COMPANY NEWS: Robust oil, gas prices fuel firms' 4Q earnings

Feb. 5, 2001
The initial trickle of US and Canadian oil and gas companies' fourth quarter and yearend 2000 earnings shows an industry well on its way to bolstering its financial strength.

The initial trickle of US and Canadian oil and gas companies' fourth quarter and yearend 2000 earnings shows an industry well on its way to bolstering its financial strength.

Major integrated firms continued to realize gains through recent consolidations and joint-venture partnerships. Independent exploration and production companies, in particular, fared well during the latest quarter in a market that is still dominated by high oil and natural gas prices. And refiners and marketers, while faced with high acquisition costs for both natural gas and oil, enjoyed a strong supply-demand balance for refined products and fuels.

Major oils

ExxonMobil Corp. reported fourth quarter 2000 earnings of $5.12 billion, compared with $2.41 billion for the same quarter in 1999. For the year, ExxonMobil earned a record $16.9 billion on $232.7 billion in revenues, vs. $8.4 billion on revenues of $185.5 billion in 1999.

"The combined assets of the new company continue to perform well, and financial results for the upstream and downstream businesses significantly exceeded the same period last year," said Lee R. Raymond, ExxonMobil chairman.

"As was the case last quarter, the majority of the improvement came from outside the US and from our upstream business due to higher crude oil and natural gas prices," he said.

"ExxonMobil's adjusted earningsellipse were an all-time record for any US company's quarterly earnings," noted UBS Warburg LLC. "The key drivers behind the better-than-expected results were higher-than-expected international [refining and marketing] earnings reflecting robust refining margins, R&M inventory gains, and also a materially lower sequential decline in ExxonMobil's chemicals earnings," the analyst said.

Conoco Inc.'s fourth quarter net income totaled $550 million, vs. the $324 million earned in fourth quarter of 1999. For the entire year, the company earned $1.9 billion on $39.3 billion in revenues compared with $744 million on $27.3 billion in sales booked in 1999.

Conoco Chairman and CEO Archie W. Dunham, stated, "The quarter's strong earnings were driven by higher natural gas and crude oil prices, robust refining and natural gas liquids margins, and higher production volumes."

This was a record quarter for Conoco, Dunham said, which was punctuated by several milestones, including the completion of the company's $1.1 billion Petrozuata heavy oil upgrading facility in Venezuela; modifications to its Lake Charles, La., refinery; and the early completion of the subsea pipeline system for the West Natuna transportation system, which will transport Indonesian natural gas to Singapore.

Phillips Petroleum Co. reported fourth quarter net income of $744 million, compared with $250 million in the same quarter in 1999. Phillips netted $1.9 billion on revenues of $21.2 billion in 2000, vs. $609 million on $13.9 billion in revenues the year prior.

Phillips CEO Jim Mulva said, "Com- pared with a year ago, our earnings were up significantly as a result of higher prices and increased production, primarily due to our Alaskan acquisition and higher output from Norway and Nigeria.

"We also benefited from significantly improved refining, marketing, and transportation earnings, which reflected im- proved marginsellipse," he said.

"We expect the difficult market conditions to continue for the chemicals industry," Mulva predicted. "We anticipate that margins will remain tight as feedstock and fuel costs stay high and as additional capacity is added by the industry," he said. Phillips has temporarily idled two ethylene units operated by its chemicals joint venture, Chevron Phillips Chemical Co. LLC., due to depressed margins, while other units are currently operating at below capacity.

Chevron Corp. reported net earnings of $1.49 billion for the most recent quarter, compared with net income of $809 million for the same quarter in 1999. In 2000, Chevron reported net gains of $5.19 billion on revenues of $5.4 billion, vs. $2.07 billion on $2.3 billion in sales the year before.

Commenting on Chevron's results, UBS Warburg said, "The main area of upside surprise was within the US [refining and marketing] operations, which benefited from continuing strength in refining margins and recorded its second highest quarterly results since 1989." Earnings from exploration and production also exhibited strong year-over-year gains, the analyst observed.

