ENVIRONMENTAL WRITEDOWNS, THINNER MARGINS CRIMP OGJ GROUP EARNINGS

April 16, 1990
Robert J. Beck Economics Editor Earnings for the Oil & Gas Journal group of 22 U.S. oil companies fell 12% in 1989. Group earnings dropped to $18.8 billion from $21.4 billion for 1988. The decline stemmed mainly from large extraordinary charges posted by several of the companies and related to environmental issues (OGJ, Feb. 5, p. 23).
Robert J. Beck
Economics Editor

Earnings for the Oil & Gas Journal group of 22 U.S. oil companies fell 12% in 1989.

Group earnings dropped to $18.8 billion from $21.4 billion for 1988.

The decline stemmed mainly from large extraordinary charges posted by several of the companies and related to environmental issues (OGJ, Feb. 5, p. 23).

Exxon Corp. earnings fell $1.38 billion due to a provision for costs associated with the Exxon Valdez oil spill. Chevron Corp. posted special charges of $1.207 billion, most related to the writedown of properties off southern California, where permitting delays have prevented production start-up.

Phillips Petroleum Co. also took a $280 million writedown on its offshore California investments. Texaco Inc., ARCO, and Sun Co. Inc. also took major writedowns in 1989 related to environmental considerations.

Pennzoil Co.'s 1989 earnings were down substantially from the year before. This was mainly due to the $1.7 billion extraordinary boost in 1988 net income as a result of the favorable settlement of litigation between Pennzoil and Texaco.

Earnings were higher in 1989 than the year before for 12 companies in the OGJ group. Ten companies posted lower earnings, but none showed a loss for 1989. By contrast, one of the group posted a loss in 1988, two in 1987, and six in 1986 when crude oil prices collapsed.

Total revenues for the OGJ group were up 7.5% in 1989 at $410.5 billion.

Capital and exploration spending moved up slightly in 1989. The 13 companies that reported capital outlays spent $36.7 billion in 1989, up 4.6% from 1988. This amounted to 233.5% of net profits posted for the companies, up from 200.2% the year before.

BEHIND THE DECLINE

Most of last year's earnings slide took place in the fourth quarter.

Fourth quarter 1989 profits were down 54.8% at $2.004 billion, compared with the same period of 1988. Five companies posted losses for the fourth quarter, and some of the large writedowns occurred then.

Earnings results from operations were generally the reverse of a year ago, with most companies showing lower downstream profits and higher exploration and production earnings.

Higher crude oil prices were a major factor upstream and downstream. The higher prices boosted revenues and profits from E&P but increased refining feedstock costs, squeezing margins and trimming profits.

Increased worldwide demand for petroleum products in 1989 helped prop up prices.

International Energy Agency figures show that non-Communist consumption of products climbed 900,000 b/d, or 1.7%, in 1989 to 52 million b/d.

The year's average world export price for crude oil was up 20.7% at $16.65/bbl, while the average wellhead price of U.S. crude oil rose 26.2% to an estimated $15.87/bbl. Natural gas prices also rose.

Product price advances lagged those of crude. For example, the pump price of U.S. self-service unleaded gasoline averaged $1.0135/gal in 1989, up only 7.2% from 1988.

Even earnings from chemicals, which had been setting records in recent years, weakened.

Excess production capacity due to recent expansions is one of the major reasons for weaker chemical prices. Increased crude oil feedstock costs also contributed to the decline. And several companies posted charges against chemical earnings associated with future environmental cleanup programs.

U.S. E&P RESULTS

In the U.S., improved upstream results from higher crude oil prices were partly offset by lower production in 1989. U.S. production fell 6.1% in 1989 to 7.647 million b/d, a drop of 493,000 b/d. Many of the companies in the OGJ group also reported lower U.S. production.

U.S. marketed production of natural gas picked up slightly last year, increasing 0.6% to 17.9 tcf. Extremely cold weather last December helped boost gas demand and prices.

Exxon's earnings from U.S. E&P increased to $1.132 billion from $804 million the year before, mainly due to a $3.50/bbl rise in average crude realization. Liquids production was down 9% due in part to hurricanes in the Gulf of Mexico and downtime associated with the Exxon Valdez accident. Gas production was up 1%.

