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This Could be the Peak for Oil Profits

Exxon Mobil is less than $4 billion away from crushing their record last year for the largest-ever annual profit at a public company

Exxon Mobil Corp. is less than $4 billion away from crushing last year’s $40.6 billion record for the largest-ever annual profit at a public company, but the global economic downturn likely has put such milestones in the rearview mirror alongside the triple-digit oil prices that fueled them.

Fadel Gheit, an oil analyst with Oppenheimer & Co., said the Irving-based behemoth and its peers will see profits contract with oil and natural gas prices “unless people daydream that we’re going to have $100 oil again anytime soon.”

Exxon Mobil whizzed past analyst expectations with a 58 percent surge in third-quarter profit unveiled Thursday, again breaking its own quarterly record amid the summer’s unprecedented oil prices. The $14.8 billion in earnings easily eclipsed Exxon Mobil’s previous record of $11.7 billion in the second quarter this year. Profit in the third quarter of 2007 was $9.4 billion.

Other producers rode the same high-profit wave, with Royal Dutch Shell posting a 22 percent increase, while Houston-based Marathon Corp. more than doubled its net income.

Houston-based Apache Corp., which doesn’t have refining operations, saw a 94 percent increase in its results year over year.

But as the price of crude has fallen to less than half of July record highs near $150 a barrel, analysts are watching for signs of belt-tightening, such as shrunken budgets for capital expenditures or delays in projects.

Light, sweet crude for December delivery closed down $1.54 at $65.96 in trading Thursday on the New York Mercantile Exchange.

Shell said Thursday it will indefinitely shelve a decision on expanding its operations in Canada’s oil sands because of increased costs, while Marathon said its 2009 capital budget will be more than 15 percent smaller than this year’s allocation.

“Most of these companies have seen their peak earnings,” Gheit said. “I think earnings will come down. The question is not if, but by how much, and who is going to suffer more.”

Companies are seeking to assure investors they can weather economic woes and shrunken demand. Exxon Mobil Chairman and Chief Executive Rex Tillerson said in a statement Thursday that despite continuing turmoil in global financial markets, the company maintains a strong financial position and remains committed to its plan to spend about $25 billion on capital projects. Exxon Mobil has spent about $19.3 billion on such projects so far this year.

Ken Cohen, Exxon Mobil’s vice president of public affairs, told reporters that the company has $37 billion in cash on hand.

“Our investment plans are unaffected by the current decline in crude prices,” he said. “None of our projects relied on oil prices above $100.”

As for The Hague-based Shell, CEO Jeroen van der Veer said in a statement that the company is “watching the world economic situation closely” and aims to maintain competitive dividends and keep making significant investments.

Clarence Cazalot, Marathon’s president and CEO, said its slimmed-down spending won’t affect 2009 production or major projects except an upgrade at its Detroit refinery to process heavy oil from Canada. He also said the company is continuing to evaluate splitting its refining business from its exploration and production side.

“There will be a board decision on the potential separation of the company into two independent publicly traded companies in the fourth quarter of 2008,” he said, declining to offer more detail.

Phil Adams, an analyst with Gimme Credit, said in a note to investors that Marathon could hear “the same negative credit vibe” that prompted Calgary-based EnCana to back off of splitting into an integrated oil company and a natural gas company.

EnCana announced in mid-October that uncertainty in global financial markets prompted a delay of a December shareholder vote on the proposed split.

Adams also noted that Marathon has $1.5 billion in cash, having just closed the $700 million sale of its half-interest in Pilot Travel centers.

San Ramon, Calif.-based Chevron is scheduled today to round out earnings announcements by the largest publicly traded oil majors.

With Exxon Mobil’s record quarterly profit came continued declining production. The company said its oil and gas output fell 8 percent. Excluding fewer barrels received amid higher oil prices under production-sharing contracts and impacts of hurricanes Gustav and Ike, which blew through the Gulf of Mexico in September, output dropped 5 percent.

Tillerson said repairs and lower volumes caused by the hurricanes will reduce fourth-quarter earnings by about $500 million.

Shell earned $8.45 billion, up from $6.9 billion in the year-ago period, but production fell 7 percent, including its oil sands operations.

Shell, a major player in the Gulf, blamed part of its crude shortfall on the hurricanes as well as planned maintenance of North Sea operations.

ConocoPhillips reported a slight decrease in production because of the hurricanes, while BP’s output was flat in spite of the storms.

Marathon’s output available for sale rose 4 percent.

“It would have been up 7 percent were it not for the two hurricanes in the Gulf of Mexico,” Cazalot said.

Exxon Mobil earned $2.86 per share in the July-September period, compared with $1.70 a share in the third quarter of 2007.

Analysts surveyed by Thomson Financial expected earnings of $2.38 a share.

Revenue reached $137.7 billion, compared with $102.3 billion a year ago.

Exxon Mobil repurchased $8 billion of its stock during the quarter, distributed $2.1 billion in dividends and spent $6.8 billion on capital projects.

Shell’s quarterly revenue was $131.7 billion, up from $90.7 billion a year ago.

Its net capital investment in the quarter reached $11.2 billion, and Shell spent $3.1 billion on dividends and share buybacks.

Marathon earned $2.06 billion, or $2.90 a share, more than double last year’s $1.02 billion, or $1.49 a share, and surpassed analyst expectations of $2.32 a share.

Revenue was $23.4 billion, compared with $16.9 billion a year ago.

Higher refining margins boosted Marathon’s refining income to $771 million from $482 million a year ago. The company’s exploration and production segment earned $939 million, up from $479 million.

Apache posted net income of $1.2 billion, or $3.52 a share, up 94 percent from $612 million, or $1.83 a share, in the year-ago period. Production fell 9 percent because of the hurricanes and continued shut-ins after a July 3 explosion at its gas hub in Australia.

Apache’s revenue was $3.36 billion, up from $2.5 billion a year ago.