"I amellipsepleased with the performance of our exploration and production businesses around the world," said Chevron Chairman and CEO Dave O'Reilly. "Although this sector benefited from higher prices for both crude oil and natural gas, earnings were further bolstered by higher production," he added.

Texaco Inc. reported fourth quarter 2000 net income of $545 million, vs. earnings of $318 million during the same quarter in 1999. Texaco reported yearend 2000 earnings of $2.5 billion on $51.1 billion in revenues, compared with 1999 net income of $1.2 billion on sales of $35.7 billion.

"Strong worldwide crude oil and US natural gas prices contributed greatly to our upstream results," said Texaco chairman and CEO Peter I. Bijur.

Operationally, Texaco-which expects to complete its merger with Chevron by midyear-met all of its production targets, Bijur said. Downstream operations, meanwhile, continued to be affected "adversely" by higher and more volatile oil prices.

Other fourth-quarter comparisons between 2000 and 1999 for selected majors, in millions of dollars, include: USX-Marathon Group, 386 vs. 148; and Occidental Petroleum Corp., 349 vs. 192.

Independent E&P

Independent E&P firms were among those with the most to gain from elevated oil and gas prices-as was illustrated by their earnings reports.

Kerr-McGee Corp., Oklahoma City, reported net fourth quarter earnings of $282.3 million, vs. $109.7 million earned in the comparable quarter a year ago. For all of 2000, the company earned $842 million on revenues of $4.12 billion, vs. $142.1 million on $2.74 billion in revenues in 1999.

Kerr-McGee Chairman and CEO Luke R. Corbett said that both of the company's core businesses-oil and gas exploration and production and titanium dioxide pigment production and marketing-reached "record income and operating achievements."

Kerr-McGee benefited from average price increases of 60% for oil and 63% for natural gas, the company said.

Burlington Resources Inc. (BR), Houston, reported fourth quarter net earnings of $304 million, vs. a net loss of $84 million during fourth quarter 1999. BR's yearend earnings were $675 million on $3.1 billion in revenues. This compares with 1999, when the company earned $1 million for the year on $2.3 billion in sales.

Unocal Corp., El Segundo, Calif., reported earnings of $173 million for the most recent quarter, compared with $97 million in the same period a year ago. For the year, Unocal recorded net earnings of $760 million on sales of $9.34 billion, vs. earnings of $137 million on revenues of $6.06 billion in 1999.

Charles R. Williamson, Unocal CEO, attributed the gains directly to higher commodity prices and the company's increased production. "We had an 18% increase in our Lower 48 natural gas production. This continued a trend that started in the first quarter last year and allowed us to take advantage of higher market prices in the Lower 48," he said.

Unocal's Muni field-on Ship Shoal Block 295 off Texas in the Gulf of Mexico-came on production in the fourth quarter last year (OGJ Online, Oct. 10, 2000) and was the main contributor to the company's increase in Lower 48 natural gas production, the company said.

"Unocal has set the stage for its most active year ever with the exploration drill bit in 2001," Salomon Smith Barney noted. "The Dendara prospect, [of which Unocal is operator and holds 75% interest], is currently drilling in the deepwater Gulf of Mexico, a host of oil prospects are being culled from the inventory in Offshore Indonesia, and the first exploratory prospect should spud [off] Gabon at the beginning of the second quarter, while two rigs have been contracted to drill prospects simultaneously [off] Brazil."

Ocean Energy Inc. reported fourth quarter 2000 net income of $66.9 million; Ocean earned $6.3 million during the same quarter in 1999. The quarter rounds out a year during which the Houston-based independent says it experienced the "best financial performance ever."

During 2000, Ocean earned $213.2 million on revenues of $1.1 billion, compared with a year-ago net loss of $43.8 million on revenues of $757.6 million.

"The year 2000 was an outstanding one, both operationally and financially, with record reserve replacement, lower finding and development costs for the second year in a row, and continued strengthening of our balance sheet," said James T. Hackett, Ocean's chairman, president, and CEO.

