning.

"While Exxon Mobil executives are popping champagne and celebrating their record profits, American families are popping antacids under the strain of soaring gas prices," Menendez said. "Prices at the pump continue to jump through the roof while oil company profits follow suit."

Analyst and industry executives have said that lawmakers are taking advantage of the fact that 2006 is a midterm election year. Additionally, Cohen says, lawmakers don't understand how Exxon reaps returns from projects that began in the early to mid 1990s, not just spot commodity increases.

He cited a West Africa project, known as Kizomba, which came online last year and is producing 500,000 barrels a day.

"They need to take into account the long-term nature of what we go through to find, develop and produce energy," Cohen said.

"Kizomba took us 12 years. That's three presidential administrations, two senatorial terms and six congressional terms."

Politicians' response to energy sector profits is not found just on Capitol Hill.

Lawmakers in Bee County, Texas, recently passed a resolution imploring residents to stop buying Exxon Mobil gasoline beginning May 1 until the price drops to $1.30 a gallon.

Gheit and other analysts say lawmakers are being disruptive. "Politicians can flip in no time, depending on where the political wind is blowing," Gheit said. "The company is concerned and doing the right thing by educating the public."

Exxon's first-quarter revenue grew to $88.98-billion from $82.05-billion a year earlier. Higher crude oil and natural gas prices and improved marketing margins were partly offset by lower chemical margins.

[Last modified April 28, 2006, 01:17:12]