Price, production increases boost first-quarter earnings

June 19, 2006
Oil and gas companies in the US and Canada and the companies that sell them services and supplies posted strong revenue and earnings gains in the first quarter of 2006.

Oil and gas companies in the US and Canada and the companies that sell them services and supplies posted strong revenue and earnings gains in the first quarter of 2006.

Oil and gas price strength, coupled with increased production volumes for many companies, yielded financial results much stronger than those of the first quarter of last year.

Prices, margins

During the 2006 first quarter, the average US wellhead price of crude was $56.25/bbl, up 30% from a year earlier. Meanwhile, the US wellhead price of gas gained 31% year-on-year to average $7.49/Mcf in the recent quarter.

Cash refining margins were mixed when compared to the first 3 months of 2005, but they still contributed to earnings gains for refiners.

With gasoline supplies tight ahead of the switch to summer-grade fuels and the increased blending of ethanol, cash margins soared in March across all the major US refining centers but were down from their peaks in the third and fourth quarters of 2005.

For the first 3 months of 2006, the average US Gulf Coast cash refining margin was up 15% from a year earlier, according to Muse, Stancil & Co. And while the US West Coast margin was up 54% from a year earlier, the US East Coast margin declined 10% from the first quarter of last year.

US companies

Collectively, a sample of oil and gas producers, refiners, and midstream companies based in the US recorded a 38% increase in first-quarter net income. The same companies reported a 22% boost in revenues for the period.

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Among the largest quarterly gainers is XTO Energy Inc., Fort Worth, which reported record first-quarter 2006 production of 1.46 bcfd of gas equivalent, up 22% from the first-quarter 2005 level.

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XTO Energy’s revenues for the first quarter were a record $1.22 billion, a 93% increase from the prior year’s first 3 months. Earnings for the quarter were a record $467 million, compared with first-quarter 2005 earnings of $166 million.

XTO’s average gas price for the first quarter increased 62% to $9.08/Mcf from first-quarter 2005. The first-quarter average oil price was $56.98/bbl, a 36% increase from last year. Natural gas liquids prices averaged $34.76/bbl for the quarter, up from the 2005 quarter average of $29.12/bbl.

Valero Energy Corp. posted a 59% gain in earnings for the first quarter. Revenues were up 40% from the 2005 first quarter.

Bill Klesse, Valero’s chief executive officer, said the company’s record earnings came amid heavy turnaround activity, implementation of more-restrictive sulfur regulations on gasoline and diesel, increased use of ethanol in reformulated gasoline, and limited capacity expansions due to the high cost of environmental regulations. These factors constricted product supplies and widened refining margins.

ExxonMobil Corp. recorded a 7% gain in earnings to $8.4 billion for the first 3 months of this year. First-quarter 2005 net income included a positive special item of $460 million from the sale of ExxonMobil’s interest in Sinopec. Excluding that sale, first-quarter 2006 earnings increased by $1 billion, the company reported.

Marathon Oil Corp. reported $784 million in earnings for the first quarter, up from $324 million a year earlier.

While Marathon’s upstream earnings were in line with expectations, its downstream underperformed, said Friedman, Billings, Ramsey & Co. Inc. analyst Jacques Rousseau.

“After-tax (downstream) operating earnings of $319 million were below our forecast, primarily because the company’s average refining margins declined more than expected from fourth-quarter 2005’s 22¢/gal high (to 11¢/gal). Total throughput averaged 897,600 b/d, 3% below comparable year-ago levels as a result of increased maintenance operations,” Rousseau said.

Canadian results

Canadian companies that OGJ sampled for first-quarter earnings posted a big increase in collective results.

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Up 190% from the first quarter of 2005, net income for the group of 15 companies totaled $5 billion (Can.). The group’s revenues gained 36%, totaling $37.8 billion.

Canadian Natural Resources Ltd. and EnCana Corp. reversed losses from the first 3 months of last year to post earnings in the recent quarter.

EnCana reported that its first-quarter 2005 earnings were hurt by an unrealized after-tax loss due to mark-to-market accounting of its hedges. For that quarter, the company incurred a $52.5 million (Can.) loss. In the first quarter of this year, EnCana’s earnings were $1.7 billion, up on higher prices and increased oil, gas, and NGL production and sales volumes.

With a 6% increase in production volumes, Canadian Natural Resources’ Ltd.’s first-quarter earnings were $57 million (Can.), compared to a loss of $424 million a year earlier. The year-ago loss included $804 million of net after-tax expenses. In the recent quarter, unrealized net after-tax expenses related to the effects of a UK statutory tax-rate change on future tax liabilities, foreign exchange losses, risk management activities, and stock-based compensation expense were $211 million.

Suncor Energy Inc. reported first quarter 2006 earnings of $713 million (Can.), compared with $67 million in the first quarter of last year. The increase was due to higher oil sands production, higher commodity prices, and fire insurance receipts. These gains were partially offset by higher oil sands operating costs as a result of increased production volumes, as well as higher royalty expense and higher stock-based compensation expense.

Suncor’s total upstream production averaged 300,300 boe/d during the first 2006 quarter, compared with 175,600 boe/d in the first quarter of last year. Oil sands production during the quarter averaged 264,400 b/d of synthetic crude oil. In the first quarter of 2005, production averaged 139,900 b/d, including 18,700 b/d of nonupgraded bitumen production. Natural gas production in the first quarter of 2006 was 196 MMcfd, up from first-quarter 2005 production of 191 MMcfd.

Service, supply firms

With a collective 87% gain in first-quarter net income, a sample of service and supply companies recorded solid, across-the-board earnings increases. There were no huge individual gains.

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The 28 companies in the sample posted $3.7 billion in earnings in the recent quarter. Meanwhile, they recorded a 31% gain in revenues to $24.9 billion.

Foster Wheeler Ltd. announced that its net earnings increased to $14.6 million for the first quarter of 2006, compared with $1.2 million in the first quarter of last year.

Foster Wheeler said the engineering and construction market is as active as it has been for many years, and the outlook remains positive. The company added that increasing demand for oil and gas, declining output from existing fields, and sustained high oil and gas prices all continue to encourage investment in new or expanded upstream oil and gas facilities.

Also, investment in large-scale chemical plants continues, particularly in the Middle East and Asia. Investment in refining is gathering momentum for new and expanded facilities and for upgrades, Foster Wheeler said.

Pride International’s first-quarter earnings were $70.5 million, up from $18.3 million for the comparable 2005 period.

Growing worldwide demand for Pride’s drilling rigs contributed to record results, the company said. Dayrates increased for all of its rig types and operating regions, particularly for the company’s semisubmersibles in West Africa and the Mediterranean Sea and for jack ups in the US Gulf of Mexico.

During the first quarter of 2006, the average daily revenue for Pride International’s drillships and semisubmersibles increased to $135,800 from $119,800 in the first quarter of last year.