Mobil Corp.'s U.S. upstream earnings advanced to $152 million from $100 million in 1988 because of increased crude oil prices. This was partly offset by reduced liquids production and lower gas prices. Mobil's U.S. liquids production averaged 362,000 b/d in 1989, down 6% from the year before.

Shell Oil Co. earnings jumped to $546 million from $326 million in 1988, mainly due to higher crude oil prices that more than offset the effects of lower production volumes and natural gas prices. Shell's U.S. crude oil prices averaged $15.57/bbl for the year, up $3.11/bbl from 1988, while natural gas prices were $1.80/Mcf, down 9 cents from 1988.

Texaco posted earnings of $373 million, more than double the $151 million of 1988, because of higher crude oil prices and lower expenses. U.S. liquids production fell to 480,000 b/d from 524,000 b/d in 1988.

BP America followed the trend with an operating profit of $1.485 billion in 1989, up from $1.055 billion in 1988. Alaskan crude oil prices averaged $16.80/bbl, up from $13.85/bbl in 1988, while Alaskan liquids production fell to 756,500 b/d from 828,600 b/d in 1988.

Chevron's operating earnings rebounded to $378 million from a loss of $20 million in 1988. Higher crude oil prices--up more than $3/bbl to $16.50/bbl--were the main reason. But after the writedown of certain oil and gas properties, mainly Point Arguello field off southern California, Chevron's U.S. E&P segment reported a $346 million loss in 1989.

Phillips' writedown of Point Arguello and related assets resulted in a $91 million loss for U.S. E&P in 1989, compared with a $45 million profit the year before. Excluding the writedown, earnings in this segment would have been $129 million, a substantial gain from 1988.

NON-U.S. UPSTREAM

Increased crude oil prices also helped boost earnings from non-U.S. exploration and production. The year's earnings results were mixed as nonrecurring adjustments influenced final results for some companies.

Mobil posted international E&P earnings of $974 million, up $179 million from 1988. Higher crude oil prices, higher natural gas production and prices, and higher liquids production all contributed to the improvement in earnings. Mobil's international production moved up 34,000 b/d to 502,000 b/d. Natural gas production was up 8% at 2.856 bcfd.

Exxon's foreign segment earnings advanced to $1.93 billion from $1.787 billion in 1988. Lower liquids production, higher taxes, and lower natural gas realizations partially offset the boost from higher crude oil prices. Liquids production was down 49,000 b/d, 4%, reflecting North Sea outages.

Non-U.S. segment earnings at Phillips rose to $193 million in 1989 from $190 million the year before. Higher crude prices and natural gas production boosted earnings. But this was offset by higher foreign lifting costs mainly associated with installation of a concrete wave barrier at the Ekofisk field and lower worldwide crude oil production.

Texaco posted 1989 earnings in this operating segment of $245 million compared with $463 million in 1988.

Excluding the nonrecurring gains of 1988, earnings for continuing operations in 1989 were up due to higher crude oil prices. In 1988 earnings included a gain from the sale of part of the Texaco interest in offshore operations in Angola, and earnings applicable to the Canadian operations sold in first quarter 1989.

Chevron's earnings from non-U.S. E&P were $492 million compared with $639 million the year before. Excluding special items, earnings were $435 million for 1989, compared with $401 million in 1988.

The 1988 earnings included a gain from the sale of Chevron's interest in Angolan E&P operations. Net liquids production outside the U.S. was 467,000 b/d in 1989, down 19,000 b/d.

U.S. DOWNSTREAM

The upward swing in crude oil prices had a major negative effect on refining earnings in 1989.

ARCO posted earnings from its R&M operations of $291 million in 1989, down from $368 million the year before. Higher crude oil prices, increased operating costs, and a $60 million addition to environmental reserves were the major reasons for the lower earnings. These factors more than offset higher product prices and increased sales volumes.

Exxon's profits from U.S. R&M fell to $370 million in 1989 from $672 million in 1988.

U.S. petroleum product sales were up 31,000 b/d in 1989 at 1.144 million b/d. Refinery runs were also up 31,000 b/d at 999,000 b/d.

Earnings from Shell's oil products segment fell to $361 million in 1989 from $519 million the year before.

Refined product sales fell to 1.207 million b/d in 1989 from 1.314 million b/d the year before.

Earnings from Mobil's U.S. R&M operations were down 37% in 1989 at $347 million. Fourth quarter earnings were down 67% at $72 million.

