First quarter earnings soar for producers, flounder for service firms

June 9, 2003
Oil and natural gas companies posted mixed results for the first 3 months of 2003.

Oil and natural gas companies posted mixed results for the first 3 months of 2003.

Higher crude oil and natural gas prices throughout the first quarter lifted producers' earnings.

Cold weather and reduced supplies in the US drove natural gas prices higher, while effects of the pending war in Iraq, the national strike in Venezuela, and civil unrest in Nigeria contributed to elevated oil prices.

The integrated and independent companies as a group posted a 352% gain in earnings compared with the first quarter of last year as revenues increased 64% (Table 1).

Meanwhile, lower day rates and reduced activity levels suppressed the earnings of many of the service and supply firms in the group of companies that OGJ sampled. Collectively, the sample's 36 companies posted a 5% gain in revenues and $591 million in earnings (Table 2).

A group of Canadian companies recorded results similar to those of their US counterparts (see related story, p. 20).

Majors

All of the large integrated oil and gas companies reported improved results from a year ago.

ExxonMobil Corp. announced earnings of $7 billion, up from $2 billion for the first quarter of 2002. Net income included a $550 million positive impact from the required adoption of Statement of Financial Accounting Standards 143 (FAS 143) related to accounting for asset retirement obligations and a one-time gain of $1.7 billion from the transfer of shares in Ruhrgas AG, a German gas transmission company.

Although ExxonMobil's production output was flat, upstream earnings gained on the strength of oil and gas prices.

Downstream earnings were up as refining and marketing margins improved in most areas worldwide from much weaker first quarter 2002 margins.

Earnings from chemicals operations increased $155 million to $287 million due to record sales volumes, improved margins outside the US, and favorable foreign exchange effects.

Marathon Oil Corp. reported stronger earnings as well as a result of higher oil and gas realizations, improved refining crack spreads, and widening sweet-sour crude oil price differentials.

The company's strong upstream performance offset the negative impact of refinery maintenance activities and high gas costs in its downstream segment.

ChevronTexaco Corp. announced its best results since the merger of its predecessor companies in late 2001.

Click here to enlarge image

The company's average US liquids sales price for the quarter was up $12/bbl from a year earlier to more than $29/bbl, and its US gas price increased more than 150% to $5.85/Mcf. Realizations also were up outside the US. A 5% decline in production—primarily the result of lower liquids production in the company's Indonesian operations—partially offset the rise in prices, however.

Independents

Stronger oil and gas prices combined with higher output to improve the results of many independent producing companies during the first quarter, also.

Houston-based Apache Corp. reported that these factors fueled its record first quarter earnings of $338.9 million, including the cumulative effect of FAS 143.

The adoption of the new rule resulted in a noncash cumulative-effect benefit of $27 million. The effect of this rule over time will be zero because, in the end, it is simply a timing issue, the company said.

"Once again, the rule-makers have served to complicate an accepted and readily understood historical industry practice," said Apache Chairman Raymond Plank regarding FAS 143, which requires companies to record the present value of estimated future abandonment obligations as a liability, with a corresponding entry to oil and gas assets.

"In our case, we had already reflected through our amortization rate a significant portion of our future abandonment liabilities. This rule caused us to reverse prior charges and recognize a gain we didn't earn. It tinkers with comprehendible accounting," Plank added.

XTO Energy Inc., Fort Worth, reported increased earnings as production of gas and natural gas liquids for the quarter moved up 27% from a year earlier.

XTO Energy attributes the increase in gas production to its development activity in East Texas and the Arkoma and San Juan basins.

Average prices were up 7% for gas and 117% for NGLs, while XTO Energy's average oil price climbed 49% from a year earlier. The company's oil production increased 1% during the quarter.

Chesapeake Energy Corp., Oklahoma City, also announced improved results with a 35% gain in oil and gas production as compared with the first quarter of last year.

With Chesapeake's average realized gas price increasing to $4.51/Mcf from $3.30/Mcf, the company's earnings were $73.5 million vs. a loss of $27.6 million a year ago.

Refiners, pipeline companies

Strong product demand benefited refiners' earnings for the quarter, but other factors limited income growth.

