US company earnings slide on lower prices, drilling activity

A sampling of 62 producing companies with US headquarters posted a collective 73% drop in profits and a 24% decline in revenue in the first quarter (Table 1). Among this group, 23 companies reported losses, whereas only 4 had a net loss in the same quarter last year.

Earnings of these companies during the first quarter were squeezed by lower commodity prices amid weak demand and by a decline in production volume.

Petroleum product prices, failing to keep up with rising crude costs in the wake of output cuts by oil exporters, squeezed refining and marketing margins.

Canadian oil and gas firms recorded similar results (see related story, "Weak demand reduces Canadian firms' first quarter earnings").

Meanwhile, a sampling of service and supply companies collectively posted slightly higher year-over-year revenues but sustained a net loss for the quarter. Many service and supply companies saw reduced earnings due to a decrease in drilling activity for natural gas and a corresponding drop in day rates (Table 2).

Integrated companies

The large integrated US-based firms in the sample reported lower profits as compared with first quarter 2001 results.

ChevronTexaco Corp. recorded net income of $725 million last quarter, down from $2.4 billion a year ago. The company said that profits were negatively affected by prices of oil, gas, and refined products that were significantly lower than a year earlier.

US crude oil realizations fell about 30% to $17.38/bbl, and natural gas realizations declined by two thirds to $2.27/Mcf.

While US exploration and production profits declined 77%, ChevronTexaco's US downstream sector posted a $154 million loss for the quarter. The company attributes this to margins that were at their lowest levels since the mid-1990s.

These trends were typical of all of the integrated companies in the sample, such as Phillips Petroleum Co. and ExxonMobil Corp. Analysts Robert Plexman and Karin Scott of CIBC World Markets Inc. noted that, while ExxonMobil's upstream earnings were in line with expectations, downstream earnings for the quarter were well below expectations. "There are signs that downstream returns are improving," Plexman and Scott said, "but visibility is low."

Bruce Lanni of A.G. Edwards & Sons Inc. stated that, although Phillips's refining and marketing segment reported an $88 million loss, earnings are expected to rebound, driven by a recent improvement in margins, higher capacity utilization, and decreased turnaround costs.

Lanni expects additional benefits to come from increased synergies associated with the acquisition of Tosco Corp. Plus, Phillips expects to sell $1 billion in downstream assets over the next 2 years and substantially reduce capital spending for refining, marketing, and transportation activities.

Independents

First quarter financial results of independent producers were reduced sharply by lower commodity prices as well.

For many independents, such as Houston-based firms Cabot Oil & Gas Corp. and Apache Corp., increased production failed to offset lower oil and gas realizations.

The same was true for Ocean Energy Inc., Houston, whose earnings were off 83% year-on-year, but the company expects second quarter earnings and cash flow to rise due to continued production growth and higher oil and gas prices. In fact, A.G. Edwards analyst Tom Covington has raised his estimates of Ocean Energy's 2003 earnings and cash flow mainly to account for stronger production from Zafiro field off Equatorial Guinea.

Lower prices stalled drilling activity in the first quarter, but there are signs of recovery. The Baker Hughes Inc. count of US active rotary rigs began to increase in April after dipping to 738 the week ended Apr. 5, compared with 1,200 for the corresponding week of last year.

Apache Pres. and COO G. Steven Farris commented, "Last fall, when drilling and acquisition costs rose to unacceptable levels, we cut back on our drilling programellipseWe now have an abundance of economically viable drilling locations in each of our North American core areas, and we are continuing our planned aggressive drilling program overseas."

EOG Resources Inc., also of Houston, recorded a $24 million loss on the quarter as the company incurred charges related to hedges for second quarter settlement. Chairman and CEO Mark Papa said that EOG had planned to protect against lower natural gas prices in the first part of the year and increase its natural gas production later in the year, as it anticipated gas prices would strengthen. The turnaround came earlier than expected, however, with gas prices firming in the first quarter.

Refining, petrochemicals

Refiners and petrochemical producers continued to be plagued by poor margins in the first quarter.

While refiner Giant Industries Inc. reported a $123,000 profit, Sunoco Inc. posted a $106 million loss. The combination of warm weather, higher crude costs, high product inventories, and weak demand led to below break-even margins, said Sunoco Chairman and CEO John G. Drosdick. In addition, the absence of fuel switching away from oil products due to cheaper natural gas and the slowing of gasoline demand growth due to March price increases contributed to dismal margins.

Sunoco's chemicals segment results were positive and improved from prior quarters but were well below midcycle conditions, Drosdick commented. "While the chemicals and refining and marketing businesses are inherently volatile and cyclical, it is unusual for each to be so weak concurrently." As for the second quarter, Sunoco sees increased demand improving margins in each segment.

Service-supply firms

Excluding the financial results posted by Houston-based Transocean Sedco Forex Inc., the service and supply firms in the sample would have earned $650 million last quarter, down from $1 billion a year earlier.

Transocean's results reflect its initial test of impairment for goodwill, which resulted in a $1.4 billion noncash charge. Before the cumulative effect of this change in accounting principle, net income was $77.3 million.

Nine of the 40 companies in the group recorded improved earnings. One of these is Rowan Cos. Inc., Houston. But excluding the net proceeds from the settlement of Rowan's Gorilla V contract dispute-which was $102 million-the company would have sustained a net loss of $14 million.

Many oil field service and equipment suppliers saw earnings slide as land drilling activity waned, suppressing revenues and margins for US land rigs.

Nabors Industries Inc., Houston, reported a 50% drop in net income and a 30% drop in revenue year-on-year as a result of decreased activity and prices in the US and Canadian natural gas markets. Geared toward oil, the company's business in Alaska and outside North America was strong and bolstered earnings.

UBS Warburg LLC analysts James Stone, David Wright, and Dan Barrett noted that they expect Nabors's revenue from areas outside North America will continue to improve in the second quarter, while revenues from operations in Alaska and Canada will decline due to seasonal factors.

Houston-based drilling contractor GlobalSantaFe Corp. posted an 89% increase in earnings, and the company attributes this to its small exposure to the US market. With about 76% of its offshore rigs in other areas, GlobalSantaFe's financial performance was largely insulated from the comparatively weak US Gulf of Mexico drilling market.