Bob Williams
Associate Managing Editor-News
Valerie Sanders
Statistics Editor
First half 1992 profits for the group of 22 large integrated U.S. petroleum companies Oil & Gas Journal tracks plummeted by almost half from a year ago.
Net profits for the group fell to $5.9 billion in the first half from $10.4 billion in first half 1991. Revenues were down 5% to $210 billion year to year.
More than three fourths of the profit drop came in an especially dismal first quarter that saw record lows in U.S. natural gas spot market prices and the post-1940 active rig count.
Faint stirrings of a turnaround in the second quarter staunched the bleeding, in contrast with the way the group fared in respective quarters last year (OGJ, Sept. 2, 1991, p. 21). Of the 22 companies, 16 reported poorer results in a comparison of 6 month periods and 13 in a comparison of second quarters.
As revenues rose slightly in the second quarter from the same time a year ago, group profits for the period fell 21% to $2.9 billion. Had Amoco Corp. not taken after tax charges of $805 million in the second quarter, its earnings and the group's likely would have been flat against second quarter 1991.
INDUSTRY RETRENCHMENT
The biggest factor in the group's poor financial showing for the first half was industry's accelerated retrenchment, especially in the U.S. Huge asset writedowns and special charges related to restructuring, consolidation, and layoffs accounted for many of the companies' losses or steep drops in earnings.
Those cost cutting measures bode well for future profits. Many companies cited the measures' early effects in buoying second quarter profits.
Not all reduced costs stemmed from improved efficiencies, however.
Among companies listing capital and exploration spending, most reported significant declines in a year to year comparison. For those reporting outlays, capital and exploration spending fell more than 10% to $14.5 billion in the first half as spending as a percent of net income soared 143.2 points. Most companies in the group cut spending in the U.S. while stepping up outlays in other countries.
Taken together, the two trends represent a continuing dismantling of the U.S. industry infrastructure. Estimates point to tens of thousands of job losses in the U.S. industry this year. U.S. oil production and refining capacity continue to erode as companies, especially U.S. integrated majors, seek friendlier investment climates and less onerous regulatory regimes abroad.
The general outlook for the rest of the year is for modest improvement in upstream earnings, largely as a result of the natural gas rally, trailed by continued difficult times ahead for refining/marketing and chemicals in a persistent recession.
Signs point to a significantly more profitable year in 1993, absent market vagaries caused by Middle East politics, disarray in the Commonwealth of Independent States, the economy, and the weather. That's when many analysts and company officials alike expect the seeds of retrenchment in 1992 to bear fruit.
ALL SEGMENTS SQUEEZED
First half earnings were down across the board for all key operating segments of the industry.
Especially hard hit was U.S. refining/marketing income, down by about 71% for those in the group reporting earnings for that segment. U.S. R&M profits were buffeted by depressed products demand and increased operating costs because of a tightening vise of new environmental regulations. Depressed demand also sliced non-U.S. R&M earnings, the salvation of group profits in first half 1991, by about 63% for those reporting.
Upstream, companies probably would have endured the same collapse in first half earnings had there not been a modest recovery in the second quarter. A surprising rally in crude oil and natural gas prices in the second quarter buoyed U.S. upstream earnings enough to push up overall upstream income about 9% for those reporting.
Lingering global economic malaise derailed chemicals operations' efforts to improve on a poor first half 1991. Sagging demand and thinning margins slashed earnings by 81% for those reporting chemical profits.
First half operating results for the group lagged across the board vs. 1991 except for refining/marketing, where increased refinery runs and product sales often contributed to the negative effects of an overstocked market.
FIRST QUARTER GLOOM
Gloom pervaded all segments of the petroleum industry in the first quarter.
Net income for 110 petroleum companies the Energy Information Administration tracks fell 34% in the first quarter from the prior year.
"Petroleum companies registered an especially poor financial performance in comparison with their performance during the previous year's first quarter," EIA said. "However, it should be noted that petroleum companies' income was unusually high during the year ago quarter due to the effects of war related petroleum product demand."
EIA reported this U.S. situation for first quarter 1992:
- Refiners' acquisition cost of imported crude down an average 17% to $16.12/bbl.
- Wellhead natural gas prices down 13.2% to an average $1.45/MMBTU, the lowest since 1980.
- Retail prices for gasoline and No. 2 heating oil down 6.6% to $1.13/gal and 18% to 91cts/gal, respectively.
- Declines of 1.7% in crude oil production to 7.4 million b/d, 2.4% in natural gas consumption to 6 tcf, and 0.1% in refinery crude runs to stills.
