The People of America's Oil and Natural Gas Indusry

Oil Company Earnings Surprising? No.

Jane Van Ryan

Jane Van Ryan
Posted July 30, 2009

The headline on the USA Today Web site reads, "ExxonMobil 2Q profit falls a surprising 66%." But in actuality, oil company second quarter earnings reports shouldn't be a surprise to anyone.

The oil and natural gas business is cyclical, meaning that it has its ups and downs, and some years are better than others. It's also important to note that oil and natural gas companies are "price-takers" not "price-makers," because the price of oil and natural gas is determined by the marketplace. Remember Economics 101? Prices are determined by the law of supply and demand.

Furthermore, quarterly earnings always are compared with earnings during the same quarter of the previous year, and market conditions have changed dramatically since 2008. This year the global recession has had a huge impact on demand for oil and oil products. As API reported in its mid-year statistical report, demand for petroleum was 6 percent lower during the first half of 2009 as compared to the same time period in 2008--the lowest level in a decade.

"Global economic conditions continue to impact the energy industry both in the volatility of commodity prices and the reduced demand for products," said ExxonMobil Chairman and CEO Rex Tillerson in the USA Today article.

Other oil companies reported similar quarterly outcomes. Royal Dutch Shell PLC said its earnings declined 70 percent in the second quarter, and according to Forbes, ConocoPhillips' overall profit dropped 76 percent as compared with the second quarter of 2008. Both companies reported smaller profit margins in their refining business. Tesoro Corp., an independent petroleum refining and marketing company, reported a revenue decline of 53 percent, according to a MarketWatch article.

"As we began 2009, we were prepared for a very difficult year, and in the second quarter, it arrived," said Tesoro Chairman, President and CEO Bruce Smith in a prepared statement.

Read more information about trends in oil company earnings.