Earnings plummet for 1998's first 9 months

Robert J. Beck
Associate Managing Editor-Economics

Laura Bell
Statistics Editor

A Look at 9 Months, Third Quarter Financial Results [415,933 bytes]
A Look at 9 Months, Third Quarter Financial Results pg. 2 [394,685 bytes]

Significantly lower oil prices for the first 9 months of 1998 resulted in a sharp decline in profits for a sampling of U.S. and Canadian oil and gas companies Oil & Gas Journal has surveyed.

A drop in natural gas prices for the period, compared with the same period in 1997, also contributed to the decline in earnings.

There was a small increase in world and U.S. demand for petroleum, but that did not offset the damage to profits caused by the decline in prices.

For major integrated firms, earnings in the refining-marketing sector were boosted somewhat by significantly lower feedstock costs, but that was more than offset by the huge decline in earnings in the exploration and production sector. Refining margins started to deteriorate in the third quarter, as product prices fell more than crude oil costs.

Profits and revenues were also off sharply in third quarter 1998, as lower oil and natural gas prices persisted and even worsened as the year progressed.

Results

For the first 9 months of 1998, total profits for the 112 companies in OGJ's survey group were down 42.2%, compared with the same period in 1997. The decline in earnings was due, in part, to a 15.7% drop in total revenues.

For the OGJ survey group, third quarter earnings were down 50.8% from third quarter 1997, and revenues were off 16.2%.

Of the 112 companies sampled, only 13 companies had higher profits than in the first 3 quarters of 1997. A drop in 9 months earnings from the same period a year earlier was posted by 47 of the companies. Another 52 companies posted losses for the first 9 months of 1998. In contrast, only 16 of the companies posted a loss for the first 3 quarters of 1997.

Demand and prices

Worldwide demand for oil and gas in the first 9 months of 1998 was up from a year earlier but much lower than expectations. High expectations for demand led to the development of excess crude oil production capacity. As a result, there was a surplus of available oil, which forced oil prices much lower.

According to the International Energy Agency, estimated worldwide oil demand averaged 73.47 million b/d for the first 3 quarters of 1998, up 0.7% from the same period in 1997. Demand was up about 500,000 b/d from prior-year levels. Earlier IEA projections for the same period had looked for a demand increase of close to 1.2 million b/d. The economic slowdown in Asia and elsewhere in the developing regions crimped growth in oil demand.

U.S. refined products demand for the first 3 quarters of 1998 was up 0.5% year on year at 18.597 million b/d.

U.S. natural gas demand slipped 1.7% to 15.951 tcf for the first 3 quarters of 1998.

Residential, commercial, and industrial demand for gas was down due to milder winter weather and stiff price competition from other fuels.

The worldwide price of export crude oil averaged $12.17/bbl for the first 9 months of 1998, a drop of 34.4% from the first 9 months of 1997. In the U.S., the 9-month average price for West Texas intermediate crude oil was $14.10/bbl, down 29.4% from the same period a year earlier. The average price for light sweet crude on the futures market was $14.92/bbl, down 28.3% from the first 9 months of 1997.

The average spot price for natural gas was $2.04/Mcf compared with $2.31/Mcf in the first 9 months of 1997, down 11.7%. The Henry hub price for natural gas averaged $2.31/Mcf for the first 9 months of 1998, down 9.3% from the same period in 1997.

Company results

Both the large independent and small independent groups of companies posted aggregate losses for the first 3 quarters of 1998.

The group of 56 large independent companies posted a loss of $589.1 million in the first 9 months of last year compared with a profit of $2.541 billion in the same period of 1997. Third quarter revenues for this group of companies were down 0.7% to $26.5 billion. Of the large independent companies, only 2 had increased profits, while 22 posted lower profits, and 32 recorded losses for the first 9 months of 1998.

The group of 28 small independent companies sampled posted a loss of $92.7 million for the first 3 quarters last year, compared with a profit of $28.3 million in the same period of 1997. Of the small independents, 5 companies had higher profits than a year earlier, while 7 posted declines in earnings, and 16 recorded a loss.

The 22 integrated companies in the sample saw third quarter 1998 earnings fall a collective 33% from the same period in 1997. Revenues for this group fell 17.9%. Profits moved up for 3 of the companies, while 16 had lower earnings, and 3 had losses. For some of these companies, increased earnings from refining and marketing operations offset some of the sharp decline related to the drop in crude oil and natural gas prices. But refining profits were eroded in the third quarter, as product prices fell faster than crude oil feedstock costs.

The survey also included six companies that are exclusively refiners and not involved in exploration and production. For these six companies, profits in the first 3 quarters of 1998 were down 10.4%, totaling $458.5 million, compared with $511.5 million in the first 3 quarters of 1997. Revenues fell 3.7%. Three of these refiners had increased profits, two logged lower profits, and one posted a loss. Third quarter profits for the independent refiners group were down significantly, falling 29% from the same period a year earlier. U.S. product demand was up 1.5% from third quarter 1997, but product prices were significantly lower, particularly for motor gasoline.