Refining's silver lining loses luster at Exxon and Chevron

By Ernest Scheyder

HOUSTON (Reuters) - Exxon Mobil Corp (NYSE:XOM - News) and Chevron Corp (NYSE:CVX - News) posted sharp drops in quarterly results on Friday as an oversupplied fuel market shrank profits from their refining units, which until now had provided healthy margins that helped insulate them from a 60 percent slide in oil prices since mid-2014.

In this downturn, large integrated energy companies have touted the virtues of a business model that both produces oil and refines it. Refiners typically see profitability increase when the price of their main feedstock - oil - falls.

But growing fuel inventories and weak demand are now hammering the refining industry, turning a typical advantage for integrated oil companies on its head.

First-quarter pain in the downstream units, which came after major U.S. refiners slashed the amount of cheap crude they were processing in February, is a sign the road ahead for oil majors may turn even more rocky. Their upstream exploration and production units have been reeling for months from the crude price crash.

"Global refining margins weakened upon lower distal demand and continued surplus inventory," Jeff Woodbury, Exxon's vice president of investor relations, told analysts on a conference call.

Lower profits from Exxon sand Chevron's refining divisions contributed to weaker overall results for both companies.

Exxon reported net income of $1.81 billion, or 43 cents per share, down from $4.94 billion, or $1.17 per share, a year earlier.

Chevron reported a net loss of $725 million, or 39 cents per share, compared with a year-earlier net profit of $2.57 billion, or $1.37 per share.

For the past six years, U.S. refiners from Texas to Philadelphia have bought every barrel of crude they can lay their hands on to cash in on a golden era of healthy margins.

But at least five U.S. refiners have voluntarily reduced output of fuels in the most widespread cuts since the global financial crisis.

Independent refiners including Valero Energy Corp (NYSE:VLO - News), PBF Energy Inc (NYSE:PBF - News), Philadelphia Energy Solutions (:PESC.N) and Monroe Energy, a unit of Delta Air Lines Inc (NYSE:DAL - News), have curbed output, capitulating to record stockpiles and sluggish demand.

Exxon has also cut the amount of crude it processes at one Texas refinery.

While so-called run cuts are common for maintenance, they are rare for purely economic reasons.

If the closures gather pace and refineries curb their purchases of crude further, this will heap further pressure on prices for crude received by exploration and production companies.

(Reporting by Ernest Scheyder; Editing by Terry Wade and Lisa Von Ahn)