Fourth-quarter 2012 earnings decline after asset writedowns

March 25, 2013
Favorable refining and petrochemical margins continued to bolster quarterly and yearend 2012 earnings of related operations for some oil and gas companies.

Conglin Xu
Senior Editor-Economics


Laura Bell
Statistics Editor

Favorable refining and petrochemical margins continued to bolster quarterly and yearend 2012 earnings of related operations for some oil and gas companies. However, some firms' decisions on large-asset writedowns negatively impacted some companies' financial statements. Many of the writedowns were related to natural gas production assets while gas prices remained low.

A sample of 52 US-based oil and gas producers and refiners posted a collective decrease of 3.4% in fourth-quarter earnings and a 9% decrease in full year 2012 earnings as compared to the same periods in 2011.

And a group of 14 producers and pipeline operators with headquarters in Canada reported a combined 53% and 37% decrease for the fourth quarter of 2012 and full year 2012, respectively.

Prices, refining margins

The front-month futures contract on Brent averaged $110.02/bbl in the final quarter of 2012, compared with $109.02/bbl during the same quarter in 2011. Meanwhile, crude oil front-month futures prices on the New York Mercantile Exchange in fourth-quarter 2012 averaged $88.22/bbl compared with $94.05/bbl in 2011's last quarter.

The average composite cost of crude oil for US refiners in the last quarter of 2012 was $97.28/bbl, down from $104.50/bbl a year earlier, according to the US Energy Information Administration.

Refining margins in all regions of the US surged from a year earlier, according to Muse, Stancil & Co. (MSC). Cash refining margins in fourth-quarter 2012 averaged $34.94/bbl for the Midwest, $15.55/bbl for the West Coast, $6.90/bbl for the Gulf Coast, and $4.48/bbl for the East Coast, MSC reported.

Front-month NYMEX natural gas futures averaged $3.54/MMbtu in 2012's final quarter vs. $3.47/MMbtu a year earlier. Wellhead natural gas prices averaged $3.24/MMbtu, compared with $3.37/MMbtu in fourth-quarter 2011.

US producers

In the sample of US oil and gas producers, 16 incurred a net loss for the final 3 months of 2012, and 19 posted a decline in earnings from the last quarter of 2011.

Some posted higher profits. ExxonMobil Corp., for example, reported $9.95 billion in earnings for the 3 months ended Dec. 31, 2012, a 6% increase from a year earlier. The firm's full-year 2012 earnings were $47.68 billion compared with $42.2 billion in 2011.

ExxonMobil's fourth-quarter 2012 upstream earnings decreased by $1.1 billion to $7.76 billion from the comparable quarter in 2011, reflecting lower production volumes and lower gains on asset sales. ExxonMobil said its oil-equivalent production was down by 47,000 b/d from 2011's last quarter and natural gas production down by 1.136 MMcfd. Downstream earnings were $1.76 billion, up $1.3 billion from fourth-quarter 2011, due to higher refining margins and petrochemical margins.

Chevron Corp. reported net income of $7.29 billion for fourth-quarter 2012 compared with $5.1 billion in fourth-quarter 2011. Earnings for all of 2012 were $26 billion, down from $27 billion for 2011.

The company's worldwide net oil-equivalent production was 2.67 million b/d in the fourth quarter 2012, up from 2.64 million b/d in the 2011 fourth quarter. International upstream earnings in the fourth quarter 2012 increased $1.4 billion from a year earlier, reflecting a gain of $1.4 billion on an asset exchange in Australia.

Chevron's US upstream earnings were down $242 million from the fourth quarter 2011, with lower crude oil and natural gas realization partially offset by higher crude oil production. The company's US downstream earnings of $331 million in the fourth quarter 2012 compared with a loss of $204 million a year earlier, primarily due to improved refining margins and higher earnings from the 50%-owned Chevron Phillips Chemical Co. LLC.

ConocoPhillips posted fourth-quarter 2012 earnings of $1.4 billion compared with fourth-quarter 2011 earnings of $3.4 billion, which included downstream results prior to the separation of Phillips 66 on Apr. 30, 2012. Production from continuing operations for the fourth quarter of 2012 increased 28 million boe/d from a year earlier, primarily due to new production from major projects and drilling programs as well as higher production in Libya and China.

Newfield Exploration Co. posted a loss of $1.4 billion in the fourth quarter of 2012. The results reflected a $1.5 billion noncash ceiling test writedown to the carrying value of US proved reserves and a $550 million noncash charge associated with the repatriation of its accumulated international profits. Newfield's total production in the fourth quarter was 11.9 million boe.

In the fourth quarter of 2012, Occidental Petroleum Corp. recorded $1.1 billion aftertax charges for impairments in the oil and gas Midcontinent business units, primarily related to the natural gas properties. Fourth-quarter net income after the charges was $336 million, compared with earnings of $1.6 billion in the fourth quarter of 2011.

Devon Energy Corp. also swung to a fourth-quarter loss of $357 million after a $896 million asset writedown on natural gas production assets.

