Growing global demand has nearly tripled oil prices in the past year, fueling a recovery among producers in the last months of 1999 that is expected to propel the oil and gas industry through 2000 and beyond.
Prices
Minimal operating inventories of oil stocks worldwide have put a floor of $19-20/bbl on West Texas Intermediate and Brent crudes for the year, said Ann-Louise Hittle, senior director of world oil operations for the Cambridge Energy Research Associates (CERA).
"Natural gas has moved to a new secular plateau, with North American supplies off 3%. The classical economics of restricted supply have driven the price up," said David Garcia, financial analyst for the Everen Securities energy group in Houston.
During the past 7 months, gas prices have been as high as $3.25/Mcf and as low as $2.10/Mcf. "So it's still quite volatile on any given day," Garcia noted.
But over the long term, the gas market has essentially established a floor of about $2.50/Mcf, he said.
"These are the best industry conditions for at least 15 years. But there is a disconnect between the fundamentals of the industry and stock prices, which have been in the 20% lowest ranges in some cases," Garcia said.
That's because energy companies are facing greater competition in capital markets from the "dot com and e-everything" internet industry, said several industry leaders and analysts at the recent CERAWeek conference in Houston.
As for future oil prices, Garcia said, "Who knows what goes on in the hearts and minds of OPEC?"
Like other industry observers, however, he marvels at the "astonishing degree" of members' compliance with current production quotas, resulting in practically "zero cheating." Continued restraint of production could keep oil prices "in the mid to high-$20 range," he said.
OPEC has "reinvigorated itself" through its success in restraining production.
But technological changes are gradually eroding the group's advantage as a low-cost producer and creating possible substitutes for oil that could reduce long-term demand, said Nader H. Sultan, deputy chairman and CEO of Kuwait Petroleum Corp., at the CERA conference.
As a result, Kuwait and OPEC members are wooing international investors to help develop their petroleum reservoirs, he said.
Integrated energy
"The late-year improvement in natural gas and gas liquids markets, combined with another solid year from our natural gas pipelines, were major factors in the year-over-year turnaround in the energy segment's profit," said Williams Chairman Keith E. Bailey.
Williams reported earnings of $122.3 million for fourth quarter 1999, compared with a loss of $33.7 million during the same period in 1998.
Enron Corp. also reported strong financial and operating results. "This business has reached critical mass in contracting activity and service capabilities, and profitability is expected to accelerate rapidly," said Kenneth L. Lay, chairman and CEO.
The Houston-based firm reported fourth quarter earnings of $259 million, up from $176 million a year ago.
Meanwhile, CMS Energy Corp. reported 1999 earnings of $269 million vs. $272 million for 1998. The firm logged net income of $21 million for the fourth quarter compared with $46 million for the same period in 1998.
Major oil
"As crude prices increased rapidly during the quarter, downstream earnings decreased substantially, reflecting the inability to raise product prices in line with rising crude prices. Downstream margins in all markets were depressed," said Lee R. Raymond, chairman of ExxonMobil Corp.
Still, the company's fourth quarter earnings totaled $2.3 billion after paying expenses of $425 million related to its megamerger. That compares with earnings of $2 billion during the same period of 1998.
"After starting the year at very low levels, crude oil prices jumped in March and continued to climb throughout the year," said Peter I. Bijur, Texaco Inc. chairman and CEO. However, he said, "Excess refining capacity has created chronic refined product oversupply in all areas, limiting the amount of crude costs that can be recovered in the market."
Texaco reported fourth quarter earnings of $318 million, compared with a loss of $213 million a year earlier.
A sampling of fourth quarter earnings among majors follows, with 1999 earnings shown first, followed by 1998. Earnings are in millions of dollars, with losses shown in parentheses: Chevron Corp., 809 vs. (206); Conoco Inc., 324 vs. (263); Phillips Petroleum Co., 250 vs. (210); and USX-Marathon Group, 171 vs. (86).
Independent E&P
"Stronger commodity markets this year, led by a nearly 50% jump in annual average oil prices, contributed significantly to our positive financial results in 1999," said Robert J. Allison Jr., chairman and CEO of Anadarko Petroleum Corp.
