US group earnings up in 2006, down in year’s fourth quarter

March 19, 2007
Fourth-quarter and full-year 2006 earnings results were mixed for oil and gas firms based in the US and Canada.

Fourth-quarter and full-year 2006 earnings results were mixed for oil and gas firms based in the US and Canada. Factors cited by companies reporting earnings declines included lower production volumes, increased expenses, and lower refining margins.

A group of US-based oil and gas producers and refiners reported lower collective earnings for the final 2006 quarter, but each group’s combined net income for the year climbed.

For a sample of service and supply companies, most based in the US, earnings made sharp gains for 2006 and for the fourth quarter. These firms benefited from strong demand for equipment and supplies, and drilling contractors reported increased day rates and utilization.

Prices, margins

Average oil prices in the fourth quarter of 2006 were little changed from the fourth quarter of 2005. On the New York Mercantile Exchange, the near-month futures price of crude averaged $60.21/bbl during the final 2006 quarter, compared with $60.02/bbl a year earlier.

Natural gas prices, however, were much lower in the fourth quarter of 2006 than a year earlier. On the NYMEX, the average front-month price during the recent quarter was $7.263/MMbtu vs. $12.861/MMbtu in the final 2005 quarter.

Refining margins dropped sharply as well. For the fourth quarter of 2006, the US Gulf Coast cash refining margin declined 41% from a year earlier, while the US West Coast margin moved 26% lower, according to Muse, Stancil & Co.

US-based firms

Collectively, a sample of oil and gas producers and refiners based in the US recorded a 10% decline in earnings for the fourth quarter of 2006. Revenues of the firms declined 12% for the period.

Full-year 2006 earnings for this sample of companies climbed 19%, though, on 6% stronger revenues.

One of the biggest gainers for the fourth quarter and for the full year was Anadarko Petroleum Corp., while ExxonMobil Corp. reported a 9% gain in annual earnings to a record $39.5 billion. Meanwhile, Cheniere Energy Inc. posted a loss for the fourth quarter and for the year.

Following the acquisitions of Kerr-McGee Corp. and Western Gas Resources Inc. in the third quarter of 2006, Anadarko posted 96% stronger earnings for the year and 119% higher earnings for the final quarter of 2006.

Anadarko reported that its sales volumes of gas, oil, and natural gas liquids for 2006 totaled 178 million boe, up from 2005 volumes of 138 million boe. And for the fourth quarter, sales volumes were up from the third quarter of 2006, due to a full quarter of production related to acquisitions and record production rates from the company’s Greater Natural Buttes and Powder River basin properties in the Rocky Mountain region and Haley gas field in West Texas.

Strong upstream and chemicals earnings drove the fourth-quarter results of ExxonMobil. Still, net income declined 4% from the fourth quarter of 2005.

ExxonMobil’s upstream earnings of $6.22 billion were down $818 million from the fourth quarter of 2005, primarily on lower natural gas realizations and lower gas production volumes driven by lower European demand.

Chemical earnings were $1.24 billion, up $407 million from the fourth quarter of 2005 due to improved margins and higher volumes. Downstream earnings were $1.96 billion, down $430 million from the fourth quarter of 2005 due to lower refining and marketing margins.

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For the year, ExxonMobil’s spending on capital and exploration projects was $19.9 billion, up 12% over 2005. The company’s fourth-quarter spending on capital and exploration projects was $5.1 billion, down 5% from a year earlier.

Cheniere Energy Inc. reported a net loss of $93.3 million for the fourth quarter of 2006 compared with a net loss of $18.5 million during the corresponding period in 2005. The primary reasons for the increase in net loss are related to the early extinguishment of debt, termination of interest rate swaps associated with the early termination of debt, and an increase in general and administrative expenses mostly related to increased personnel costs.

These same factors were behind the company’s results for the full year. And in 2005, Cheniere recorded a $20.2 million gain on the sale of its investment in Gryphon Exploration Co.

Without the losses related to the early extinguishment of debt and termination of interest rate swaps, Cheniere said it would have reported a net loss of $30.1 million for the fourth quarter of 2006.

Service, suppliers

A sample of 31 companies that provide service and supplies to oil and gas producers posted strong gains in net income for the fourth quarter and for the year. Their combined full-year 2006 earnings climbed 77%, while quarterly earnings were up 41% from a year earlier.

The companies in this group benefited from continued strong demand for drilling rigs, equipment, and services that accompany increased exploration and drilling activity. At the same time, these firms have been hit with higher operating and labor costs.

Six of the firms reported lower earnings for the quarter, including Drill-Quip Inc., Halliburton Co., and Rowan Cos. Inc., but none of the companies in the sample recorded a loss for the last 3 months of 2006 or for the year.

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Diamond Offshore Drilling Inc. announced strong gains in net income for the fourth quarter and for 2006. For the quarter, Diamond Offshore reported higher day rates and utilization for its high-specification floating rigs compared with the final 2005 quarter. Meanwhile, day rates for its other semisubmersibles and jack ups were higher than a year earlier, but utilization declined slightly.

Rowan reported a 39% increase in earnings for the year and a 10% decline in fourth quarter earnings. Rowan’s land rig utilization was 95% during the fourth quarter of 2006, up from 89% in the comparable 2005 period.

Meanwhile, the company said its offshore rig utilization decreased to 81% during the fourth quarter from 93% during the comparable 2005 period. The company realized 164 net fewer operating days during the recent quarter from five rigs that were either preparing for or mobilizing to overseas assignments.

Canadian companies

Eleven oil and gas firms based in Canada recorded a larger collective decline in fourth-quarter earnings than their counterparts in the US sample, but their collective gain in annual earnings was stronger that that of the US-based companies.

Full-year 2006 earnings results for this group of companies climbed 27%, as seven of the firms reported earnings gains.

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For the final quarter of 2006, the group of Canadian firms posted a combined 46% decline in net income, while their collective revenues were down 14% from a year earlier.

Talisman Energy Inc. is the only company in the group that recorded a gain for the quarter. The Calgary oil and gas producer reported $598 million (Can.) in earnings for the fourth quarter of 2006, up 12% year-on-year.

Talisman’s production volumes were lower for the fourth quarter but higher for 2006 compared with the prior year’s volumes. In addition, the company’s revenues for the quarter declined, and its expenses rose. But Talisman paid less tax in the recent quarter: $156 million vs. $439 million a year earlier.