Hackett expects continued success for the company in 2001. Plans for this year include Ocean's involvement in the drilling of at least six deepwater exploratory prospects in the Gulf of Mexico and in four to six wells off West Africa. Also, development and appraisal work of four deepwater Gulf of Mexico fields-Nansen, Boomvang, Magnolia, and Zia-will continue this year.

Pogo Producing Co., Houston, reported net income of $35.9 million in the latest quarter, vs. earnings of $8.1 million for the same quarter a year ago. For the year, the company earned $87.3 million on revenues of $498 million, vs. $22.1 million earned on $275.1 million in revenues in 1999.

Paul G. Van Wagenen, chairman and CEO of Pogo, said, "Replacing the reserves Pogo produces each year is a primary objective at the company. We are committed to grow our hydrocarbon asset base andellipsehave met that objective each of the last 9 years."

Pogo increased its average liquids hydrocarbon production to 27,929 b/d in 2000 from 18,113 b/d in 1999. Natural gas production averaged 164.6 MMcfd last year vs. 141.6 MMcfd in 1999.

Pogo plans to focus its exploration and delineation drilling program on prospects in the Gulf of Mexico and in the Gulf of Thailand in 2001 and beyond.

"Accelerated Benchamas field production in the Gulf of Thailand is expected over the next 2 years, and domestic production will also rise markedly in 2001 and 2002," Van Wagenen said.

Not all independents saw positive earnings in the fourth quarter, however. McMoRan Exploration Co., New Orleans, reported a net loss of $2.6 million for the quarter. This included income of $0.7 million from discontinued operations, the company said, and compares with a loss of $0.8 million for the same quarter in 1999.For yearend 2000, McMoRan reported a net loss of $131.5 million on revenues of $58.5 million, vs. earnings of $0.1 million on $54.3 million in revenues the year prior.

The massive loss for McMoRan for the year was due to a $96.6 million loss associated with discontinued sulfur operations and a $34.9 million charge to "eliminate a deferred tax asset as a result of changes in estimated future taxable income relating to discontinued sulfur operations."

A sampling of fourth quarter earnings among other US independents follows, with 2000 earnings listed first, followed by 1999 income, in million of dollars. Losses are shown in parentheses: Devon Energy Corp., Oklahoma City, 306.9 vs. 74.9; Mitchell Energy & Development Corp., The Woodlands, Tex., 95.3 vs. 34.6; Pioneer Natural Resources Co., Dallas, 84 vs. 8; Noble Affiliates Inc., Houston, 71 vs. 22; Cabot Oil & Gas Corp., Houston, 18.7 vs. 3; and Triton Energy Ltd., Dallas, (9.5) vs. 15.7.

Refining

It was a mixed bag for the downstream sector in fourth quarter 2000.

"Tight supplies, continued strong demand for refined products, and the decline in crude oil prices during the [fourth] quarter all contributed to exceptional refining margins and the best retail gasoline margins of the year," noted John G. Drosdick, chairman and CEO of Sunoco Inc., Philadelphia.

During the fourth quarter of 2000, Sunoco earned $154 million, compared with $38 million in earnings for the same quarter in 1999. In 2000, the company earned $422 million on $14.3 billion in revenues, vs. $97 million in earnings on $10.1 billion in revenuesin 1999.

"Except for depressed chemicals margins, in part due to exceptionally high current natural gas prices, our product base is well-positioned for continuing strong financial results," Drosdick said.

Tosco Corp., Stamford, Conn., reported fourth quarter net income of $164 million, vs. $53.4 million earned in the comparable quarter in 1999. For 2000, Tosco earned net income of $517.5 million on revenues of $24.5 billion, compared with earnings of $296.9 million on $14.4 billion in revenues in 1999.

"Although 2000 was an exceptional margin year for refining," said Thomas D. O'Malley, Tosco's chairman and CEO, "we are poised to grow earnings in 2001 with a full year of our newly acquired assets." In 2000, Tosco's asset purchases included the 295,000 b/d Wood River refinery in Roxana, Ill., from Equilon Enterprises LLC; the 250,000 b/d Alliance refinery, south of New Orleans, from BP; and 1,740 retail outlets from ExxonMobil.

