Oil and gas firms' 2016 net losses mitigated by reduced impairments

May 15, 2017
A sample of 65 US-based oil and gas producers and refiners collectively posted full-year 2016 net losses of $37.13 billion on revenues of $726 billion compared with net losses of $92.96 billion in 2015 on revenues of $871 billion.

Conglin Xu
Senior Editor-Economics

Laura Bell
Statistics Editor

A sample of 65 US-based oil and gas producers and refiners collectively posted full-year 2016 net losses of $37.13 billion on revenues of $726 billion compared with net losses of $92.96 billion in 2015 on revenues of $871 billion. The decrease in net losses was mainly due to less severe asset impairments relative to a year ago, gains on asset sales, and lower operating and exploration expenses.

Low oil and natural prices continued to weigh on results. Average West Texas Intermediate and Brent crude oil prices respectively declined 11% and 16%, from $48.80/bbl and $53.64/bbl in 2015 to $43.32/bbl and $45.04/bbl in 2016. However, oil prices were boosted in fourth-quarter 2016 from the effects of a production-cut agreement among members of the Organization of Petroleum Exporting Countries and other major non-OPEC producers, including Russia. At yearend, WTI and Brent oil prices closed at $53.72/bbl and $56.82/bbl, respectively. Average natural gas prices trading on the New York Mercantile Exchange declined 12% from $2.75/MMbtu in 2015 to $2.42/MMbtu in 2016.

US crude oil production of 8.87 million b/d for 2016 was down from 9.42 million b/d a year ago, according to data from the US Energy Information Administration. EIA estimates that dry gas production averaged 72.4 bcfd in 2016, a decline of 2.2% from 2015 and the first decline since 2005.

There was a noticeable fall in US refining margins in 2016 from a year ago. According to Muse, Stancil & Co., refining cash margins in 2016 averaged $11.14/bbl for Midwest refiners, $14.18/bbl for West Coast refiners, $9.25/bbl for Gulf Coast refiners, and $3.73/bbl for East Coast refiners. In 2015, these refining margins were $17.58/bbl, $22.42/bbl, $11.27/bbl, and $5.52/bbl, respectively.

The US refinery utilization rate was 89.9% in 2016 compared with 91% in 2015, while refinery operable capacity increased to 18.4 million b/d in 2016 from 18.06 million b/d in 2015.

A sample of 11 oil and gas producers and pipeline companies with headquarters in Canada posted combined net earnings of $2.64 billion (Can.) compared with a net loss of $12.28 billion (Can.) in the prior year, as pipeline companies, including Enbridge Inc. and TransCanada Corp., recorded strong earnings in 2016.

In 2016, the Canadian dollar relative to the US dollar weakened as the average exchange rate decreased to 0.75 from 0.78, which has a positive impact on price realizations for Canadian companies. Meanwhile, the Canadian firms' results were negatively impacted by wildfires in northern Alberta in the second quarter of 2016.

US producers

ExxonMobil Corp. reported 2016 net earnings of $8.37 billion compared with net earnings of $16.55 billion a year earlier. The company's worldwide upstream earnings were $196 million in 2016 and included an asset impairment charge of $2 billion mainly related to dry gas operations with undeveloped acreage in the US Rocky Mountains. Worldwide upstream earnings for 2016 were down $6.9 billion vs. 2015. On an oil-equivalent basis, production of 4.05 million b/d during 2016 was down slightly compared with 2015.

US upstream earnings declined $3.07 billion from 2015 to a loss of $4.15 billion and included the $2-billion impairment charge. Upstream earnings outside the US were $4.35 billion, down 47% from the prior year.

ExxonMobil's downstream earnings of $4.2 billion decreased by $2.35 billion from 2015 because of weaker refining and marketing margins. Chemical earnings of $4.6 billion increased by $197 million from 2015 with stronger margins.

Chevron Corp. reported a net loss of $431 million for full-year 2016 compared with net earnings of $4.71 billion in 2015. US upstream operations incurred a loss of $2.05 billion in 2016 compared with a loss of $4.06 billion in 2015. The improvement was because of lower depreciation and lower exploration expenses primarily reflecting a decrease in impairments and project cancellations.

Chevron's international upstream business incurred a loss of $483 million in 2016 compared with earnings of $2.09 billion in 2015. The decrease in earnings was primarily due to lower commodity realizations, lower gains on asset sales, and higher tax items. Partially offsetting the decrease were lower exploration and operating expenses and higher gas sales volumes. Foreign currency effects increased earnings by $122 million in 2016 compared with an increase of $725 million a year earlier.

