Second-quarter results tumble for US, Canadian operators

Sept. 3, 2007
The combined second-quarter 2007 earnings of a group of US-based producers and refiners slipped almost 10% from a year earlier, largely because of rising costs.

The combined second-quarter 2007 earnings of a group of US-based producers and refiners slipped almost 10% from a year earlier, largely because of rising costs. The group’s revenues climbed slightly. For the first 6 months of the year, the same companies’ collective revenues and earnings declined from the first half of 2006.

Meanwhile, a sample of oil and gas producers and pipeline operators based in Canada posted a 21% drop in earnings for the second quarter as well as a decline in first-half earnings. Revenues for both periods were up.

A group of service and supply companies reported a strong improvement in earnings for both the quarter and the first half of 2007, extending a streak of gains for these types of firms.

Prices, margins

Oil prices during the second quarter of this year were lower than a year earlier, but natural gas prices and motor gasoline prices were higher on average than during the second quarter of 2006.

Averaging $64.80/bbl during the recent quarter, the near-month futures price of crude on the New York Mercantile Exchange was 8% less than during the second 2006 quarter. And the refiners’ acquisition cost of crude was down 3% from a year earlier, averaging $62.36/bbl in the second quarter of this year.

Cash refining margins were little changed on the US Gulf Coast and East Coast from a year earlier but varied widely for US Midwest and West Coast refiners.

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The US Midwest cash margin during the recent quarter averaged $26.95/bbl, up 43% from a year ago, while the US West Coast margin declined 22% to average $28.83/bbl during the second quarter of this year, according to Muse, Stancil & Co.

Average front-month natural gas prices on the NYMEX were $7.663/MMbtu in the second quarter, up 15% from the second quarter of 2006.

US operators

The OGJ sample of US-based oil and gas producers and refiners collectively recorded a 9.6% decline in net income for the second quarter on revenues up just 2.6% from a year earlier.

Hit by rising operating costs, 15 in the group of 71 firms posted a net loss for the second quarter.

Delta Petroleum Corp., for example, reported a $94.2 million loss for the quarter, although its revenues increased 20% from a year earlier to $49 million. Delta’s operating income for the recent quarter was hit hard by expenses, primarily $69 million in dry hole costs and impairments. The Denver company’s production from continuing operations during the quarter increased 17% from the second quarter of 2006.

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Goodrich Petroleum Corp. incurred a $3.3 million loss for the second quarter in spite of posting a 39% gain in revenue from a year ago to $28 million. Its operating loss, too, was primarily due to higher expenses. The company said that its depreciation, depletion, and amortization expense for the second quarter of 2007 was $19.5 million, up from $10 million in the second quarter of 2006.

Another group of 15 firms recorded positive but reduced net income from a year earlier at the same time that revenues climbed. A variety of factors contributed to these results, including higher costs, debt retirements, and accounting adjustments on commodity trades. For some companies, these factors outweighed gains from higher production volumes.

For example, Swift Energy Co. posted a 17% earnings decline to $31.5 million, while revenue increased 14% from the second quarter of last year. Swift said that its production volumes were up 9% from a year earlier but that the company incurred early debt retirement expenses of $12.8 million during the recent quarter. Without this, Swift’s net income would have increased 4% for the second quarter of 2007 to $39.5 million.

Chevron Corp. and Occidental Petroleum Corp. recorded increases in earnings for the recent quarter. Chevron’s net income climbed 24%, and Oxy’s gained 64% as compared with the corresponding 2006 quarter.

But the other major producers reported reduced earnings. At $557 million in profit, Hess Corp. recorded a 1.6% earnings decline despite higher sales volumes and strong trading and refining results. Higher corporate costs and interest expenses outweighed a 7% gain in oil and gas production volumes.

With net income of $10.26 billion, ExxonMobil Corp. posted a 1% decline in results from the second quarter of 2006. The company reported that higher refining, marketing, and chemical margins mostly offset lower natural gas realizations during the recent quarter.

ConocoPhillips reported second-quarter net income of $301 million, down from $5.2 billion for the second quarter in 2006. Revenues were little changed at $49.4 billion vs. $48.5 billion a year ago.

Second-quarter net income included an after-tax impairment of $4.5 billion in ConocoPhillips’s exploration and production segment related to expropriation of the company’s oil projects in Venezuela.

ConocoPhillips’s refining and marketing segment net income was $2.4 billion in the second quarter, up from $1.7 billion a year earlier. The company said the increase primarily was due to higher worldwide margins, a net benefit associated with asset rationalization, and lower costs associated with turnarounds and Hurricane Katrina impacts in 2006. But these increases were offset partially by lower volumes due to the contribution of assets to the company’s downstream business venture with EnCana Corp. (OGJ, Nov. 20, 2006, p. 36).

