TOTAL REVENUES UP, PROFITS DOWN FOR OGJ400

Oct. 8, 1990
Robert J. Beck Economics Editor Joan Bonfield Biggs Statistics Editor Total earnings sagged in fiscal 1989 for the OGJ400 group of U.S. public oil and gas companies. Net income for the group dipped 8.6% to $20.34 billion from $22.27 billion in 1988. Net income had moved up sharply the previous 2 years--80.2% in 1987 and 137.6% in 1988 after plummeting in 1986. The group's total assets increased 0.3% to $469.8 billion. But the growth was concentrated. Assets of the 20 largest companies
Robert J. Beck
Economics Editor
Joan Bonfield Biggs
Statistics Editor

Total earnings sagged in fiscal 1989 for the OGJ400 group of U.S. public oil and gas companies.

Net income for the group dipped 8.6% to $20.34 billion from $22.27 billion in 1988. Net income had moved up sharply the previous 2 years--80.2% in 1987 and 137.6% in 1988 after plummeting in 1986.

The group's total assets increased 0.3% to $469.8 billion. But the growth was concentrated. Assets of the 20 largest companies increased $12 billion, those of the entire group only $1.3 billion.

The 1989 earnings slump was mainly due to extraordinary charges posted by several large companies, related to environmental issues.

The lower net income reduced several measures of profitability. The other measures of financial and operating performance of the group were generally lower and to some extent represented caution about future trends in demand and price.

Capital and exploratory spending by the group was down, and net wells drilled dropped significantly.

The bright spots for the group in 1989 were increased revenues due to higher crude oil and product prices and increased production of natural gas in the U.S. and worldwide.

Operating earnings from industry segments were the reverse of a year earlier, with upstream earnings improving and downstream earnings falling.

Upstream profits were boosted by a jump in the average price of crude oil, a small increase in natural gas prices, and an increase in natural gas production. This was partly offset by a decline in U.S. crude production.

The average wellhead price of crude oil in the U.S. increased 26% in 1989 to $15.85/bbl. The wellhead price of natural gas increased 1.2%. Total U.S. gas production increased 0.8%, and crude output fell 6.5%.

At the same time, downstream earnings weakened due to smaller margins resulting from feedstock costs' advancing more rapidly than product prices. The refiner acquisition cost of crude oil in the U.S. increased 22.5%; the wholesale price of motor gasoline moved up 13.5%.

The thinner margins were partly offset by increased demand for petroleum products. U.S. demand moved up 42,000 b/d--0.2%--in 1989, and worldwide demand in free-market economies rose 1.2 million b/d-2.3%.

DRILLING DIPS

Even though wellhead prices were up in 1989, drilling activity fell to one of the lowest levels on record. The average number of active rigs drilling in the U.S. in 1989 fell to 869, the lowest level since 1942. Well completions dipped 12% to 28,340. The weakness showed up outside the U.S. The international rig count fell 10% in 1989 to average 922 active rigs.

This weakness in the upstream segment reflects uncertainty in the industry about crude oil prices, which have been on a roller-coaster ride the last several years.

Crude oil prices fell sharply in 1986 due to overproduction by members of the Organization of Petroleum Exporting Countries. The average wellhead price in the U.S. fell 48.1% in that year to $12.51/bbl. Some production discipline in late 1986 and 1987 pushed the 1987 average price to $15.40/bbl.

In 1988, however, OPEC overproduction weakened prices again. The year's average was $12.58/bbl.

This year prices began at levels above those of first half 1989 but slid through most of the year. Exploration and drilling activity increased slightly nevertheless.

Prices leaped following Iraq's invasion of Kuwait Aug. 2. They seem likely to remain elevated for the last part of the year, which should give a modest boost to E&P activities. But companies remain wary of a price collapse after the dispute is settled.

There has been some optimism in the industry, with expectations of increasing demand for petroleum products and for natural gas.

Companies went through a major program of reorganization and restructuring the past several years. They have cut costs and are operating much more efficiently than before and seem well-positioned to take advantage of opportunities in the industry and to turn them into profits.

FINANCIAL RESULTS

The OGJ 400 group's 8.6% profit decline in 1989 came despite a 6.1% gain in revenues to $459.2 billion.

