Third-quarter earnings surge for US oil and gas companies

Dec. 12, 2005
Many of the major oil and gas producers set earnings records for the third quarter of 2005.

Many of the major oil and gas producers set earnings records for the third quarter of 2005.

Results from upstream and downstream operations were much stronger than they were in the same period a year earlier due to higher oil and gas prices as well as higher refining margins in the wake of Hurricanes Katrina and Rita.

A group of US-based oil and gas producers and refiners collectively recorded a 65% surge in earnings for the third quarter compared with the same 2004 period as their revenues gained 38%. For the first 9 months of 2005, these companies reported earnings gains of 47% collectively.

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Also, a sample of service and supply companies with headquarters in the US posted much improved results. Collectively, the net income of this group of firms increased 220% from a year earlier.

And a group of oil and gas companies based in Canada also reported stronger third quarter earnings, although a handful of the 22 firms reported declines in net income (see related story, p. 28).

Oil, gas prices

During the third quarter, the crude oil futures price reached its all-time high in nominal dollars on the New York Mercantile Exchange. On Aug. 30, the price of crude for October delivery settled at $69.81/bbl.

The average closing price of crude during the recent quarter was $63.31/bbl, up from $43.89/bbl for the third quarter of last year. Similarly, the refiners’ acquisition cost of crude climbed to an average $57.77/bbl for the third quarter from $39.43/bbl a year earlier.

Meanwhile, natural gas futures prices averaged $9.731/MMbtu in the most recent quarter vs. $5.58/MMbtu in the same 2004 period.

Average refining margins in most of the world’s major refining centers more than doubled in the third quarter compared with the same 2004 period, according to Muse, Stancil & Co.

The largest increase was for US East Coast refining margins, which jumped to average $10.89/bbl from $3.81/bbl for the same quarter a year earlier. Likewise, the average third quarter US Gulf Coast margin increased to $17.08/bbl from $6.56/bbl a year earlier, and on the US West Coast, the third quarter refining margin averaged $29.92/bbl, up from $12.01/bbl in the same 2004 quarter.

Company results

The biggest earner, ExxonMobil Corp., set a quarterly earnings record for the company with nearly $10 billion in net income for the third quarter. The company’s revenues totaled $100.7 billion for the 3 months.

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ExxonMobil’s upstream earnings, excluding a special item-the restructuring of its interest in the Dutch transportation business, Gasunie-were $5.7 billion, up $1.8 billion from the third quarter of 2004 as a result of higher oil and gas realizations, although production decreased 4.7% from the third quarter of last year.

Downstream earnings were $2 billion, up $727 million from the year-earlier third quarter, reflecting higher refining margins partly offset by weaker marketing margins. Petroleum product sales were down slightly from last year’s third quarter.

Chemical earnings were $472 million, down $537 million from the same 2004 quarter, as increased feedstock costs reduced margins.

The biggest earnings gainer in percentage terms was Exploration Co., which posted record third quarter net income of $15.3 million, up from $599,820 a year earlier. The company sold its Maverick basin operations in Texas to EnCana Oil & Gas (USA) Inc., effective Sept. 1, which was the primary driver behind the jump in income.

Marathon Oil Corp. recorded a 247% gain in earnings. Marathon’s upstream segment income totaled $627 million, compared with $351 million in third quarter 2004, primarily due to higher liquid hydrocarbon and natural gas prices.

Downstream segment income for Marathon was $814 million, compared with $391 million in the same quarter of 2004. The increase was primarily due to a higher refining and wholesale marketing margin reflecting the impact that Hurricanes Katrina and Rita had on refined product margins.

Marathon reported that its Garyville, La., and Texas City, Tex., refineries safely returned to operation with a minimum amount of downtime. The refineries sustained minimal damage during the storms and were able to be brought back online within days of the hurricanes.

Among independent oil and gas producers, Pogo Producing Co. saw third quarter earnings soar. Pogo’s earnings gained 447% for the quarter as it closed on the sale of its assets in the Gulf of Thailand in August. And in September, the company closed on the purchase of Northrock Resources Ltd., which included an inventory of western Canadian properties.

Some firms in the sample reported lower earnings compared with the third quarter of 2004. Forest Oil Corp. reported a 90% drop in net income to $3.3 million.

Accounting regulations required Forest to take a pretax, noncash charge of $72.1 million including $42.8 million associated with the discontinuance of hedge accounting related to 2005 hedges on Hurricane Katrina and Rita production deferrals, $23 million of unrealized losses related to several collar agreements that did not qualify for cash flow hedge accounting, and measured hedge ineffectiveness of $6.3 million (OGJ, Nov. 28, 2005, p. 18).

Forest also incurred a pretax charge of $3.6 million to establish a reserve for insurance surcharges related primarily to Hurricane Katrina.

For the third quarter of 2005, Forest’s sales volumes were down 14% from the third quarter of 2004. In all, hurricanes in the third quarter of 2005 deferred about 6 bcf of gas-equivalent production.

Valero Energy Corp. reported a 99% increase in third quarter earnings. The spike was primarily due to the sharp rise in product margins following the hurricanes, as well as widening sour crude oil discounts, the company reported. Valero also benefited from the addition of four former Premcor Inc. refineries, which contributed about $330 million to operating income in September.

Service, supply firms

A sample of 30 service and supply firms, mostly US-based, reported collective net income of $2.7 billion for the third quarter, up from $850 million for the same year-earlier period.

Diamond Offshore Drilling Inc. reported net income of $82 million for the third quarter, compared with net income of $2.9 million in the same period a year earlier.

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Due to the impact of Hurricanes Katrina and Rita, the company recorded a third quarter after-tax gain of $21.8 million related to insurance proceeds from the casualty loss of its 300-ft Ocean Warwick jack up.

Other damage to the company’s fleet resulted in hurricane-related after-tax costs of $2.6 million, which were reported as operating expenses. Excluding the Warwick, Diamond Offshore experienced a total of 41.5 days of contractual downtime in the third quarter directly related to the two hurricanes.

Weatherford International Inc. posted a 32% decline in third quarter earnings despite record revenue of $1.1 billion.

Weatherford completed its purchase of Calgary-based Precision Drilling Corp.’s energy services and international drilling divisions at the end of August, so its quarterly results include one month of activity from these businesses and a charge of $97 million related to exit costs, restructuring charges, and the write-off of in-process research and development acquired in the transaction.

Rowan Cos. Inc. posted third quarter earnings of $75 million, up from $10 million for the same 2004 quarter. Rowan lost four jack ups and had one jack up severely damaged during Hurricanes Katrina and Rita. The company recorded an $8.9 million loss during the third quarter of 2005 related to these events.

Rowan’s offshore rig utilization was 97% during the recent quarter, unchanged from the comparable 2004 period. But the company’s average Gulf of Mexico day rate was a record $74,400 during the third quarter of this year, up 12% from the second quarter and up 60% from the same 2004 period. Rowan’s land rig utilization was 89% during the third quarter, up from 83% in the comparable 2004 period, while its average land rig day rate was $18,800, up 52% from the comparable 2004 period.

Grey Wolf Inc. reported net income of $31.8 million for the 3 months ended Sept. 30, compared with net income of $5.5 million for the third quarter of last year. The Houston-based drilling services firm said its record revenue and net income were supported by continued increases in dayrates-up an average of 10%/rig-day across all rigs and market areas between the second and third quarters-and additional rigs working.