Chevron's downstream operations in the US earned $1.31 billion in 2016 compared with $3.18 billion in 2015 because of lower margins on refined product sales, lower earnings from the 50%-owned Chevron Phillips Chemicals Co. LLC, and asset impairments. International downstream earned $2.13 billion in 2016, down from $4.42 billion in 2015, primarily because of the absence of a $1.6-billion gain from the sale of the company's interest in Caltex Australia Ltd. in 2015, partially offset by 2016 asset sales gains of $420 million. Lower margins on refined product sales of $1.14 billion also contributed to the decline.

ConocoPhillips reported a 2016 net loss of $3.56 billion compared with a net loss of $4.37 billion in 2015. This 19% decrease in losses was mainly due to lower exploration, production, and operating expenses, lower proved property, and equity investment impairments, including the absence of a $1.5-billion impairment of its equity investment in Australia Pacific LNG Pty. Ltd. in 2015. The decrease in losses was partly offset by lower commodity prices, lower sales volumes, lower equity earnings, higher interest and debt expense, and lower gains on dispositions.

Hess Corp. posted a net loss of $6.07 billion in 2016 and net loss of $3 billion in 2015. The adjusted net loss was $1.49 billion in 2016 and $1.11 billion in 2015. In 2016, net production averaged 322,000 boe/d, down from 375,000 boe/d in 2015, reflecting reduced investment, the sale of Algeria assets, and natural field declines.

Devon Energy Corp. reported a net loss of $3.7 billion in 2016 compared with a net loss of $15.2 billion in 2015. The 2016 results include asset impairments of $5 billion, while the 2015 results include asset impairments of $21 billion. In 2016, Devon divested certain noncore upstream assets in the US and its 50% interest in the Access Pipeline in Canada.

Occidental Petroleum Corp.'s oil and gas segment results were losses of $600 million and $8.1 billion in 2016 and 2015, respectively. The 2016 results for the oil and gas segment included pretax gains of $107 million, mainly comprised of the sales of Piceance and South Texas assets, and net charges of $61 million related to the sale of Libya assets and an exit from Iraq. Oil and gas segment results in 2015 included pretax impairment and related charges of $3.5 billion and $5 billion on domestic and international assets, respectively. The company's chemical segment earnings were $571 million and $542 million for 2016 and 2015, respectively.

EOG Resources Inc. realized a net loss of $1.097 billion during 2016 compared with a net loss of $4.525 billion for 2015. During 2016, net operating revenues decreased 13% to $7.65 billion from $8.757 billion in 2015, while operating expenses of $8.876 billion were lower than the $15.44 billion incurred during 2015. Impairments, as part of operating expenses, were $620 million and $6.6 billion for 2016 and 2015, respectively.

For 2016, Chesapeake Energy Corp. had a net loss of $4.4 billion on total revenues of $7.87 billion. This compares with a net loss of $14.64 billion on total revenues of $12.76 billion for 2015. The impairments of oil and gas properties and other fixed assets totaled $3.39 billion in 2016, down from $18.43 billion in 2015. During 2016, the company's oil, gas, and NGL sales were $3.28 billion compared with $5.39 billion in 2015.

Refiners

Valero Energy Corp.'s refining segment adjusted operating income decreased $4.4 billion for 2016 compared with 2015, primarily because of a $4.3-billion decrease in refining gross margins. The decrease in refining margins resulted from decreases in gasoline and distillate margins, lower discounts on light sweet and sour crude oil, and higher costs of biofuel credits.

Marathon Petroleum Corp. reported earnings of $1.21 billion for 2016 compared with earnings of $2.87 billion in 2015. Marathon's refining and marketing segment's income from operations decreased $2.54 billion in 2016 compared with 2015, mainly because of lower crack spreads. The firm's midstream segment income from operations increased $491 million in 2016 compared with 2015 because of the inclusion of MarkWest's operating results following the merger with MPLX, as well as earnings from new and existing pipeline and marine equity investments.

Phillips 66's 2016 earnings were $1.64 billion compared with $4.28 billion in 2015, which reflected lower margins in its refining and chemicals businesses. Earnings for the refining segment decreased to $374 million in 2016 from $2.55 billion in 2015. The worldwide refining margins dropped to $6.99/bbl in 2016 from $11.84/bbl a year ago because of decreased market crack spreads, higher costs associated with renewable fuels blending activities, lower clean product differentials, and lower feedstock advantage.