Of IEA's universe of companies in the U.S. petroleum industry, 19 integrated majors' income fell 57% from first quarter 1991, 10 independent refiners' earnings fell 78%, and 43 independent oil and gas producers posted a combined loss of $2 million compared with first quarter 1991 combined earnings of $170 million. IEA also noted 38 oil field service/supply companies posted a 22.2% drop in earnings for the period.
SECOND QUARTER BOOST
Strategic positioning of earnings and aggressive cost control were the keys to improved earnings for integrated petroleum companies in the second quarter, said First Boston Corp.
"The companies that have addressed the cost control issues first and most aggressively have delivered positive earnings surprises to the marketplace," the New York firm said.
"Phillips Petroleum and ARCO were at the leading edge of the efficiency move, and both companies' estimates came in above expectations. As a percentage of 1991 earnings from operations, Phillips and ARCO have targeted expense reductions of 39% and 12.4%, respectively, by the end of 1992."
Dean Witter, also of New York, noted firming crude oil prices and sharply higher natural gas prices in the second quarter buoyed upstream income for 11 major integrated companies it tracks. It estimated crude prices overall up about an average $2.50/bbl and U.S. natural gas prices up about 25cts/Mcf from first quarter levels.
U.S. refining/marketing profits continue to lag because of poor margins resulting from increased crude oil prices, weak product demand, and ample supplies, Dean Witter noted, adding that a tighter supply/demand balance enabled West Coast refiners to report more favorable margins than their counterparts elsewhere.
Non-U.S. downstream operations did not fare much better in the second quarter, Dean Witter said, noting that refining margins have been disappointing in Europe and appear more positive in the Far East.
RETRENCHMENT SNAPSHOTS
Ledger sheets of the OGJ group of integrated companies abounded with signs of industry retrenchment in first half 1992.
Here's a sample of steps companies took that battered bottom lines in the near term in hopes of improving them later:
- Amoco's second quarter charges included $473 million to cover costs of restructuring business units and related charges, including expected losses on disposition of oil and gas properties and other nonstrategic assets and investments, $181 million for charges related to workforce reductions, and $151 million to cover other reserves and adjustments.
- Chevron Corp. recorded employee severance and relocation provisions totaling $92 million after tax, compared with an after tax provision of $102 million recorded at yearend 1991. Of the first half charges, a net $36 million was related to Chevron's enhanced early retirement program, which about 4,400 employees had accepted as of the end of July. The remainder went for Chevron business units' employee severance and relocation costs associated with staff cuts and employee redeployment.
Noting Chevron's progress toward reducing operating costs by 50cts/bbl through restructuring and cost cutting, Chairman Ken Derr said, "As programs are completed and implemented, we may need to make additional provisions, but we believe the majority of the workforce reduction costs are behind us."
- Texaco Inc. expects to produce full year cash savings, compared with its original plan, or about $700 million from reductions in planned capital outlays and expenses. As of midyear, the company said it remains on track toward that goal.
- Shell Oil Co. reported second quarter operating earnings in all its business segments benefited from progress it's making in cost reduction programs. Shell recently disclosed plans to sell its coal mining unit and is considering additional steps for further company-wide improvements in cost structure.
- Sun Co. said it is on target to meet a goal of slashing pretax expenses by $100 million, but Sun Chairman Robert Campbell said, "It is clear we need to do more, and we are currently identifying areas for further savings and efficiencies." Sun just last week announced a major reconfiguration and downsizing of its Tulsa refinery, for which it expects to take a third quarter after tax writeoff of $60-70 million (see p.30).
- Mobil Corp. slashed its 1992 capital budget to $4 billion from $5.4 billion in 1991 and is continuing efforts to restructure operations, increase efficiency, and step up asset sales, expected this year to exceed last year's level of about $600 million.
Mobil Chairman Allen Murray said, "The worldwide economic slowdown has been more severe and of a longer duration than anticipated. While we continue to believe our basic businesses are sound, it is prudent to defer certain investments until conditions improve...These steps will upgrade the earnings potential of our asset base, enhance our competitive position, and help us achieve our goals of increasing shareholder value and maintaining financial flexibility."
U.S. UPSTREAM
Despite a decline in results for the 6 months, there was a healthy improvement in second quarter U.S. exploration and production income for companies reporting earnings for that segment.
Phillips cited improvements in its U.S. upstream operations as a key factor in posting a big jump in second quarter profits.
Phillips E&P earnings rose in the second quarter from the prior year because of higher U.S. natural gas prices, a $12 million after tax gain from the sale of two LNG tankers, and foreign currency gains. These were partly offset by lower non-U.S. natural gas sales volumes and prices. Gas and gas liquids earnings more than doubled in the quarter and half vs. year ago periods as a result of higher residue gas and natural gas liquids sales prices, higher residue gas sales volumes, and lower operating costs offset in part by higher raw gas purchase costs.
