Robert J. Beck
Economics Editor
Valerie Sanders
Statistics Editor
A weak downstream sector, due largely to a sluggish world economy, took a hefty slice out of 1992 profits for Oil & Gas Journal's group of 22 major U.S. oil and gas companies.
More restructuring, staff cuts, and adoption of new accounting rules combined to drop group net profits 47.3% to $8.3 billion. By contrast, total revenues were down a scant 0.3% at $457.7 billion.
All major financial indicators fell in 1992. Group assets were off 2.5% at $389 billion.
Puny growth in product demand because of lackluster economic recovery in the U.S. and slowing of economies in several major European industrial countries depressed product prices and trimmed refining margins. That was offset in part by increases in exploration and production profits due to higher natural gas prices in the U.S.
Several companies booked nonoperating charges because of restructuring. Companies also continued to redefine their business focus, shedding some assets.
Adoption of a new accounting principle that moves forward some charges stemming from future retirement benefits caused a major reduction in profits for many companies.
Even though profits plunged, the group continued to invest in industry activities at a level consistent with the last several years. Capital and exploration spending fell but not nearly as much as profits. Outlays were down 10.6% at $41.4 billion.
This may be a good indication that the slump in earnings in 1992 is viewed as a short term occurrence because of accounting charges and restructuring.
Of greater long term significance is a decline in crude oil and natural gas reserves of the group and a big drop in drilling. That may signal a major policy shift for some companies to focus on the downstream sector at the expense of exploration and production.
Group liquids reserves fell 3% to 31.4 billion bbl. Natural gas reserves slipped 3.5% to 139.6 tcf.
Net wells drilled slid 31.6% to 4,494 from 6,559 the year before. In sharp contrast with the industry's go-go days, the group drilled 12,565 wells in 1981.
PRICES
The OGJ group's average crude oil prices were down from 1991.
The average annual U.S. wellhead price of crude oil fell to $15.98/bbl in 1992, down 3.4% from $16.54/bbl in 1991. The price averaged $20.03/bbl in 1990, buoyed by a market scare from the Persian Gulf conflict.
There was little change in international crude oil prices in 1992. In contrast to U.S. prices, worldwide export crude oil prices increased a scant 0.7% to $17.95/bbl from $17.82/bbl in 1991.
The average annual U.S. wellhead price for natural gas advanced 12.8% in 1992 to $1.85/Mcf, the highest since 1986's $1.94/Mcf. During 1987-91 the annual wellhead price of natural gas remained in a narrow range averaging $1.68/Mcf, with a low of $1.64/Mcf in 1991 and a high of $1.71/Mcf in 1990.
Outside the U.S., natural gas prices fell in 1992, and exploration and production earnings tended to be lower than the year before.
Mobil Corp. reported average natural gas sales price in Europe at $3.16/Mcf for 1992, down from $3.45/Mcf the year before. The price in Canada dropped to $1.05/Mcf from $1.15/Mcf in 1991. In other regions, mainly Indonesia and Nigeria, the price fell to $2.19/Mcf from $2.30/Mcf.
In refining, lower product prices more than offset the benefit from lower feedstock costs. So earnings were lower.
This is best illustrated by U.S. price data compiled by the Energy Information Administration (EIA). The average U.S. refiner acquisition cost of crude oil fell 3.3% in 1992 to $18.43/bbl.
However, the average U.S. refiner price for finished motor gasoline fell 3.1% to 67.7cts/gal. Weak winter demand caused a 6.9% drop in the average refiner price of No. 2 fuel oil, which fell 6.9% to 57.9cts/gal. And the average price for kerosine jet fuel for commercial aviation dropped 7.1% to 60.4cts/gal, while the refiner price for residual fuel oil dipped 3.3% to 30.7cts/gal.
Several companies reported their average crude oil sales prices.
