Quarterly earnings from the top two publicly traded oil companies on Thursday showed clearly both the challenge and potential gains of growing output, with Exxon Mobil Corp falling short and Royal Dutch Shell Plc easily beating estimates.
Exxon's oil and natural gas production slumped 5 percent in the first quarter, leading to a lower net profit and pushing its shares down 1.7 percent -- an especially big move for a $400 billion company that just increased its dividend the previous day by a better-than-expected 21 percent.
Shell, on the other hand, beat forecasts with an 11 percent rise in quarterly profit, as higher oil prices and a ramp-up of new projects outweighed the impact of lower U.S. natural gas prices.
Shell Chief Executive Peter Voser said he expects the latter effect to continue to eat into profits. "In downstream and North American natural gas we see continued challenges for our industry," he said.
The North American gas glut is a particularly big challenge for its larger Texas-based rival, Exxon, which greatly increased its exposure to U.S. natural gas through its purchase of XTO two years ago.
Yet Exxon's drop in production to 4.55 million barrels of oil equivalent per day (bpd) was largely due to declines outside the United States. The decline reduced profits by $850 million, offset by higher global oil and gas prices that added about $980 million in profits during the quarter.
"Lower than expected results were driven by lower than expected oil and gas production," Barclays said in a note to investors, in which it anticipated Exxon share price weakness in the near term.
Exxon shares fell 1.7 percent to $85.37 in morning trading on the New York Stock Exchange.
Exxon has already warned that oil and gas output will be down about 3 percent this year from 2011, as it works to get several large projects on line that will increase production by 1 percent to 2 percent on average each year through 2016.
Smaller rival Chevron Corp, which posts results on Friday, is facing a similar production outlook ahead of the start-up of its huge Australian natural gas projects and Gulf of Mexico oil developments in the next three-to-five years.
Exxon's net profit slipped to $9.5 billion, or $2.00 per share, from $10.65 billion, or $2.14 per share, in the year-ago quarter. Analysts had forecast earnings of $2.09 per share, according to Thomson Reuters I/B/E/S.
Shell, Europe's largest oil company by market capitalization, said its current cost of supply net income - an industry measure of profit - rose 11 percent to $7.66 billion.
Citigroup analysts said market forecasts for Shell's future earnings would likely rise on the back of the results, and its London-listed shares rose 3 percent, against a 1.4 percent rise in a European oil and gas sector index.
"We believe the stock deserves trading at a premium to its peer group," analysts at Societe Generale said of Shell "given its healthy organic production and cash flow growth, and strong upstream asset longevity."
Production was up 1.4 percent in the first quarter compared to the same period a year earlier at 3.55 million bpd, as production at new facilities such as Pearl in Qatar, which converts natural gas into liquid motor fuels.
Brent crude prices averaged more than $118 per barrel last quarter, up from $105 a year before. U.S. natural gas prices have fallen to near 10-year lows after a sharp rise of shale gas production sent supplies to near all time highs.
U.S. rival ConocoPhillips posted a 1 percent drop in underlying earnings last week, due in part to weak U.S. natural gas prices.