Phillips 66's worldwide refining crude oil capacity utilization rate was 96% in 2016 compared with 91% in 2015. The increase was primarily attributable to lower turnaround activities and less unplanned downtime.

Earnings from the firm's chemicals segment decreased $379 million, or 39%, in 2016 compared with 2015 because of lower realized margins from the olefins and polyolefins business. In addition, CPChem recognized a $177-million impairment in 2016 due to lower demand and margin factors affecting an equity affiliate, which resulted in an $89-million aftertax reduction in Phillips's equity earnings from CPChem.

Earnings from the midstream segment increased $165 million in 2016 compared with 2015. The increase was primarily due to improved results from DCP Midstream.

Net earnings of Tesoro Corp. were $734 million in 2016, down from $1.54 billion in 2015 because of the weaker margin environment within the refining segment. The gross refining margin decreased $1.2 billion during 2016 compared with 2015. Operating expenses remained relatively flat at $2.5 billion in 2016 compared with 2015. Tesoro had a total refining capacity of 895,000 b/d in 2016 following the acquisition of the Dickinson, ND, refinery. Its refining utilization rate was 93%, flat with a year ago.

Canadian firms

All financials in this section are in Canadian dollars unless specified otherwise.

Suncor Energy Inc. reported a full-year 2016 net income of $445 million compared with a net loss of $2 billion in the previous year. The aftertax, unrealized foreign exchange gains on the revaluation of US dollar denominated debt were $524 million for 2016 compared with an aftertax loss of $1.93 billion for 2015.

Suncor's consolidated operating loss in 2016 was $83 million compared with operating earnings of $1.46 billion in 2015. The decrease was primarily because of lower upstream price realizations in the first 9 months of 2016, the impact of shut-in production associated with the forest fires in the Fort McMurray, Alta., area in second-quarter 2016, and weaker benchmark crack spreads. These factors were partially offset by lower operating costs across the company's operations, higher refined product location differentials, and increased exploration and production.

Suncor acquired Canadian Oil Sands Ltd. in first-quarter 2016, adding 128,600 b/d of synthetic crude oil capacity. During second-quarter 2016, Suncor acquired an additional 5% interest in Syncrude from Murphy Oil Co. for $946 million, adding an additional 17,500 b/d of synthetic crude oil capacity.

Imperial Oil Ltd. reported a net income of $2.98 billion for 2016 compared with $1.54 billion for 2015. Net income in 2016 includes a gain of $1.7 billion from the sale of retail sites.

Imperial Oil's upstream segment reported a net loss of $661 million in 2016 compared with a net loss of $704 million in 2015. The loss in 2016 reflected lower realizations, the impact of the northern Alberta wildfires, and higher depreciation expenses. These factors were partially offset by higher volumes, the impact of a weaker Canadian dollar, the favorable impact of lower royalties, and lower field operating costs. The loss in 2015 reflected the impact associated with the Alberta corporate income tax rate increase of $327 million.

Imperial Oil's downstream net income was $2.75 billion, up from $1.58 billion in 2015. Chemical net income was $187 million in 2016, down from $287 million a year ago.

Cenovus Energy Inc. ended 2016 with a net loss of $545 million compared with net earnings of $618 million in 2015 primarily because of an aftertax gain in 2015 of $1.9 billion from the divestiture of the royalty interest and mineral fee title lands business. During 2016, Cenovus decreased total crude oil operating costs by $1.63/bbl, or 14%, compared with 2015. Total crude oil production remained relatively consistent as higher production from its oil sands segment was offset by lower production from conventional properties.

Enbridge's net earnings were $1.77 billion in 2016 compared with a loss of $37 million for 2015. For 2016 the company's earnings before income tax reflected $543 million of unrealized derivative fair-value gains compared with $2 billion of unrealized derivative fair-value loss in 2015. Adjusted EBIT was $4.66 billion compared with adjusted EBIT of $4.16 billion for 2015. The increase was largely driven by stronger contributions from its liquids pipelines segment, which benefitted from several new assets that were placed into service in 2015, including the expansion of the mainline system in third-quarter 2015, as well as the reversal and expansion of Line 9B and completion of the Southern Access Extension in fourth-quarter 2015.