Coastal Corp.'s earnings more than doubled in the second quarter, maintaining first half income on an even keel, on the strength of increased oil and gas production and prices.
Chevron's U.S. E&P earnings improved on increases of 2.2% in crude prices and 11% in natural gas prices. Its net liquids production in the U.S. was about level year to year as new production nearly offset production sales and normal field declines. U.S. upstream results also benefited from a decline of more than $1/bbl in operating costs stemming from cost reduction programs and its continuing disposal of high cost, marginal producing leases.
NON-U.S. UPSTREAM
For the group of 12 integrated majors Dean Witter tracks, worldwide upstream earnings rose by 22% in the second quarter from the prior year on the strength of higher crude prices, improved natural gas realizations, and lower exploration expense.
The crude oil price increase for the Dean Witter group outside the U.S. to $18.60/bbl from $17.37/bbl-was more than double that in the U.S.-to $16.50/bbl from $15.97/bbl.
For the OGJ group, non-U.S. E&P operations probably would have improved on the prior year periods for those reporting results for that segment had Amoco not taken charges of $258 million associated with expected losses on the disposition of oil and gas properties and workforce reductions in its non U.S. E&P segment. Also listed in second quarter results was a $90 million gain from settlement of natural gas contracts in Sharjah. And the 1991 second quarter included a restructuring charge in Canada. Excluding those items, Amoco's E&P profits outside the U.S. declined as higher exploration expenses and lower crude oil production more than offset higher crude oil prices and currency gains.
Exxon cited increases in oil and gas production for its gain in non-U.S. E&P profits in the first half. Liquids production rose by 72,000 b/d to 1.119 million b/d, reflecting increased production in the North Sea. Gas production climbed 284 MMcfd to 4.348 bcfd, reflecting increased demand in Europe. Non-U.S. average crude oil realizations slipped by $1.65/bbl, however, from first half 1991 levels.
U.S. REFINING/MARKETING
First Boston cited a mixed bag of "impressive positive surprises and befuddling disappointments" in describing second quarter U.S. refining and marketing results for the majors.
"Refiners in the northern Midwest-Ohio Valley regions of the U.S. were hit hard by a refining margin depression during the second quarter," First Boston said. "Excess gasoline supplies from Minnesota to Ohio, north of the Mason-Dixon line, created an environment of inverted prices, where gasoline sold for less than gasoline on the Gulf Coast. Normally gasoline in this region sells at a premium to the Gulf Coast to reflect transportation costs.
"Amoco, USX-Marathon group, and Ashland were particularly hard hit by this situation, as revealed by the average year over-year decline in R&M profitability of 69.5% for these companies."
First Boston contended that R&M profits in this region have improved somewhat but remain depressed.
West Coast refiners, notably ARCO and Chevron, showed better than expected results, First Boston said. The analyst expects this better than average profit level to continue through 1992 and 1993 as tight supply/demand conditions persist.
ARCO cited the strength of its West Coast R&M segment as underpinning its second quarter earnings improvement.
An exception on the West Coast was Unocal, where First Boston contended the company's results from its newly reconfigured refinery-the result of its acquisition of about 50% of Shell's neighboring refinery-fell below expectations. First Boston cited as reasons: the spread between California heavy and Alaskan North Slope feedstock crudes declined in the second quarter, reducing potential gain in profits from Unocal's new, heavier crude slate; and operating costs, particularly cooling and reheating of intermediate streams between the two refinery sites, added about 50cts to $1/bbl to refining costs at the dual refinery.
FINA Inc.'s downstream business reported a significant loss in the second quarter because of depressed refining margins that were only partly offset by a 33% jump in refinery throughput year to year to a record 203,000 b/d.
NON-U.S. REFINING/MARKETING
The OGJ group's refining/marketing results outside the U.S. varied according to regional strengths and weaknesses.
Much of the downturn in 1992 resulted from the relative strength non-U.S. R&M operations enjoyed in first quarter 1991. Dean Witter noted majors' refining/marketing operations outside the U.S. generally still were performing satisfactorily early in 1991 as a result of some carryover of market fallout from the Persian Gulf war.
Although its sales volumes increased 12% outside the U.S., Chevron's product prices did not fully recover crude oil cost increases, resulting in lower sales margins. Increased volumes resulted from product trading activities and higher volumes for Caltex, a key player in the booming Asia-Pacific market.
Texaco's non-U.S. downstream earnings fell sharply in the second quarter and for the first half. The results reflect lower refined product margins in Europe. Results for the half also were affected by refinery downtime in the U.K. in the first quarter and comparatively strong results by Caltex in the first quarter, during which time the Japanese government allowed price increases to pass through accumulated higher costs of crude oil. Texaco's international refined product margins for areas other than Europe improved in the second quarter.