Chevron Corp. reported revenues from U.S. crude oil production averaged $16.50/bbl in 1992, down from $17.10/bbl in 1991. Non-U.S. revenues from production averaged $18.53/bbl, down from $19.01/bbl the year before. Natural gas revenues averaged $1.70/Mcf in the U.S., up from $1.53/Mcf in 1991. For non-U.S. operations, natural gas sales averaged $2.07/Mcf, down from $2.28/Mcf.
Amoco Corp. reported an average sale price for U.S. crude oil of $17.79/bbl in 1992, down from $18.31/bbl in 1991. Average price for natural gas in 1992 moved up to $1.65/Mcf from $1.52/Mcf the year earlier. The price for NGL dropped to $11.43/bbl from $11.69/bbl in 1991.
Shell Oil Co. reported a similar pattern for prices. Its average U.S. crude oil price fell 36cts/bbl to $15.78/bbl in 1992. The price for non-U.S. production fell 21cts/bbl to $16.14/bbl last year. And the average for total production was $16.14/bbl in 1992, down from $16.47/bbl in 1991. U.S. NGL prices slipped to $13.03/bbl from $14.84/bbl in 1991.
Texaco Inc.'s revenue from worldwide liquids production averaged $15.61/bbl last year, compared with $15.93/bbl in 1991. Revenue from worldwide gas production inched up to $1.68/Mcf from $1.53/Mcf in 1991.
PROFITS PERSPECTIVE
OGJ group profits in 1992 were the lowest since 1972.
Combined net income was as high as $30.2 billion in 1980. Profits fell to $11 billion in 1987, then bounced back to recent highs of $21.5 billion in 1988 and 1990.
Of the 22 companies in the OGJ group, 17 had poorer results in 1992 than the year before. Only five companies had higher profits. Seven of the companies had lower earnings than the year before, while 10 posted a loss. Three of those also booked a loss in 1991.
In revenues, the group was evenly split with 11 showing an increase and 11 a decrease.
The biggest increase in revenues was for BP America Inc. with an 8% gain. The biggest decline was recorded by Occidental Petroleum Corp., where revenues slipped 13.7%.
Exxon Corp. accounted for 25.6% of group revenues with $117.1 billion in 1992. That was up 0.5% from 1991.
Exxon posted the group's biggest profit in 1992-$4.77 billion, down 14.8% from 1991. The decline was due to lower refining and marketing earnings, which fell from $2.555 billion in 1991 to $1.574 billion last year.
Mobil's earnings were down 55.1% in 1992, plunging to $862 million. Its U.S. refining and marketing operations posted a loss, while non-U.S. refining was also down substantially. The loss of $145 million posted for U.S. refining and marketing included $50 million for restructuring costs and a $50 million environmental provision.
Mobil earnings were reduced by $446 million by adoption of new accounting principles.
RESTRUCTURING
Restructuring, coupled with adoption of new accounting principles, caused some drastic changes in 1991 and 1992 earnings. There were large swings in earnings in 1992 with several companies moving from a substantial profit in 1991 to a significant loss in 1992.
Oxy, for example, posted a loss of $591 million in 1992 compared with a profit of $460 million the year before. Much of the swing was due to a $622 million loss from discontinued operations. The vast majority was because of Oxy's decision to get out of the coal business.
Amoco moved from a profit of $1.5 billion in 1991 to a loss of $74 million in 1992. Excluding accounting changes, earnings in 1993 were $850 million compared with $1.173 billion in 1991. The upshot of accounting changes was a reduction in earnings of $924 million in 1992 and an increase of $311 million in 1991.
Shell's earnings also showed a sharp swing from a profit of $20 million in 1991 to a loss of $190 million last year. In its case the result of accounting changes was a reduction in earnings of $635 million in 1992. Net income from operations prior to the accounting change was $450 million in 1992.
Ashland Oil Inc. was another extreme example in which earnings swung from a profit of $145 million in 1991 to a loss of $356 million in 1992. The change in accounting reduced earnings by $267 million in 1992.
