A.G. Edwards: Integrated oil firms' key operating measures mixed, but healthy

By OGJ editors

HOUSTON, June 18 -- Overall oil market fundamentals remained strong during 2001, as shown by the higher-than-average financial performances of a sampling of integrated oil and gas companies. These financial gains were driven by robust oil prices and above-average US natural gas prices and refining margins.

On the operations side, costs rose while key reserves and production indicators remained robust.

These were some of the findings in an integrated oil company upstream matrix performance analysis released last month by brokerage firm A.G. Edwards & Sons Inc.

A.G. Edwards took note of the tight rein the integrated firms kept on finances last year.
"Nonetheless, financial measures were mixed with higher per-unit operating costs, exploration expenses, and (depreciation, depletion, and amortization), resulting from an increase in oil field service costs and higher cost structures associated with a series of recent acquisitions," A.G. Edwards added. "And although net profit, cash flow, and return on capital employed (ROCE) declined from year-ago levels, they remained significantly higher than 5 and 10-year averages," it said.

"Conversely, key operating measures were mixed year-over-year (YOY), with slightly higher (finding and development) costs, but strong reserve replacement and growth in reserves, production, and reserve life," the firm said.

In its 2001 Upstream Matrix Performance Analysis, A.G. Edwards ranked BP PLC, Phillips Petroleum Co., and ExxonMobil Corp. as top quartile performers. These firms were trailed immediately by Occidental Petroleum Co., Royal Dutch/Shell, Kerr-McGee Corp., Chevron Texaco Corp., and Conoco Inc.

Finding, development costs
Among the group, worldwide F&D costs—which excluded purchases and sales—rose 7%, averaging $5.56/boe for 2001, A.G. Edwards reported. This compares to the 2000 average of $5.18/boe and falls well above the 3, 5, and 10-year averages of $5.22/boe, $5.14/boe, and $5.00/boe, respectively.

"The higher F&D costs reflect the increased capital spending," the firm said. "Both exploration and development costs were higher YOY (domestic exploration up 4%, foreign exploration up 27%, domestic development up 47%, foreign development up 40%) in part due to rising oil field service costs and a ramp-up of exploration and development projects.

"However, compared to 1998 (peak F&D costs, $6.77) when drilling and oil field service costs were at record levels, an offsetting factor for the improved industry performance has been better economics and stronger capital discipline," A.G. Edwards noted.

Reserve replacement
The report stated that 2001 worldwide reserve replacement—again, excluding purchases and sales—was unchanged vs. 2000 at 37%. Reserve replacement was, however, "modestly" above the respective 3, 5, and 10-year averages of 129%, 124%, and 117%, A.G. Edwards said.

"Based on a 3-year average, reserve replacement (rates) increased in 2001. . .benefiting from improvements in both the domestic and international markets (US up 10% to 95% and international up 3% to 149%)," the firm said. "In the US both oil and gas experienced significant reserve additions (oil, up 21% to 99% and natural gas, up 9% to 89%)."

Outside the US, the oil reserve replacement rate increased by 1% to 157%, while the non-US natural gas reserve replacement rate declined 12% to 116%. "We expect the trend of growing US natural gas reserves to continue as companies try to increase their exposure to the starved US natural gas market (which is expected to experience a 4% production decline in 2002), as we anticipate gas prices to remain relatively strong over the next several years," A.G. Edwards said.

"Moreover, we expect the industry to experience an increase in (non-US) reserve replacement as major discoveries become sanctioned and move closer to production. Accordingly, we believe higher capital spending; technological advances, including 3D seismic, horizontal drilling, and well-logging techniques;, along with increased international projects will contribute to a steady increase in reserve replacement," the firm said.

Reserves, production
For 2001, the sample group's total worldwide proved reserves improved 4% to 85.5 billion boe, A.G. Edwards noted, with liquids reserves rising 3% and natural gas up 4%. Reserves in the US increased 2% to 24.8 billion boe from 24.4 billion boe the year before. Reserves outside the US, meanwhile, increased 5% to 60.9 billion boe from 58.2 billion boe, A.G. Edwards said.

Total worldwide production for the group rose 3% to 6.6 billion boe in 2001 from 6.4 billion boe in 2000, above both the 5 and 10-year average growth of 1%. Production in the US rose 3%, with liquids production up 2% and natural gas production up 3%. Likewise, production outside the US was up 3%, with liquids production flat and natural gas production up 8%, the firm said.

Worldwide reserve life for the group in 2001 reached an average of 12.1 years, up 3% from 11.8 years in 2000. Excluding Phillips, however, the group's reserve life for 2001 was up 5% to 11.7 years compared with the year before. "In 2000, Phillips's reserve life increased 51% to 18.5 years from 12.3 years in 1999, benefiting from its acquisition of ARCO's Alaskan assets and booking reserves at its Hamaca project in Venezuela," A.G. Edwards noted. "In 2001, Phillips's reserve life continues to be relatively high at 16 years; however, it should be noted that while production from Hamaca has started (expected to average around 13,000 b/d net in 2001), a significant increase in volumes is not anticipated until 2004," the firm said.

Financial performance
Operating costs for the group worldwide in 2001 climbed to $4.88/boe from $4.46/boe in 2000. In the US, operating costs were $4.87/boe, and they were $4.54/boe in non-US operations, reflecting a 15% and 5% increase, respectively, from the previous year.

"Higher equipment rates and tariffs associated with strong commodity prices, in part, contributed to the increase," A.G. Edwards noted.

The firm said, "As expected, robust earnings last year led to higher exploration budgets, resulting in worldwide exploration expenses (per barrel of oil equivalent) increasing by 7% to $1.40 from $1.31 in 2000. International exploration expenses were up 30% to $1.57, more than offsetting an 18% decline in the US.

Worldwide net profit fell by 25%, to $5.87/boe from $7.81/boe in 2000, A.G. Edwards said. The main contributors to this were lower average oil and US natural gas prices. "Over the next several years, we expect profits to be significantly higher than the 5-year average of $4.28/boe, due to our expectations for strong oil prices. . .and natural gas prices," the firm said.

Finally, "Worldwide average return on capital employed (ROCE) declined to 19% from 26% in 2001, above the 5-year (15%) and 10-year average (12%). While lower oil and gas prices had a modest negative effect on ROCE, management's focus on capital discipline provided a partial offset."

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