The collective third-quarter earnings for a sample of US-based oil and gas producers and refiners declined from earnings a year earlier, softened by lower production volumes and weak downstream margins.
Higher depreciation and operating expenses weighed on earnings, much as they did earlier this year. For the first 9 months of 2007, this group of US companies reported a combined 8% decline in earnings from a year earlier.
A sample of service and supply firms, benefiting from a higher cost of doing business in exploration and production, together reported a surge in profits for the third quarter of 2007 compared with the same 2006 period. Strong demand for equipment and services pushed these companies’ earnings 33% higher in the first 9 months of this year.
Meanwhile, a group of oil and gas producers and transporters based in Canada reported a combined 10% decline in earnings for the recent quarter compared with the third quarter of last year. Most of these firms reported that a weaker US dollar relative to the Canadian dollar had a negative impact on recent earnings.
All figures here are reported in US dollars.
US producers
Lower production volumes and much lower refining margins combined to put downward pressure on earnings for the US-based companies. Higher oil prices helped the producers but crimped downstream earnings.
Thirty-six of the firms in a sample of US oil and gas producers reported a decline in earnings from the third quarter of last year. Another 14 companies in the group recorded a loss for the recent quarter.
ExxonMobil’s third-quarter net income was $9.4 billion, down 10% from the third quarter of 2006. The company’s realized prices for crude oil were up from a year earlier, but downstream and chemical margins were lower. Natural gas realizations were lower, operating expenses were higher, and the company’s worldwide oil and gas production volumes declined from a year earlier.
Downstream earnings of $2 billion were down $737 million from the third quarter of 2006, driven by lower refining and fuels marketing margins, ExxonMobil reported.
Marathon Oil Corp. reported third quarter 2007 net income of $1 billion, down from $1.6 billion in third quarter 2006.
Upstream income was $479 million in this year’s third quarter, compared with $572 million a year ago, mainly as a result of lower oil and gas sales volumes. Marathon’s downstream income was $482 million in the third quarter of this year, compared with $1 billion a year earlier, primarily as a result of 47.5% lower refining and wholesale marketing gross margins.
Weak US refining and marketing conditions had a negative impact on the earnings of Chevron Corp., which reported net income of $3.7 billion for third-quarter 2007, down from $5 billion in the comparable period a year ago.
“Margins were squeezed as escalating costs for crude oil feedstocks could not be fully recovered in a US marketplace that was well-supplied with gasoline and other refined products,” said Chevron chairman and CEO Dave O’Reilly.
Chevron’s upstream earnings declined slightly from last year’s third quarter. Although prices for crude oil increased between periods, this benefit to earnings was more than offset by the impacts of lower sales volumes due to the timing of crude-oil cargo liftings and higher operating and depreciation expenses.
With $216 million in net income, Sunoco Inc. announced a 38.5% decline in third-quarter earnings. Revenue was up 9.5% for the period.
Eitan Bernstein, analyst with Friedman, Billings, Ramsey, & Co. Inc., said Sunoco’s refining earnings were below expectations. “Operating earnings of $171 million were well below our forecast, primarily due to lower mid-continent refining margins (of $13.10/bbl) and higher operating costs. Total throughput volumes averaged 943,000 b/d, 4% above comparable year-ago levels,” he said.
Bernstein said Sunoco’s marketing earnings were strong on margins and volumes. “The retail group earned $31 million, above our forecast, due to higher gasoline margins,” he said.
Anadarko Petroleum Corp., along with a handful of other independent producers, reported a decline in earnings and revenues. Anadarko posted lower revenue from reduced oil and gas sales compared with a year earlier, and the company’s expenses climbed.
In the recent quarter, the company’s total expenses were up 35%. Anadarko incurred increased operating, transportation, and exploration expenses, as well as higher costs for gathering, processing, and marketing and for depreciation, depletion, and amortization.
Refiner Valero Energy Corp. reported that its third quarter 2007 operating income was $1.2 billion vs. $2.3 billion in the same period last year. The reduction was mainly due to higher prices for light, sweet crude oils and narrower discounts for sour crude oils, as well as lower US West Coast refining margins.
Relative to the price of WTI, Valero said its feedstocks were about $3/bbl more costly in third-quarter 2007 than in third-quarter 2006, which resulted in a more than $700 million unfavorable impact to operating income.
Canadian firms
A group of oil and gas producers and pipeline operators based in Canada reported a collective 9.5% decline in earnings compared with the third quarter of 2006, even though the firms’ revenues climbed almost 13%.
For the first 9 months of this year, the group’s earnings moved 10.4% lower, and revenues were up 9.6% from a year earlier.
The companies’ results varied, though. Canadian Natural Resources Ltd. recorded a 37% earnings decline for the recent quarter, but Nexen Inc. posted $403 million in net income, up from $199 million a year earlier.
Canadian Natural Resources said its cash flow in the third quarter of this year was negatively impacted by the strengthening of the Canadian dollar compared to the US dollar. Higher expenses for depletion, depreciation, and amortization as well as stock-based compensation expenses, interest, and risk management activities also decreased earnings.
Nexen said its improved results reflect increased production from ramping up its North Sea production at Buzzard field, where daily production volumes continued to increase and contributed 76,000 boe/d net (177,000 boe/d gross) to third-quarter volumes.
And although the price of WTI increased during the quarter and averaged $75.38/bbl compared with $70.48/bbl a year ago, Nexen was unable to retain the full benefit of the price increase because of the weakening US dollar.
With net income of $78.1 million, Enbridge Inc. incurred an 18% earnings decline from the third quarter of last year. Revenues for the quarter were up 21% to $2.6 billion.
Enbridge said its earnings were lower due not only to a weaker US dollar, but also because of a lower contribution from its Aux Sable natural gas liquids extraction and fractionation plant, which had derivative losses during 2007. Also, the company reported increased operating costs in the Enbridge and Athabasca pipeline systems.
Service, supply companies
A sample of 28 service and supply firms posted a 39% surge in earnings for the third quarter of 2007. None of the companies reported a loss for the recent quarter, but 10 firms recorded a decline in net income compared with their third-quarter 2006 earnings.
In the final full quarter prior to its merger with Transocean Inc., Houston-based GlobalSantaFe Corp. posted an 83% jump in third-quarter 2007 earnings to $448.6 million. Revenue for the quarter was nearly $1.2 billion. For the first 9 months, net income was $1.16 billion, up 77% from the corresponding 2006 period.
Transocean’s net income for the recent quarter was $973 million, up 214%, on record quarterly revenues of $1.5 billion. Third quarter 2006 revenue was $1 billion.
Transocean said the quarter-to-quarter increase in revenues was due primarily to a higher average day rate, partially offset by a slight reduction in the number of days in service. The third-quarter 2007 average day rate reached a record high of $219,700, up 8.5% from the second quarter. And the increase in the average day rate spanned all rig categories, primarily as a result of rigs commencing new contracts at the higher prevailing day rates.
BJ Services Co. reported a 17% slide in third-quarter earnings from a year ago to $189.4 million. The company’s revenue moved 5% higher, but earnings were hit by increased operating expenses.
BJ Services’ cost of sales and services for the recent quarter was $910.6 million, up 14% from a year earlier.