Group net income is still well above levels of a few years ago. Profits of the OGJ group fell from $29.9 billion in 1982 to a low of $5.2 billion in 1986, the year crude prices collapsed. Profits recovered to $9.4 billion in 1987 and $22.3 billion in 1988. In 1986, only 116 of the 400 recorded profits. In 1989, 224 companies posted profits.

With the lower net income, group profitability indicators were slightly weaker in 1989 than in 1988. Return on assets slumped to 4.3% from 4.8% the year before. It was only 1% in 1986. The best year was 1982 at 5.7%.

Return on revenue slipped to 4.4%. This was down from the 5.1% of 1988--highest recorded for the OGJ400. This ratio had dropped to 1.2% in 1986.

Return on stockholders' equity dropped to 12.6% from 13.5% a year ago.

The high for this measure of performance was 13.8% in 1982; the low was 3% in 1986.

With financial performance a bit weaker in 1989, the group reduced capital and exploration expenditures by 1.8% to $49.2 billion. Capital outlays for the OGJ400 group exceeded $65 billion/year in 1982-85.

The OGJ400 group changes from year to year, so comparisons are not for identical groups. However, the group does represent a large portion of the domestic oil and gas industry and, therefore, represents changes and trends in industry activity and operating performance.

HIGHLIGHTS

Here are other highlights of the 1989 performance of this year's OGJ400:

  • Total assets increased 0.3% to $469.8 billion. The $468.5 billion assets total for the 1989 OGJ400, reflecting 1988 data, was the lowest since the first OGJ400 report, which covered fiscal 1982.

  • The group's revenue total of $459.2 billion was the highest since 1985, when it was $572.2 billion.

  • Stockholders' equity fell 1.4% to $162 billion. Stockholders' equity peaked at $233.8 billion in 1983.

  • Worldwide liquids production fell 6% in 1989 to 3.445 billion bbl. U.S. liquids production fell 7.3% to 2.145 billion bbl.

  • Gas production moved up in 1989--worldwide by 4.1% to 14 tcf, U.S. by 2.1% to 10.3 tcf.

  • Worldwide liquid reserves fell 5.4% to 34.6 billion bbl at yearend 1989. U.S. liquids reserves fell 2.2% to 22.4 billion bbl.

  • Worldwide gas reserves dropped 3.5% to 166 tcf, and U.S. reserves fell 5.3% to 109.8 tcf.

  • U.S. net wells drilled for the group was down 15.7% to 8,462 wells--the lowest number of wells drilled by the group since the OGJ400 report was first compiled.

GROUP CHANGES

The OGJ400 list reflects the industry's continued restructuring and consolidation.

This year's list has 51 new companies. It has 95 publicly held limited partnerships (LPs), compared with 71 last year and 63 the year before, and six royalty trusts, compared with seven last year.

It includes 25 companies that are subsidiaries of non-U.S. energy companies or of companies operating in another industry.

Publicly held LPs were first included in the OGJ400 in 1988. A number of drilling and income funds were converted to LPs in recent years for tax reasons. And a number of new LPs have been formed that are similar in function to income funds but are organized as limited partnerships. Many of these have been created by investment firms with experience in oil and gas financing as a way to acquire producing properties and sell interests publicly.

These firms have been included because they hold an increasing share of U.S. reserves and offer partnership units publicly.

The number of LPs may decline in future years. Some investment firms plan to consolidate assets of a number of their LPs into larger but fewer entities.

Mergers, consolidations, and other changes in reserves ownership continued throughout 1989 in a trend unlikely to reverse soon.

With crude prices now exceeding $30/bbl, however, producers may be more reluctant to sell reserves than they were before the Middle East crisis.

Lowest assets total on this year's OGJ400 list is $455,000--up from only $251,000 last year. This cutoff asset number has fluctuated from a low of $149,000 in 1986 to a high of $2.37 million in 1983.

Lowest asset total in the top 100 companies on this year's OGJ400 is $94.7 million, compared with $154 million last year.

The number of companies with net incomes exceeding $100 million totaled 28 this year and last, up from 21 in 1988. One hundred seventyfive companies posted net losses for 1989, but none had a loss of $100 million or more. In 1988, six companies lost more than $100 million.

THE TOP 20

Concentration of assets in the top 20 companies of the OGJ400 increased slightly in 1989.

