Rising crude and natural gas prices, combined with lower operating costs, gave the largest US oil and gas companies a five-fold increase in net profits in 1999 vs. 1998, according to a new report released by petroleum research company John S. Herold Inc.
The company's 33rd Reserve Replacement Cost Analysis also shows that reserve levels were sustained despite a 25% decline in capital spending. That spending fell from $29.7 billion in 1998 to $22.2 billion in 1999. Exploration and development spending fell more steeply than overall capital investment, however, declining $8.9 billion to $15.6 billion. At the same time, expenditures by the top 50 US firms to acquire proven properties rose to $6.6 billion, $1.4 billion more in 1998.
Holding back
John S. Herold Chairman Art Smith said the 36% decline in E&D spending among the top 50 reflected a prudent way to rein in spending during hard times by deferring more-speculative exploration and development projects. "Another conservative way to replace production is buying proved reserves, and our analysis showed that companies did substantially boost acquisition spending," said Smith.
More prudent E&D strategies enabled the 50 companies to trim reserve replacement costs by 42% in 1999 to $5.13/boe, paced by finding and development costs that plunged nearly 60% to $5.18/boe, the best performance since 1995. Reserve replacement costs were 16% below the 3-year average, despite a 27% increase in acquisition costs to $5.01/boe.
The 50 companies surveyed replaced 98% of the oil and gas they produced in 1999, a substantial improvement over just 61% in 1998. The oil replacement rate rose from 54% in 1998 to 97% last year, due to price-related reserve additions, while gas replacement rose marginally, to 98% from 96%. The 50 companies have achieved a 105% replacement rate over the past 5 years, 94% through exploration and 11% through acquisitions.
Revenues were up 16% among the top 50 companies, while reserve replacement costs were down 42%, the company said.
Despite rising production taxes that resulted from higher oil and gas prices, overall production costs for the 50 firms dropped 4.6% to $3.53/boe, a 5-year low. The group's total oil and gas production declined 2.6%. But Herold Senior Vice-Pres. Nicholas D. Cacchione noted that the group's production revenues increased nearly 16% to $42.9 billion. Pretax income of the 50 increased nine-fold to $13.7 billion, while net income was $9.7 billion, five times the 1998 total.
"These statistics indicate that, when oil executives keep their capital spending within cash flow and focus on their best projects, the industry can be profitable and create value for shareholders," Cacchione said.
During 2000, spending by the 50 companies should rise by more than 20%, as the increased spending of independent E&P firms is offset by single-digit spending growth among the integrated companies.
The analysis of the top 50 US companies also found that US oil reserves at the end of last year were almost unchanged from yearend 1998, declining 0.2% to 18.1 billion bbl. Gas reserves ended 1999 up 0.7% at 94.1 tcf.
The annual study is based on a compilation of operating and financial data disclosed to the US Securities and Exchange Commission by the 50 companies with the largest US inventories of proved oil and gas reserves. The companies polled accounted for about 56% of US proven oil reserves, 57% of gas reserves, and 53% of US oil and gas production in 1999.