Refiners

Refiners' income was bolstered by a higher margin environment, significantly improved crude oil differentials, and favorable crude oil acquisition costs.

Tesoro Corp. recorded $35 million in earnings for the last 3 months of 2012, compared with a net loss of $118 million in the final 2011 quarter. For the full year, the company reported net income of $770 million, up from $563 million in 2011. The company completed three of five large capital refinery projects in 2012, contributing significant additional earnings during the year. During the fourth quarter, the company captured a gross margin of $14.25/bbl.

HollyFrontier Corp. realized net income of $392 million for the fourth quarter of 2012, compared to $223 million net income in the previous fourth quarter. The company's refinery gross margin was $24/bbl, a 57% increase from $15.32/bbl during fourth-quarter 2011.

Valero Energy Corp. reported a surge in fourth-quarter earnings to $1 billion from fourth-quarter 2011 net income of $45 million. Through replacing all imported light foreign crude oils with cheaper US crude oil at Gulf Coast and Memphis refineries, coupled with larger discounts for medium sour and heavy sour, the company significantly increased refining throughput margins.

In the last 3 months of 2012, Valero started up a new hydrocracker at the Port Arthur, Tex., refinery, which was the largest project in Valero's history. The construction on St. Charles hydrocracker is under way and scheduled for start-up in this year's second quarter.

Marathon Petroleum Corp.'s income from refining and marketing operations increased by $1.32 billion for the fourth quarter 2012 and $1.51 billion for the full year compared to the same period in 2011. The refining and marketing gross margin averaged $9.17/bbl and $10.45/bbl for the fourth quarter of 2012 and full year 2012, respectively, compared with 39¢/bbl and $7.75/bbl for the fourth quarter of 2011 and full year 2011, respectively, the company said.

Canadian firms

In a group of firms based in Canada, 6 of the 14 incurred losses in fourth-quarter 2012. More than half in the group reported declines in earnings from a year earlier. All figures are in Canadian dollars.

The group's combined revenues for the year ended Dec. 31, 2012, were $185.5 billion, compared with $188.9 billion for 2011. The combined earnings for the full year 2012 were $12.8 billion, down 37% from 2011. Although varied, the results are attributable to factors including large asset impairment losses, lower upstream production, and lower natural gas prices. However, the decrease of the industry's earnings, as a whole, was partially offset by strong performance and higher earnings from downstream operations.

Suncor Energy Inc. posted the largest earnings loss of $562 million for fourth-quarter 2012, compared with $1.43 billion in net income a year earlier. The net loss was attributable to an aftertax impairment charge of $1.49 billion for the Voyageur upgrader project. Other factors that contributed to the loss include lower average price realization in oil sands and lower production from offshore assets completing maintenance. Suncor's refining and marketing segment cap record year for earnings and cash flow, benefiting from lower feedstock cost from the company's oil sands operations.

Cenovus generated a loss of $118 million in the fourth quarter 2012 vs. earnings of $266 million in the same period of 2011. A $393 million noncash goodwill impairment related to the company's Suffield assets resulted in this quarterly loss and lower full-year earnings. The goodwill writedown is primarily because of declined estimated future cash flow from the assets, as a result of lower natural gas price forecasts in the long term. In its downstream business, the wider Western Canadian Select to West Texas Intermediate differentials and a favorable appreciation in the price of Brent crude led to strong refining margins.

Talisman Energy Inc. reported a net income of $375 million in the fourth quarter of 2012 and a net loss of $116 million in 2011. But for all of 2012, net income was $131.6 million, an 83% decrease from the previous year. The decrease was primarily due to lower North American gas prices, reduced production from the North Sea, increased operating costs, higher depreciation, depletion, and amortization (DD&A) and a number of one-time, noncash asset impairments, partially offset by gains on disposals of assets in North America and a 49% equity interest in UK North Sea, the revaluation of the Ocensa pipeline in Colombia and lower current and deferred tax.

Imperial Oil posted net earnings of $1.07 billion for the fourth quarter 2012, up 7% from the corresponding 2011 period. Imperial Oil attributed higher fourth quarter earnings to higher Midcontinent refining margins, lower royalty costs and higher Syncrude volumes partially offset by lower upstream realizations and higher Kearl production readiness expenditures. Downstream net income was $549 million in the fourth quarter, the best single quarter earnings on record and $277 million higher than the fourth quarter of 2011.

Imperial Oil's earnings for the full year 2012 were $3.7 billion, up 12% from 2011. The Kearl initial development was completed in the latter months of 2012 and progresses towards the planned start of production are underway, the company said.

TransCanada Corp.'s revenues for the fourth quarter were up 3.6%, while its earnings declined 18.6%. The company's full-year 2012 earnings were $1.3 billion, down 13% from $1.5 billion in 2011. The decrease in earnings was primarily caused by lower contributions from Western Power, Bruce Power, and certain natural gas pipelines including the Canadian Mainline, ANR, and Great Lakes.