Independents, refiners

Abraxas Petroleum Corp. recorded $56.9 million in earnings during the second quarter of 2007, during which the company closed a series of transactions that resulted in the repayment of all of its indebtedness. For the second quarter of 2006, the company posted earnings of $1 million.

During the recent quarter, Abraxas formed a master limited partnership, Abraxas Energy Partners LP, to which Abraxas contributed properties in South and West Texas. This and subsequent transactions resulted in the recognition of a pretax gain in the amount of $58.5 million.

Independent refiner Frontier Oil Corp. announced record net income of $243.8 million for the quarter ended June 30, 2007, compared with earnings of $145.9 million a year earlier. For the first half of 2007, net income was $318.5 million, up from $203.2 million a year earlier.

Frontier said its record quarterly results were achieved despite a planned 30-day, plant-wide shutdown at its 52,000-b/d Cheyenne refinery. As a result of the Cheyenne turnaround, total charges of crude and other feedstocks at its two refineries for the second quarter of 2007 fell to 163,991 b/d from 171,426 b/d for the same period of 2006. However, the company stored intermediate and finished products during the first quarter of this year, allowing product sales to average 173,888 b/d for the most recent quarter, nearly unchanged from the second quarter of 2006.

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For the recent quarter, the Cheyenne refinery’s light-heavy differential averaged $14.17/bbl, and the light-heavy spread at Frontier’s 110,000-b/d El Dorado, Kan., refinery averaged $18.78/bbl.

Refiners Sunoco Inc. and Valero Energy Corp. each posted a nearly 20% climb in earnings.

Commenting on Sunoco’s performance, analyst Eitan Bernstein of Friedman, Billings, Ramsey & Co. Inc. said, “Operating earnings of $482 million were well above our forecast, primarily due to higher-than-expected refining margins and lower operating costs.”

Sunoco’s total throughput volumes averaged nearly 900,000 b/d, reflecting turnaround work at the company’s refineries, while Midcontinent margins averaged $22.14/bbl, up 48% from a year earlier. Northeast margins averaged $12.32/bbl, up 7% from the comparable year-ago quarter.

Canadian firms

Led by declines from Suncor Energy Inc. and EnCana, a sample of oil and gas firms based in Canada collectively posted a drop in second-quarter earnings of more than 20%.

EnCana’s earnings decline was the result of some one-time items in the second quarter of 2006, which included a gain on discontinuance, mark to market hedging gains, foreign exchange gains, and the impact of tax rate reduction. These items in the second quarter of 2006 accounted for about $1.3 billion of that quarter’s net earnings, said EnCana Chief Financial Officer Brian Ferguson.

Suncor said its 47% decrease in earnings was primarily due to lower oil sands production and higher operating expenses, as well as lower income tax rate reductions compared to the second quarter of 2006.

A shutdown of one of Suncor’s two oil sands upgraders lowered production volumes, while increased maintenance costs were the main reason for the increase in operating expenses. The shutdown, which began May 31 and ended July 20, reduced production rates to about 121,000 b/d and was required to tie in new facilities related to a planned expansion that will increase production capacity to 350,000 b/d in the second half of 2008.

Services, contractors

The combined earnings of a sample of 31 service and supply companies increased 18% from the second quarter of last year, as revenues climbed 21%. For the first 6 months of this year, the group posted a 30% gain in combined earnings from a year earlier.

Leading the surge in second-quarter profits were Transocean Inc., with earnings up 121% from a year earlier, and Pride International Inc., whose earnings gained 116%. Various factors buoyed these firms’ revenues, including higher average dayrates, increased rig activity, and improved shipyard performance.

Louis A. Raspino, president and chief executive officer of Pride International, said partially offsetting recent results was the company’s US gulf jack up fleet, which experienced lower utilization and lower average daily revenues in the quarter due to reduced activity combined with an increase in out-of-service time as the company prepared to relocate the Pride Oklahoma and Pride Mississippi to the stronger market in Mexico.

“From a macro perspective, strong global demand for energy is fueling our customers’ continued growth in E&P spending, particularly in the deep water,” Raspino said.

Halliburton announced that net income for the second quarter of 2007 was $1.5 billion, up from $591 million a year earlier. The results of the recent quarter include a net gain of $933 million from the separation of KBR Inc., which was recorded in discontinued operations.

Baker Hughes Inc. is among the dozen companies in the sample to report a decline in net income from the second quarter of 2006, although the company’s revenue was up 15% from the second quarter of 2006. At the same time, the company’s net income declined 75% to $350 million.

Chad C. Deaton, Baker Hughes chairman and chief executive officer said, “A 21% year-over-year increase in revenue in the second quarter from outside North America was partially offset by weaker activity in Canada and the US offshore market. Net income in the quarter was impacted by lower profit from our drilling and evaluation business in Canada.”