Old Greenwich, Conn.-based Premcor Inc., which owns and operates three refineries in the US with combined throughput capacity of 610,000 b/d, reported lower-than-expected earnings, said Jay Saunders of Deutsche Bank Securities Inc.

Saunders said that, like Marathon, Premcor's earnings were squeezed by high gas prices raising operating costs for the company's coking units and by high oil prices in a futures market that put a premium on prompt deliveries of crude.

Limited exposure to that futures curve in addition to a cold winter and wide crude price discounts made for New York-based Amerada Hess Corp.'s best downstream quarter in years, Saunders said.

Amerada Hess reported earnings of $176 million for the first quarter compared with $141 million for the first quarter of 2002. The refining and marketing segment recorded a gain of $136 million vs. a loss of $22 million a year earlier.

Click here to enlarge image

For the quarter, Sunoco Inc., Philadelphia, earned $86 million, largely on the strength of much-improved refining and supply results. John G. Drosdick, Sunoco chairman and CEO said, "Despite significantly higher crude oil and transportation costs, refining margins were very strong, especially in our northeast US refining system.

"While we experienced some cold weather-related downtime at our facilities, overall our refineries ran at a very high utilization level and did a good job maximizing and optimizing production during the quarter.

"The rising crude oil costs, however, did squeeze margins in our retail marketing and chemicals businesses, where price changes tend to lag. Retail marketing earned $10 million, mostly late in the quarter when crude oil prices began to decline from near $40/bbl levels," he added.

Sunoco reported that its chemicals segment had a loss of $4 million in the first quarter vs. income of $2 million in the prior-year period. The decline was due largely to lower margins resulting from the steady increase in feedstock costs during the quarter.

Although selling prices for both polypropylene and phenol increased during the quarter, market recovery lagged raw material cost increases and resulted in lower average margins for the quarter. Increased fuel costs due to higher gas prices also contributed to the decline. Four percent higher sales volumes partially offset the negative variances.

Meanwhile, Enbridge Energy Partners LP, Houston, reported net income of $32.6 million, up from $17.7 million for the same 2002 quarter.

The company benefited mostly from its midcoast gas gathering, processing, and transmission assets acquired from Calgary-based Enbridge Inc. in October.

Service and supply firms

Most service and supply companies struggled and posted lower earnings for the first quarter, although a few—including BJ Services Co., Halliburton Co., and Varco International Inc.—recorded higher earnings from a year ago due to improving market conditions.

Weatherford International Ltd., Houston, reported a net income of $33.6 million for the first quarter, down from $45.2 million a year earlier, as operations were negatively affected by turmoil in Venezuela and Nigeria and military action in the Middle East.

The company said that the initial phase of recovery in North American drilling activity and cost reduction initiatives undertaken in the prior quarter were unable to outweigh those factors. Revenues for the quarter were $589.3 million vs. $568.2 million a year ago.

GulfMark Offshore Inc., Houston, announced a net loss of $3.3 million as a result of weaker market conditions during the quarter, the removal of several vessels from service for contract modifications, and the acceleration of drydockings.

This compares with earnings of $5.4 million a year earlier. The marine transportation company's revenues declined $1.5 million from the same period in 2002 primarily due to lower vessel utilization, although stronger revenue from slightly higher day rates in the North Sea and new vessels partially offset the decline.

Houston-based Baker Hughes Inc. posted improved revenues and earnings from a year ago.

The company's revenues from oil field operations increased 2% from a year ago but declined 5% from the fourth quarter of last year. Michael E. Wiley, Baker Hughes chairman, president, and CEO, commented that while North American onshore activity improved, the US offshore rig count declined 10%.

Wiley said, "International results were negatively affected by a slow recovery in Venezuela, civil unrest in Nigeria, weakening North Sea markets and associated price erosion, as well as product shipment delays to Russia and the Middle East."

Offshore drilling contractor Transocean Inc., Houston, announced that net income for the first quarter was $47.2 million compared with a net loss of $1.3 billion for the same quarter last year.

Results for the first quarter of 2002 included a noncash charge of $1.4 billion to reflect the impairment of goodwill associated with the company's Gulf of Mexico shallow and inland water reporting unit following the January 2002 adoption of FAS 142 regarding goodwill and other intangible assets. Excluding this charge, net income for the first quarter of 2002 was $77.3 million, the company reported.