Big spenders

2012 may be as good as it gets for Exxon Mobil. America’s largest oil company pumped out a near-record profit and its best earnings per share ever. But Exxon, like Chevron, is spending huge sums – almost $40 billion last year — to find and extract reserves. Holding output steady is tough enough. Unless oil prices jump, Exxon may have peaked.

The big boost to the bottom line for America’s two top oil titans didn’t come from their main exploration and production divisions, but from processing and refining. That’s because the oil and gas needed to run this side of the business was cheap and plentiful in the United States, driving down costs. That helped Exxon as a whole generate $44.9 billion of net income — within a whisker of 2008’s $45.2 billion record.

Topping this feat in the future won’t be easy. Earnings from its refining and chemical operations account for just a third of Exxon’s profit and a tenth of Chevron’s. What would move the needle is an improvement in their two main businesses — both companies suffered a decline in production last year despite years of escalating outlays.

Reversing that trend looks hard, though. Oil-rich nations are becoming more protective of their natural resources, so the likes of Exxon have to resort to drilling for more expensive oil trapped in rocks, the ocean depths or the frigid Arctic.

That requires spending much more money, which helps explain why Exxon’s capital spending has jumped by almost a quarter since 2010. Worse, in some instances costs are running ahead of expectations — by 10 per cent at its oil-sands project in Canada, the company admitted on Friday. That’s a rare embarrassment for a company obsessed with operational discipline. Chevron’s spending, meanwhile, leapt by 17 per cent last year — in large part due to ramping up its liquefied natural gas operations in Australia.

Getting its operations Down Under online should at least provide some relief for Chevron. Exxon, though, has no spurt in output in sight. Aggressive share buybacks may keep earnings-per-share performance high. But boosting net income will require higher oil prices. With global growth tepid, that looks too much for shareholders to hope for.