"Heading into 2001, industry fundamentals remain outstanding," said Valero Energy Corp. Chairman and CEO Bill Greehey. "Gasoline and distillate margins are already at record levels for this time of year. In the US, gasoline and distillate inventories are near the very low levels we began 2000 with, and that's with refiners having run at near full capacity throughout last year," he noted.

The San Antonio-based refiner saw earnings rise in fourth quarter 2000 to $93.3 million from $16.5 million in the same quarter in 1999. For the full year 2000, Valero earned $339.1 million-a record for the company-on revenues of $14.7 billion. This compares with 1999 income of $14.3 million on revenues of $8 billion.

A large contribution to Valero's earnings was made by the company's Benicia, Calif., refinery, which it acquired from ExxonMobil in the second quarter 2000.

Service-supply

Many service and supply companies carried notable year-over-year gains during fourth quarter 2000, although for some it was a matter of "too little, too late" to revive slouching income for the year.

Contract drilling company Santa Fe International Corp., Dallas, posted fourth quarter gains of $33.9 million, compared with same quarter net income of $16.3 million a year ago. During 2000, the company booked $107.2 million in earnings on $584 million in revenues, vs. a net income of $149.8 million on $614.2 million in revenues in 1999.

"Our land rig utilization declined slightly in 2000, as the Middle East and Venezuela land markets remained relatively flat; however, we are seeing an upturn in activity in Venezuela, which we expect to continue during 2001," said Sted Garber, Santa Fe president and CEO.

"While global E&P spending by the oil and gas industry increased in 2000 over 1999, most of the increase was in the Gulf of Mexico," Garber stated. "We anticipate that international spending will show a marked increase in 2001, which will accelerate the upturn in our markets.

Transocean Sedco Forex Inc., Houston, reported a net loss for fourth quarter 2000 of $9.2 million, vs. a net loss of $12.4 million in the fourth quarter a year ago. At yearend 2000, the company earned $108.5 million on revenues of $1.2 billion, vs. net earnings of $58.1 million on revenues of $648.2 million in 1999.

"Operating results for the fourth quarter of 2000 were impaired by several events, including planned and unplanned downtime affecting our active fleet, seasonal weakness in the UK sector of the North Sea, a sluggish floater market in Asia, and continued delays associated with the activation of newbuild rigs," explained J. Michael Talbert, Transocean president and CEO.

Other fourth quarter, year-to-year comparisons for service and supply companies, in millions of dollars, were: Helmerich & Payne Inc., Tulsa, $33.8 vs. 20.5; Halliburton Co., Dallas, 5 vs. 235; Horizon Offshore Inc., Houston, 1.4 vs. (2.8); and Cooper Cameron Corp., Houston, (9.6) vs. 7.2.

Integrated energy firms

Enron Corp., Houston, reported a $326 million charge to fourth quarter 2000 earnings from losses on its investment in Azurix Corp.-the fledgling water company Enron spun off a few years earlier.

Fourth quarter earnings fell to $60 million from $259 million in the 1999 comparable quarter. For the year, Enron reported income of $979 million, vs. $893 million earned in 1999. Enron's revenue more than doubled to $94.9 billion from $36.2 billion.

The jump in the company's 2000 earnings was attributed to increases in performance for the wholesale services business. Officials also said the company will not experience a negative financial impact from the California energy crisis.

"We continue to see phenomenal opportunities in wholesale business in all commodity segments across the world," said Jeffrey Skilling, CEO of Enron, in a conference call with financial analysts.

Duke Energy Corp., Charlotte, NC, reported fourth quarter net income rose 18%, beating expectations on higher natural gas prices and nonregulated electricity prices. The company's net income exceeded expectations despite a $110 million charge related to California power sales taken during the fourth quarter. The company also said that for all of 2001, 90% of its generation had already been sold to other suppliers with California delivery points.