Texaco's earnings fell 45% in 1992 to $712 million. Accounting changes lowered earnings by $300 million in 1992.
In contrast to some of those results, Chevron posted a 21.3% increase in earnings in 1992 at $1.569 billion in spite of a $641 million charge due to the adoption of new accounting principles. Income before the accounting change was $2.21 billion, up 70.9% from 1991.
Also in contrast to some of the other companies, Chevron booked a substantial increase in earnings from U.S. refining and marketing. The gain came from the absence of operating problems that plagued the company in 1991, improved West Coast margins as price wars eased, increased efficiency, and lower operating costs.
ARCO and Unocal Corp. also reported increased earnings in 1992. ARCO's net income advanced 13% to $801 million, while Unocal's rocketed 201.4% to $220 million.
FINANCIAL INDICATORS
The group's barely perceptible 2% return on total assets in 1992, down from 3.5% the year before, is a recent low-in fact, the lowest in 15 years.
Return on assets was as high as 9.3% in 1980. The rate then slipped to 2.9% in 1987 but jumped to 5.7% in 1988. It was 4.3% in 1989 and 4.6% in 1990.
Return on stockholders equity also fell to a recent low-only 5.3% in 1992. That's down from 9.5% in 1991 and 12.2% in 1990. Return on stockholders equity was 21% in 1980 but fell to 5.6% in 1987 as industry profits plummeted.
Profits as a percent of total revenues also posted a recent low at 1.7%, down from 3.1% in 1991 and 3.8% in 1990. The recent high was 6.1% in 1979. It fell to 2.4% in 1987.
Funds from operations fell 6.2% in 1992 to $35.8 billion, and working capital remained negative at $2 billion compared with a negative $4.8 billion in 1991.
SPENDING
Capital and exploration spending for the group fell in 1992 but not as much as profits. As a result, the ratio of spending to net income hit a recent high.
Total, spending last year was $41.6 billion, down 10.6% from $46.3 billion the year earlier. Group spending shot to a record $66.9 billion in 1981. Outlays then plummeted to $30.8 billion in 1987 in the wake of a crude oil price collapse. During 1988-92, capital spending amounted to more than $40 billion/year, averaging $42.2 billion.
Last year 17 of the companies reduced spending, while only five posted increases. The 10 largest companies, ranked by assets, all cut spending in 1992.
Exxon remained the biggest spender with outlays of $8.758 billion, down a bare 0.7% from 1991. Exxon's spending in the U.S. fell to 29.2% of its total from 34.6% in 1991. One of the biggest changes was in spending on U.S. exploration and production, which fell 20.9% in 1992.
Of the 10 largest companies, ARCO listed the biggest decline in capital spending, cutting outlays 29.7% in 1992 to $2.278 billion. The biggest slide was in spending on oil and gas resources, which fell 34% to $1.249 billion.
Amoco also cut spending sharply-23.8% to $2.996 billion. The largest cut was in exploration and production, which slumped 30% to $1.754 billion. About 80% of exploration dollars went outside the U.S.
By far the largest increase was posted by Pennzoil Co., which increased spending five fold from $230 million in 1991 to $1.172 billion last year. Of the total, $1.009 billion was for oil and gas assets acquired from Chevron. This major acquisition tended to inflate total group outlays. Without the Pennzoil purchase, group capital and exploration spending was $40.42 billion, down 12.8% from 1991.
Capital and exploration spending as a share of net income shot up to 500.2%. The highest previous share was 307.3% in 1986.
In past years companies have cut outlays when it appeared profits were falling. However, last year, because a big portion of the decline in profits was due to accounting rules rather than falling operating earnings, companies continued to invest despite lower profits.
REFINING, MARKETING
Profits from refining and marketing were down substantially for a number of the OGJ group. There were some exceptions-particularly companies with significant motor gasoline sales on the U.S. West Coast, where margins and earnings improved in 1992.
