Exxon profit disappoints despite high oil prices

The price of gas is displayed at an Exxon Mobil gas station in Fairfax, Virginia, outside of Washington May 1, 2008. Exxon Mobil Corp posted a $10.89 billion first-quarter profit on Thursday but still managed to disappoint investors as weak production volumes and low refining margins blunted the impact of the record-high crude prices. (REUTERS/Larry Downing)

NEW YORK (Reuters) - Exxon Mobil Corp <XOM.N> posted a $10.89 billion first-quarter profit on Thursday, but still managed to disappoint investors as weak production volumes and low refining margins blunted the impact of the record-high crude prices.

The company's quarterly earnings rose 17 percent year over year and were the second-highest in U.S. history, but the results fell short of Wall Street expectations and the its shares dropped more than 4 percent.

Exxon's near-record profits sharpened scrutiny of the company from politicians and consumer groups, who are upset about sky-high gasoline prices at the pump.

Benchmark U.S. oil prices averaged a record of nearly $98 a barrel during the quarter, up about 70 percent from a year earlier.

Exxon posted record earnings of $40.6 billion in 2007, with revenue higher than the gross domestic product of Turkey, the world's 17th-largest economy. If oil prices stay above or around $100 for the remainder of 2008, the company could beat that mark.

A steep drop in profit margins for gasoline cut into Exxon's earnings as the company, such as other refiners, struggled to pass on higher crude costs to customers. First-quarter gasoline prices rose 33 percent year over year in the United States -- less than half crude's rise.

Exxon's oil and gas production also fell 5.6 percent in the quarter.

Chris MacDonald, portfolio manager at WHG Funds, said the production decline was "kind of shocking."

"It makes the future seem kind of dire, because this quarter they really got bailed out by high oil prices ... It kind of shows that you're at the limit of big new finds."

The company has been criticized by some analysts and investors for laying back on capital spending while going full bore on share buybacks.

Exxon spent $31.8 billion to buy back shares in 2007, while shelling out $20.9 billion for capital expenditures. In 2008, the company expects to increase its capital spending to around $25 billion.

"It seems that they are more of a share buyback machine that also happens to produce energy," MacDonald said.

European oil majors BP Plc <BP.L> and Royal Dutch Shell Plc <RDSa.L> earlier this week posted big first-quarter earnings gains as the crude oil surge was an even bigger boon for the companies than expected. Both companies had flat production during the quarter.

REVENUE OF $117 BILLION

The world's largest publicly traded company earned $2.03 a share in the first quarter, up from net income of $9.28 billion, or $1.62 a share, in the same period last year.

But analysts on average had expected the company to earn $2.11, according to Reuters Estimates.

Revenue in the quarter rose to $116.85 billion from $87.22 billion last year.

Earnings from the company's exploration and production segment increased 45 percent to $8.79 billion, while its refining profits dropped 39 percent to $1.17 billion.

The company said its production shortfall resulted in part from production-sharing contracts that give host countries a larger share of oil and gas produced as commodity prices rise. The decline of older fields and the loss of operations that were nationalized by Venezuela last year also hurt production.

Exxon reached a deal with a Nigerian oil union on Thursday <ID:nL01628282> after an eight-day old strike had shut down virtually all of the 800,00 barrels per day of production in the country, which could hit the company's second output figures.

"The question is going to come and you always have to ask it every year: Are they seeing any acceleration in mature field declines? Because slowly the majors are beginning to see this to some degree," said James Halloran, energy analyst with National City Private Client Group in Cleveland.

Halloran was concerned because very little of the volume shortfall appears to be one-time items such as maintenance.

Earnings at Exxon's chemicals unit dropped 17 percent to $1.03 billion.

"There is something seriously wrong with our economy when Exxon's record $11 billion in quarterly profits are seen as a disappointment by Wall Street," presidential candidate Sen. Hillary Clinton (D-NY) said in a statement.

"But on Main Street, middle class families are facing devastating choices every day between buying groceries and filling up their gas tanks to get to work."

Exxon shares closed $3.37, or 3.6 percent, down at $89.70 on the New York Stock Exchange.

Through Wednesday's close they were down less than 1 percent this year, underperforming the Chicago Board Options Exchange's oil index <.OIX>, which is up more than 2 percent over the same period.

(Additional reporting by Euan Rocha in New York and Lori Santos in North Carolina)

(Editing by Mark Porter/Andre Grenon)