Refining props up earnings as upstream results weaken

June 18, 2007
First-quarter 2007 earnings for a sample of companies were mixed, as service and supply firms fared much better than oil and gas producers and refiners based in the US and Canada.

First-quarter 2007 earnings for a sample of companies were mixed, as service and supply firms fared much better than oil and gas producers and refiners based in the US and Canada.

Refining margins boosted the results of refiners and integrated firms in the sample, while many US producers reported net losses for the first 3 months of this year.

Production volumes for some companies moved higher from a year earlier, but oil and gas realizations were lower.

Prices, margins

The front-month futures closing price for crude oil on the New York Mercantile Exchange averaged $58.25/bbl during the first quarter of 2007, down 8% from the first quarter of last year.

Average natural gas prices also declined from a year earlier. In the recent quarter, the front-month NYMEX closing price averaged $7.18/MMbtu, down from an average of $7.84/MMbtu in the first 3 months of 2006.

For refiners the cash margin on the West Coast averaged $25.18/bbl during the recent quarter. This compares with an average of $23.92/bbl during the first quarter of last year and $15.53/bbl in the first period of 2005, according to Muse, Stancil & Co. Meanwhile, average refining margins were mildly weaker for US East Coast and US Gulf Coast refiners during first-quarter 2007 than they were a year earlier.

US operators, refiners

A sample of 128 oil and gas producers and refiners collectively recorded a 2.4% decline in earnings for the first quarter, and their combined revenues fell 6%. In this group 44 companies, mostly exploration and production firms, reported net losses for the quarter.

Most of the integrated firms in the group and independent refiners reported improved earnings.

As a result of strong margins and high throughput rates, Valero Energy Corp. posted a 35% increase in earnings for the first quarter as compared to results a year earlier. The refiner’s revenues, however, were down 6%.

Valero said it benefited from the January commissioning of the expanded crude unit at its Port Arthur, Tex., refinery, which increased overall throughput capacity by 30,000 b/d to 325,000 b/d of sour crude oil.

Holly Corp. reported net income for the first quarter of $67.5 million, up 44% from a year earlier. Revenues were up 17%. On Mar. 31, 2006, Holly sold its refinery in Great Falls, Mont.

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Holly said the positive effects of processing improvements completed at its two refineries last summer, strong gasoline and diesel crack spreads, and strong industry-wide refinery margins propelled its earnings over those of the 2006 first quarter.

Marathon Oil Corp. reported a 9% first-quarter earnings decline from a year ago. While income from Marathon’s refining, marketing, and transportation segment grew to $345 million from $319 million, the company’s income from upstream operations was down 17% from a year earlier at $385 million.

Chevron Corp., ConocoPhillips, and ExxonMobil Corp. each reported reduced revenues but stronger net income for the recent quarter as compared with the first quarter of 2006.

ExxonMobil attributed its results to higher refining, marketing, and chemical margins, which were partly offset by a decrease in oil and gas realizations. While liquids production was slightly higher, ExxonMobil’s gas production declined nearly 10% from a year earlier.

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Chevron’s downstream profits increased $1 billion, due mainly to a $700 million gain on sale of refining assets in Europe. Upstream earnings declined $550 million on lower average oil and gas prices, Chevron reported.

ConocoPhillips’s refining and marketing net income was $1.1 billion in the first quarter, up from $390 million in the first quarter of 2006. E&P net income was $2.3 billion, down from $2.55 billion a year earlier. The decrease from the first quarter of 2006 primarily was due to lower commodity prices, higher taxes, and higher operating costs.

ConocoPhillips said the decline in upstream earnings was partially offset by the current-year net benefit from asset rationalization efforts and higher production volumes. The increase in volumes reflected the inclusion of Burlington Resources Inc.’s results following the merger, partially offset by normal field decline and production cuts mandated by the Organization of Petroleum Exporting Countries.

Service, supply firms

A group of service and supply companies had a combined 46% jump in first- quarter earnings from the first 3 months of 2006. Total revenues for this sample of 28 firms climbed 25%.

Almost all of these companies reported gains in earnings from a year ago, and none incurred a loss for the quarter.

Weatherford International Inc. reported a 39% gain in net income for the first quarter of 2007 to $281.6 million, the largest quarterly earnings in the company’s history.

While the company improved on revenues in each geographical region in which it operates, the largest year-on-year increase in earnings for the first quarter was for its operations in the Middle East, North Africa, and Asia. First-quarter revenues of $395 million in this region were 44% higher than a year earlier but 4% lower than the preceding quarter.

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Weatherford said this region’s performance reflected sequential improvements in its wireline, reentry, drilling tools, and underbalanced service lines. But seasonal declines in completion, artificial lift, and other product shipments more than offset these increases.

Parker Drilling Co. posted net income of $30 million for the recent quarter, up from $11.5 million a year earlier.

The company said its deep-drilling barge day rates in the Gulf of Mexico reached record levels, averaging $51,600/day during the first quarter of this year, up 37% from a year earlier. The average utilization of Parker Drilling’s land rigs outside the US for the first quarter of this year was 66%, down from 84% in the first quarter of last year.

BJ Services Co. reported a 7% decline in earnings for the quarter ended Mar. 31, 2007, as compared with the same 2006 quarter. Chairman and Chief Executive Officer Bill Stewart said the results did not meet the company’s projections due to pricing declines in the US, lower activity and pricing declines in Canada, and project delays in its pressure pumping markets outside the US and Canada.

“In response to market softness in Canada, we have taken corrective action to reduce personnel to a level more reflective of expected drilling activity. We have also identified excess pressure pumping equipment in this market that is currently being deployed to select markets internationally,” Stewart said.

Canadian companies

A sample of oil and gas producers, refiners, and transmission companies in Canada posted a combined 2.3% gain in earnings for the first quarter. These 15 firms’ collective revenues climbed 3.7% from the first quarter of 2006.

Only three companies in this sample reported net losses for the quarter, while Canadian Natural Resources Ltd., Petro-Canada, and Talisman Energy Inc. posted surges in earnings from a year earlier.

Canadian Natural Resources recorded net income for the first quarter of $269 million (Can.), up from $57 million a year earlier as production of oil, gas, and natural gas liquids climbed.

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The company reported that gas production was up from a year ago following a full quarter of additional gas production from the Anadarko Canada Corp. acquisition completed in November 2006, along with a successful gas drilling program during the winter.

EnCana Corp. posted reduced quarterly earnings year-on-year. Net income for the quarter ended Mar. 31, 2007, was $497 million, down from $1.47 billion a year earlier. Earnings were hurt by a $423 million unrealized after-tax loss due to mark-to-market accounting of commodity price hedges.

EnCana created an integrated oil sands enterprise with ConocoPhillips composed of two businesses, one upstream and one downstream. This equal partnership became effective Jan. 2, 2007 (OGJ, Nov. 20, 2006, p. 36).

Also during the first quarter, EnCana completed the sale of its Chad assets for about $203 million, resulting in a $59 million gain.