Exxon's earnings from worldwide refining and marketing fell sharply in 1992, dropping 38.4% to $1.574 billion despite a 1.1% increase in refinery throughput and a 0.8% increase in product sales. The drop was caused by sluggish demand growth and industry surplus capacity, which weakened margins.
Mobil's R&M earnings plunged 80.3% in 1992 to $184 million. U.S. operations posted a loss of $145 million following a $116 million profit in 1991. The 1992 bottom line included a $60 million charge for future environmental cleanup costs and a $50 million charge to restructuring. Refinery runs, refinery yields, and product sales advanced in 1992. But the average price received for U.S. petroleum products slipped to 65.6cts/gal in 1992 from 68.6cts/gal the year before.
Mobil's non-U.S. refining and marketing earnings fell 59.8% to $329 million in 1991. That included a $37 million charge for restructuring. Weak European demand contributed to the lower non-U.S. earnings.
Amoco's U.S. refined product sales moved up 3% to 1.088 million b/d, while refinery utilization rate increased to 95.3% from 90.9% in 1991. But earnings from refining and marketing fell 28.3% to $462 million in 1992. This was mainly due to declining margins. Amoco's average U.S. sale price for refined petroleum products slipped 4cts/gal to 60.9cts. But the average cost of crude input fell only 0.9cts/gal to 44.6cts.
By contrast, Chevron's results from U.S. refining and marketing showed a marked improvement in 1992. Net income moved up to $297 million in 1992 following a loss of $153 million in 1991. This was offset in part by a $387 million drop in non-U.S. to $1.11 million for last year.
The improvement in the U.S. flowed from several things. The easing of the gasoline price wars in the West Coast improved refined product sales margins. Sales of refined products moved up 2%. Cost cutting programs and improved operating efficiencies also contributed.
Chevron's average refined product sales price slipped 1.7% to $25.96/bbl.
Internationally weak global economic conditions held down product prices and resulted in shrinking sales margins in all the areas of operations. This dragged down earnings even though refined product sales outside of the U.S. advanced 4%.
ARCO, Unocal, and Phillips Petroleum Co. also posted improvements in earnings from worldwide refining and marketing operations.
At Phillips, net income from petroleum products sales increased 15.9% to $102 million as a result of lower feedstock costs and operating expenses.
ARCO's refining and marketing profit increased 30.1% to $346 million in 1992, the result of higher margins and sales volumes on the U.S. West Coast. West Coast petroleum product sales increased to 479,300 b/d from 466,400 b/d in 1991.
Unocal's earnings from refining, marketing, and transportation rose to $102 million in 1992 from $71 million a year earlier, largely the result of significantly improved margins on the U.S. West Coast.
OUTLOOK
Expectations are for an improvement in industry performance in 1993. World crude oil prices have held relatively steady during the first 4 months of this year. And U.S. natural gas prices have been much higher than a year earlier.
The price of world export crude oil has averaged $17.03/bbl for the first 4 months, up 2.9% from $16.55/bbl for the same period last year.
The U.S. natural gas price has been consistently well above year ago levels. The price on the futures market the week of May 7 was $2.23/MMBTU, up 50.1% from a year earlier.
In addition, forecasters expect increased world demand for petroleum products and natural gas in 1993.
Product demand is expected to continue to move up in 1993. The International Energy Agency predicts world demand for petroleum products will increase 400,000 b/d to 67.5 million b/d. Excluding the C.I.S., where demand is expected to drop 900,000 b/d, demand will be up 1.3 million b/d, an increase of 2.2%. For the industrial countries in the Organisation for Economic Cooperation and Development demand is expected to increase 400,000 b/d to 39.1 million b/d.
IEA also predicts that crude oil and NGL production outside of the Organization of Petroleum Exporting Countries, C.I.S., and China will rise 200,000 b/d to 27.8 million b/d in 1993. Therefore, most of the increase in demand will be met by a boost in OPEC output.
Copyright 1993 Oil & Gas Journal. All Rights Reserved.