U.S. petroleum product sales moved up 12,000 b/d to 939,000 b/d. Refinery runs were up 66,000 b/d at 716,000 b/d.

A $325 million provision for future environmental cleanup costs at U.S. refining, marketing, and chemicals locations resulted in Chevron posting an $82 million loss from its U.S. R&M operations in 1989. The year before it posted a profit of $571 million.

Excluding the special items Chevron had a profit of $270 million in 1989, down from $690 million in 1988. Average refined product sales margins fell from 1988.

Profits from Texaco's manufacturing, marketing, and distribution segment fell to only $78 million in 1989 from $663 million the year before.

The Texaco results for 1989 included charges of $153 million for reserves related to environmental improvement programs planned at present and former refinery sites, marketing facilities, and waste sites.

BP America had an R&M operating profit of $580 million, down from $601 million in 1988. The drop was due to depressed refining margins.

Refinery runs climbed to 717,000 b/d from 629,000 b/d the year before. Petroleum product sales increased to 898,1 00 b/d from 811,700 b/d in 1988.

NON-U.S. DOWNSTREAM

Earnings from R&M operations outside the U.S. were also down for most group companies.

The pattern was the same as in the U.S.: higher crude costs squeezing margins and profits.

Exxon's profits from foreign R&M fell to $729 million from $1.14 billion in 1988. This was due to reduced refining margins and was offset by higher refining runs and product sales.

Refinery runs outside the U.S. climbed 10.9% to 2.301 million b/d. Petroleum product sales were up 7.3% at 3.425 million b/d.

Profits from Mobil's international R&M segment were down 15% in 1959 to $384 million. Mobil said margins were under pressure as product prices lagged the increase in local currency crude costs.

Margins in Japan were further eroded by a very competitive market that followed gasoline production decontrol Apr. 1.

Mobil's earnings decline was partly off set by the benefit from the increased sales of higher margin products, particularly motor gasolines and lubricants. The 1989 results included a gain of $192 million on a Hong Kong property exchange and a $140 million loss on the sale of business operations in southern Africa.

The drop in Texaco's earnings from its manufacturing, marketing, and distribution operation outside the U.S. was not as sharp as the decline in domestic operations.

Profits fell to $393 million from $471 million the year before. The 1989 results included a $38 million charge for reserves related to environmental improvement programs planned at various facilities.

Refinery runs and product sales were down in 1989 mostly because of the sale of Texaco's assets in Canada and West Germany.

Earnings from Amoco's worldwide refining, marketing, and transportation segment fell 28% in 1989 to $648 million.

The drop reflected lower refined product margins but was offset somewhat by higher volumes.

Unocal's refining, marketing, and transportation segment earned $157 million in 1989, down from $182 million in 1988.

Phillips had $176 million in earnings from its petroleum products sector, down from $312 million in 1988.

CHEMICAL EARNINGS

After setting record highs in the past few years, earnings from chemicals operations turned down in 1989 for most group companies.

Additions the past few years have led to excess capacity and lower chemical product prices.

Exxon's earnings from both U.S. and foreign chemicals operations were down in 1989. Worldwide chemical earnings were $1.08 billion in 1989 down 17.3% from $1.306 billion the year before. Sales volume was up 1%.

Chevron's earnings from chemicals fell to $342 million in 1989 from $391 million the year before. The 1989 results included $36 million in charges for environmental programs.

Special charges of $64 million in 1988 related to environmental programs and asset disposition losses.

Operating earnings were down in 1989 as "prices in the industry continued to slide in the aromatics and olefins industrial chemicals areas due mainly to an easing of the industry capacity constraints of 1988."

Amoco's chemicals earnings fell to $481 million in 1989 from $684 million in 1988 in spite of a gain in chemical revenues of $98 million to $4.146 billion in 1989.

The drop in earnings was mainly due to weaker prices brought about by increased industry supply.

Mobil posted a 7% drop in chemical profits in 1989 to $573 million. This was $40 million below the record in 1988.

Full year 1989 chemical products earnings for Shell were $630 million, up $77 million from 1988. However, the 1988 results included an aftertax provision of $120 million for environmental remediation.

Shell said that excluding the effect of the environmental provision in 1988, earnings in 1989 declined because of lower margins and sales volumes in commodity chemicals and to a lesser degree the extreme weather in December.

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