US company second quarter, first half earnings dwindle

Sept. 2, 2002
Lower oil and gas prices coupled with weak refining margins to shrink the earnings of many US oil and gas companies during the second quarter. Oil and gas prices were stronger than during the first 3 months but still below prices posted during the second quarter of last year.

Lower oil and gas prices coupled with weak refining margins to shrink the earnings of many US oil and gas companies during the second quarter. Oil and gas prices were stronger than during the first 3 months but still below prices posted during the second quarter of last year.

A sampling of 64 US-based oil and gas companies recorded a collective 66% drop in earnings on revenues that were down 7% from the second quarter of last year. For the first 6 months, their collective net income declined 72% from a year earlier (Table 1). Eleven of the companies in this group reported a net loss for the quarter; a year earlier, five of the group recorded a loss.
Table 1 is a PDF and will open in a new window.

Most of the Canadian firms that OGJ sampled recorded reduced results from a year ago as well (see related story, p. 20).

Table 2
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Service and supply companies posted similar results, as lower commodity prices and high natural gas storage levels slowed North American drilling activity and thereby lowered day rates during the first half of 2002 (Table 2).

Integrated companies

Most of the large, integrated US-based companies reported results slightly lower than a year ago.

Phillips Petroleum Corp. posted lower net income on higher revenue as refining and marketing margins showed improvement from first quarter levels. Phillips CEO Jim Mulva commented, "Our average realized crack spread was up about 10% but still below historical industry norms, while our average marketing margin returned to levels more consistent with the industry's 5-year average.

"The improved conditions from the first quarter also were reflected in our crude oil capacity utilization rate, which averaged 94%, up from 85% in the first quarter. Turnaround costs incurred during the quarter reduced earnings by approximately $20 million, down from $45 million in the first quarter of 2002."

For the second quarter, Phillips's US gas production declined 4% as prices sagged; this helped to drag down the company's total production 3% from a year earlier. Phillips also pinned depressed production volumes on output curtailments in Nigeria, Norway, and Venezuela.

Although earnings for both Phillips and Conoco Inc. were below consensus estimates, analysts are bullish on prospects for the soon-to-be merged companies. Management at each company expects the merger to close during the third quarter, and J.J. Traynor of Deutsche Bank AG sees significant earnings growth for ConocoPhillips combined with an estimated $1.4 billion of synergy benefits.

Traynor calls Conoco the strongest performer in refining and marketing during the first quarter but says that it was among the weakest during the second quarter. "Little US marketing ownership means that Conoco missed out on the improvement in marketing margins seen by Phillips. Also, the company's large exposure to heavy crude inputs on the Gulf Coast sees it severely affected by the fall in the heavy-light crude spread," he said.

Independents

Many of the independent oil and gas producers in the sample barely eked out a profit for the quarter as a result of substantially lower gas realizations compared with a year earlier.

Firms such as Swift Energy Co., Penn Virginia Corp., and Houston Exploration Co. realized gas prices that were about 30% below those of the same quarter last year. Swift announced a 13% increase in production for the second quarter, but the company's net income was down 76% as revenues fell 26% from a year ago.

Oklahoma City-based Kerr-McGee Corp. reported a $7.6 million net loss compared with a 2001 second quarter net income of $175 million. For the first half of 2002, the net loss was $2.1 million vs. net income of $510 million for the same 2001 period. Lower oil and gas sales prices hit exploration and production profits, but a 40% increase in gas sales volumes and a 4% increase in oil production partially offset their effects.

Refining, petrochemicals

Rising oil prices, excess inventory, and sluggish demand for most refined products continued to pressure refining margins at Sunoco Inc. during the second quarter. Each of the company's refining centers was profitable, though off sharply, as the refining and supply segment of Sunoco earned $16 million in the second quarter vs. $155 million a year ago.

Sunoco's chemicals business lost $1 million for the quarter. Rising feedstock costs, particularly those of benzene and propylene, outpaced selling price increases and crushed margins. Ten percent higher sales volumes partially offset the margin declines.

ChevronTexaco Corp. reported higher earnings from chemical operations. The company said that lower feedstock costs somewhat improved its product sales margins.

ChevronTexaco's refining, marketing, and transportation earnings outside the US declined due to lower overall refined product margins and lower freight rates for the company's non-US shipping operations. Margins were lower in the Asia-Pacific and in Europe but were slightly improved in Latin America.

Total refined product sales declined 10% on weaker demand for jet fuel and residual fuel oil.

Service-supply firms

Of the 39 service and supply companies in the sample, 14 posted a net loss for the quarter; 13 of them recorded a loss for the first half. Combined second quarter earnings fell to $102 million from $1.4 billion for the same 2001 period.

The standouts among this group were the handful of firms that improved on their second quarter 2001 earnings. Some of these were Trans- ocean Inc., Harsco Corp., Cooper Cameron Corp., and Oceaneering International Inc.

Cooper Cameron's second quarter revenues, essentially flat vs. a year ago, exceeded those of the first quarter and propelled earnings to $22.7 million from $19.8 million for second quarter 2001. The company noted that the improvement in earnings during the first half of this year reflects better performance in most of the regions in which it operates, although softness remains in some areas of North America and Latin America. Results of the company's compression services segment were little changed from a year ago in what has become a rapidly deteriorating market for gas compression equipment and services.

Transocean's reductions in expenses and costs outweighed the effects of a weak conventional semisubmersible rig market in the Gulf of Mexico and off West Africa and Norway, in addition to idle time on several of the company's jack ups. Transocean reported a second quarter profit of $80 million, up from $69 million a year earlier.