CHEMICAL DOLDRUMS
Chemical earnings for the OGJ group continued in first half 1992 a slide that has persisted for several quarters.
While prices increased for some products, increased capacity and soft demand trimmed prices for others, and margins were crimped by increased feedstock costs.
Texaco blamed lower sales prices for ethylene and its derivatives for dragging down U.S. chemicals earnings. They were partly offset by lower expenses and lower costs for specialty chemicals owing to higher utilization rates at U.S. plants.
Shell posted a big drop in chemical earnings, noting a $25 million gain from an asset sale in 1991. Although its sales volumes increased across most product lines and operating costs fell, operating earnings declined because margins for commodity chemicals fell as a result of industry overcapacity and an increase in scheduled maintenance in noncommodity businesses.
An exception to the trend is FINA, which reported higher chemical profits in the second quarter because of higher styrene and polystyrene sales volumes and polypropylene margins. FINA said it continues to achieve strong sales in all three major product lines and is poised for entry into another key market. FINA plans to acquire Hoechst Celanese Corp.'s 350 million lb/year high density polyethylene business and associated assets at Bayport, Tex., while Hoechst buys FINA's 26% interest in Cape Industries.
"HDPE will be a new product for FINA, and it's a natural fit with our other polymer business lines of polystyrene and polypropylene," said FINA Pres. Ron Haddock. "We're a world scale participant in each of those markets, and with our affiliation with the Petrofina Group, the second largest HDPE producer in Europe, we intend to become a major factor in the HDPE market as well."
IMPROVEMENT AHEAD?
Many signs point to a petroleum industry recovery sputtering to life in the second half of this year (see OGJ's Midyear Forecast/Review, July 27, p. 61) and improving in 1993 and beyond.
Dean Witter estimates postings for West Texas intermediate will average almost $20/bbl this year, about flat with last year's level, based on expectations of a modest 350,000-400,000 b/d increase in world demand to 67.4 million b/d.
"Given moderate economic growth, which should more significantly increase demand, and the modest tilt in Saudi policy toward higher realizations, crude oil prices may be expected to rise $1-2/bbl in 1993," Dean Witter said.
PaineWebber, New York, estimates U.S. natural gas prices will average $1.57/Mcf for 1992 vs. $1.42/Mcf last year. With a contraseasonal surge in storage refill, increasing production curtailments, still-competitive prices, and the psychological lift from new field allowable adjustments in key gas producing states, PaineWebber contends third quarter U.S. natural gas realizations will be up from the improved levels in the second quarter.
County NatWest, Washington, D.C., reports its survey of forecasts for U.S. spot oil and gas prices shows a consensus that both will rise modestly in 1993-97 from its suggested average prices of $21/bbl and $1.40/Mcf in 1992. That would put spot WTI at $21.50/bbl in 1993 and $24.25/bbl in 1997 and spot gas at $1.55/Mcf in 1993 and $1.95/Mcf in 1997.
Merrill Lynch, New York, sees the first glimmer of hope that U.S. refining/marketing overall may improve before long.
Citing American Petroleum Institute's report for the week ended Aug. 7 that U.S. crude and gasoline inventories fell, Merrill Lynch said, "The material decline in motor gasoline inventories east and west of the Rockies gives a basis to hope but not yet believe the worst of the thoroughly unsatisfactory unit margin levels in wholesale refining is abating."
Dean Witter sees U.S. further refining capacity shrinkage in tandem with long term U.S. product demand growth of 1 1.5%/year pushing refinery utilization rates and thus margins higher. For its group of companies, the analyst expects a 37% improvement in U.S. R&M profits in 1993. For non-U.S. downstream profits, Dean Witter expects its group to post a 19% increase in 1993 and further improvement thereafter.
Although Dean Witter sees continuing pressure on chemical margins depressing income by 7% for its group the rest of the year, it expects gradual economic recovery to boost earnings by 38% next year.
Given the prospect of another crisis involving Iraq, mounting disarray in the C.I.S., the fragility of the economic recovery said by some to be under way, and some forecasts of a colder winter, oil and gas markets could see a brief jolt upward in prices this year or early next year.
But as can be seen in the huge retrenchment under way, especially among companies in the OGJ group of integrated companies, U.S. petroleum firms aren't waiting for salvation from volatile oil and gas markets and instead have already bitten the bullet to ensure improved profits in the months and years to come.
As Chevron's Derr put it, "We are having to make difficult and painful decisions. However, I am confident we will emerge a much more competitive and profitable company as a result of the dramatic changes we are making in the way we conduct our businesses."
Copyright 1992 Oil & Gas Journal. All Rights Reserved.