The top 20 companies ranked by assets had total assets of $390.3 billion in 1989, up 3.2% from the $378.3 billion a year earlier. This represented 83.1% of the total assets of the OGJ400, up from 80.75% of the assets on the 1989 list.

The biggest 20 companies on this year's list are the same as those last year, although there were some position changes. Consolidated Natural Gas Co. moved up to No. 19 from 20 last year, swapping places with Ashland Oil Inc. The only company that moved more than one position was BP America, which fell from No. 7 last year to 9 this year.

This top group reported revenues of $413.8 billion in 1989, 90.1% of the total for the OGJ400; net income of $18.2 billion, 89.6% of the total; and stockholders' equity of $132.8 billion, 82% of the total.

Capital and exploration expenditures by the top 20 group in 1989 amounted to $40.1 billion, 81.5% of OGJ400 spending. The group drilled 4,996 net wells in 1989, 59% of all the wells drilled by the OGJ400 group.

Production and reserves statistics for the OGJ400 also were dominated by the top 20 companies, which accounted for 89.1% of the total group's worldwide liquids production, 87.7% of U.S. liquids production, 74.5% of worldwide natural gas production, and 69% of U.S. gas production.

With respect to future production potential, the largest 20 companies hold 90% of the OGJ400 group's worldwide liquids reserves and 87.7% of U.S. liquids reserves. They also have 74.5% of the worldwide natural gas reserves and 71 % of the U.S. gas reserves.

OGJ400'S SHARE

The OGJ400 group's total revenue of $459.2 billion in 1989 represented 8.8% of U.S. gross national product. This was down from 8.9% the year before.

The group's revenues reached a peak of 18.4% of GNP in 1983.

The OGJ400 companies' 1989 liquids production was 65.5% of the U.S. total. Their natural gas production was 57.6% of the total. They hold 65.5% of total U.S. liquids reserves and 65.7% of U.S. natural gas reserves.

The group holds 3.5% of worldwide liquids reserves and 3.6% of natural gas reserves. In 1989 it represented 14.8% of worldwide liquids production and 19.6% of natural gas production.

FAST GROWERS

Rankings on the list of fastest growing companies are based on growth in stockholders' equity and include only companies with positive net income for 1989 and 1988 and income growth in 1989. Subsidiary companies, newly public companies, and LPs are not included.

Most of the 20 fast-growth companies posted substantial increases in net income in 1989. Twelve had increases of 100% or more.

The long term debt positions of the companies on the list were mixed. Ten of the companies decreased long term debt, seven increased long term debt, and three were unchanged with no long term debt. None of the companies had large increases in long term debt.

Nucorp Inc. led the growth list this year. Its stockholders' equity moved up 186%, and net income increased 322% to $725,000 in 1989.

Eight of the companies were on the fast-growth list last year. Three of them have appeared on the list for 3 straight years--Swift Energy Co., Plains Petroleum Co., and Coastal Corp. Union Texas Petroleum Holdings, Brock Exploration Corp., Belcor Inc., Whiting Petroleum Corp., and Arch Petroleum Inc. made it for the second year in a row.

THE OGJ100

The OGJ 100, a companion list, includes financial and operational data for non-U.S. companies.

Many of the state owned oil and gas companies report only production and reserves information and do not report financial data. Therefore, the companies are not ranked by assets or revenues but instead are listed by region based on the location of corporate headquarters.

The top 20 OGJ100 companies in crude oil production and reserves are dominated by state companies in major producing countries. The leading nongovernment company in both reserves and production is Royal Dutch/Shell Group. It ranks No. 11 in the world in liquids reserves and 6 in liquids production.

Reserves of the top 20 companies increased by 139.3 billion bbl to 853.8 billion bbl. The top 20 companies now control 85.2% of the world's proved oil reserves, up from 78.7% last year.

The major U.S. international oil companies headquartered in the U.S. are not included in the OGJ100, but several of the companies would rank in the top 20.

Exxon Corp. would rank No. 7 in worldwide liquids production and 14 in worldwide liquids reserves.

Other U.S. companies that would make the list of top liquids producers are Chevron Corp. No. 14, Amoco Corp. 15, Texaco Inc. 16, Arco 17, and Mobil Corp. 20.

However, no other company on the OGJ400 list would make the worldwide list of top 20 companies in terms of liquids reserves.

Copyright 1990 Oil & Gas Journal. All Rights Reserved.