Duke said its earnings also exclude the sale of two LNG vessels and the sale of its stake in a wireless telecommunications company. Duke said fourth quarter earnings were $352 million, an increase from the $299 million earned in fourth quarter 1999.

Meanwhile, CMS Energy Corp., Dearborn, Mich., reported a net loss for fourth quarter 2000 of $171 million, vs. net earnings of $21 million in fourth quarter a year ago. CMS said that the reported loss included a previously announced $268 million post-tax write down of its Australian power investment, Loy Yang.

Quarter-to-quarter comparisons for other integrated energy firms were, in millions of dollars: Coastal Corp., Houston, 208.3 vs. 169; and El Paso Energy Corp., Houston, 127 vs. (178).

Canadian firms

Fourth quarter earnings for Enbridge Inc., Calgary, climbed to $70.2 million (Can.) from $3.2 million for the same period in 1999. During 2000, Enbridge earned $392 million, vs. $288 million in 1999.

Enbridge CEO Patrick Daniel said the company achieved double-digit growth in earnings per share despite warmer-than-normal weather for the third consecutive year overall.

Earnings included a gain of $88.1 million from income tax cuts in Ontario-where the company operates Consumers Gas-as well as at the federal level. The company reported a one-time charge of $8.7 million relating to Enbridge's merchant pipeline capacity on the Alliance and Vector natural gas pipelines.

The company said it created a new division holding its 21.4% interest in the Alliance Pipeline from western Canada to Chicago and a 45% interest in the Vector Pipeline that transports gas through the Midwest and into southern Ontario from Chicago. Both lines started operations in December.

Calgary-based Shell Canada Ltd., meanwhile, earned $858 million in 2000, compared with $641 million in 1999. The 1999 results included a $230 million gain from sale of Shell's Plains business, a $32 million impairment provision for the Peace River, Alta., in situ oil sands operation, and a $54 million gain from fees paid by Shell's Athabasca Oil Sands project partners. Earnings in 1999, excluding these one-time items, totaled $389 million.

The company said spending in 2000 included $753 million on the Athabasca Oil Sands project in Alberta, and spending in 1999 included $335 million for the Sable Offshore Energy Project off Nova Scotia.

Shell Canada Pres. and CEO Tim Faithfull said the company achieved record 2000 earnings and a return on average capital employed of more than 20%.

"While market conditions were an important factor in our results, a strong focus by our employees on operational excellence allowed us to take advantage of exceptional prices and margins," Faithfull said. "These results provide a solid foundation for our large growth investment program over the next 5 years."

Other fourth quarter 2000-1999 comparisons, in millions of Canadian dollars, include: Imperial Oil Ltd., Toronto, 494 vs. 205; Petro-Canada, Calgary, 386 vs. 66; and PanCanadian Petroleum Ltd., Calgary, 344 vs. 147.

Petrochemical firms

Nova Chemicals Corp., Calgary, reported a $266 million profit in 2000, compared with $217 million in 1999, despite a fourth quarter loss of $12 million.

Factors in the fourth quarter slide included a slowdown in the US economy, weakening product demand in Asia, high natural gas prices, and a decline in chemical product prices. A $51 million after-tax charge for closing an unprofitable polystyrene plant in Joliet, Ill., was also a factor. Nova said fourth quarter earnings would have been $39 million without the one-time charges.

Overall in 2000, Nova had improved revenues of $3.9 billion compared with $2.8 billion in 1999.

Nova, which has plants at 18 locations in five countries, has cut production by 30-35% at its major Joffre complex in Alberta, where it operates three ethylene units and a polyethylene plant, with a second polyethylene plant nearing completion. Production at Joffre will not be increased until the price of gas falls significantly.

Nova Pres. and CEO Jeff Lipton said the current "unusual and difficult market conditions" are unlike any he has seen in 36 years in the industry.

"There's no doubt the short term will be tough, but I believe it will represent a clear bottom for the industry," Lipton said.

He expects the market to begin improving in March and beyond 2001. He said consultants have forecast that new and existing capacity together will not be able to meet demand.