The company reported earnings of $28 million in the fourth quarter of 1999, compared with a loss of $56.7 million a year earlier.
Allison expects continued improvements in 2000 and beyond. "We've spent the last several years building a foundation that should create double-digit production growth and long-term value for our shareholders. [We're] now beginning to see some real, immediate returns from these projects," said Allison.
James G. Floyd, president and CEO of Houston Exploration Co., said, "We saw the greatest production growth from our offshore operations in the Gulf of Mexico, where we have achieved excellent drilling results. And we still have a solid 3-plus-year backlog of drilling opportunities."
Houston Exploration boosted its average gulf production to 76 MMcfd of gas equivalent in 1999 from 56 MMcfde in 1998. Its total average production increased 13% to 71.2 bcfe from 62.8 bcfe the previous year.
The company reported earnings of $10.2 million in the latest quarter, compared with a loss of $84.7 million a year ago.
Other fourth quarter comparisons between 1999 and 1998, in millions of dollars, include: Kerr-McGee Corp., 109.7 vs. (324.7); Apache Corp., 92.5 vs. (160.6); Devon Energy Corp., 47.9 vs. (3.5); Santa Fe Snyder Corp., 18.8 vs. (81); EOG Resources Inc., 30.5 vs. 10; Noble Affiliates Inc., 21.5 vs. (164.7); Nuevo Energy Co., 18.4 vs. (68.8); Newfield Exploration Co., 16.6 vs. (69); Valero Energy Corp., 16.5 vs. (85.7); and Triton Energy Ltd., 5.8 vs. (130.3).
Upstream service-supply
Higher commodity prices haven't yet stimulated a flurry of new drilling.
"That's because operators are saying not only no, but hell no, to higher costs," said Garcia.
However, Dick Cheney, chief executive of Halliburton, said, "My optimism is bolstered by strong worldwide economic conditions, increasing worldwide demand for crude oil...and strong current crude oil and natural gas prices that are providing excellent cash flows for Halliburton's customers."
He expects customers to increase worldwide spending by slightly more than 10% this year.
Halliburton's fourth quarter earnings totaled $235 million, up from $66 million the previous year.
Quarter-to-quarter comparisons for other service companies were, in millions of dollars: Noble Drilling Corp., 16.5 vs. 32.8; Santa Fe International Corp., 16.3 vs. 82.7; Cooper Cameron Corp., 7.2 vs. 26.7; Oceaneering International Inc., 4 vs. 6.4; National Oilwell Inc., 2.5 vs. 2.7; Grey Wolf Inc., (8.1) vs. (79.6); Weatherford International Inc., (10.3) vs. (24.2); and Parker Drilling Co., (13.4) vs. (11.3).
Refining
US independent refiners enjoyed improved results for the period vs. fourth quarter 1998, although the quarter could not be considered a raging success.
Ultramar Diamond Shamrock log- ged net income of $24.6 million in fourth quarter 1999 vs. a loss of $67.7 million in fourth quarter 1998. Pres. and CEO Jean Gaulin said, "We now have the financial flexibility to seek accretive growth by acquiring quality assets that fit strategically.''
Gaulin told investment analysts earlier this month that UDS is seeking to acquire such quality assets in 2000. The firm is vying for ExxonMobil's 128,000 b/d Benicia, Calif., refinery and associated retail assets, which the megamajor must sell to satisfy the US Federal Trade Commission's merger approval conditions.
Meanwhile, Tosco Corp. saw earnings before special items rise to $53.4 million from $47.9 million in fourth quarter 1998. An inventory write-up took net earnings for the quarter to $215.3 million vs. a loss of $115.9 million for the same period the previous year.
Petrochemical makers
"We were able to considerably improve earnings again this quarter despite a $480 million surge in hydrocarbon and energy costs, which outpaced our product price increases," said Bill Stavropoulos, president and CEO of Dow Chemical Co. Dow reported earnings of $267 million, up from $144 million a year ago.
Other chemical companies' quarterly earnings, in millions of dollars, for 1999 vs. 1998, are: Nova Chemicals, 135 vs. 53; Union Carbide Corp., 94 vs. 77; and Mississippi Chemical Corp., (10) vs. (0.49).