Bob Williams
Senior Staff Writer
The financial and operating performance of U.S. independents continues to improve with firming oil prices.
A rise of about $3/bbl in average oil prices was the main factor in boosting earnings in 1989 for a group of 50 independents Oil & Gas Journal tracks. Gas prices for the group remained about flat year to year.
The group posted net profits of about $1.23 billion in 1989 on revenues of about $26 billion. Some of the companies in 1989 posted heavy net losses due to special items and accounting changes, while reporting improved operating incomes.
Oil price increases also buoyed earnings of some in the group in first quarter 1990, although unusual items masked the improvement.
Higher oil prices in early 1989 reversed a profits slide for an OGJ group of 28 independents in 1988, when oil prices dropped in the second half (OGJ, May, 1989, p. 21).
The OGJ group of independents almost doubled in size this year to reflect a broader sampling of U.S. independents.
IMPROVING OUTLOOK
Most companies expect oil and gas prices to ramp up in the 1990s in response to continuing firm demand and tightening supplies.
U.S. independents, which generally live or die by those prices, thus could see their earnings continue to grow in response. It follows that independents are hiking capital budgets to fund more drilling in 1990, focusing on developing gas reserves and finding more oil in non-U.S. arenas.
Independents also are pursuing attractive new technologies, such as horizontal drilling and coalbed methane development, to boost reserves and production.
Restructuring continues to affect independent operations, notably movement away from certain limited partnership structures with the erosion of tax benefits for those arrangements.
The question of higher environmental compliance and mitigation costs looms on the horizon for most independents, and some of the bigger independents are already feeling the squeeze.
For 1989 and first quarter 1990, there is little evidence of the widespread writedowns related to environmental costs that have hit the major, integrated oil and gas companies. Such writedowns were the main factor in a drop in 1989 earnings of the OGJ group of integrated companies (OGJ, Apr. 16, p. 19).
FIRST QUARTER 1990
First quarter earnings for companies in the OGJ group reporting results improved somewhat from the year before.
For those reporting, profits were up only 3.6% from the same period the year before. Were it not for some unusual items, first quarter 1990 earnings would have risen sharply.
Oryx Energy Co., Dallas, reported its operating income in the first quarter jumped by 135% from $17 million the same time the year before, largely on the strength of higher oil prices. Net income for first quarter 1989, however, included an $85 million cumulative benefit for changes in accounting methods, which caused the relative slide in Oryx net income in first quarter 1990.
For Union Texas Petroleum Holdings Inc., Houston, a decline in earnings from first quarter 1989 to first quarter 1990 stemmed from accrual of $38 million in revenues in last year's period from its business interruption insurance policy resulting from the 1987 Piper Alpha platform explosion in the U.K. North Sea.
Absent those two items alone, quarterly earnings for those reporting would have jumped by more than 60% from the previous year.
OIL PRICE FACTOR
A sizable increase in oil prices in 1989 was the leading factor in earnings growth for most of the independents in the OGJ group.
Oryx reported a 16% hike in cash flow from operations before working capital changes for the year and a 131% hike for fourth quarter 1989. It received an average crude oil price of $16.83/bbl for the year and $17.97/bbl for the fourth quarter vs. $13.78/bbl and $12.10/bbl respectively the year before. That compares with an average gas price relatively flat at $1.63/Mcf in 1989 vs. $1.64/Mcf in 1988.
Oryx's oil production changed little in quarterly and annual comparisons for 1988-89, while gas production rose by 2.3% year to year and 5.8% quarter to quarter.
Anadarko Petroleum Corp., Houston, reported record revenues and cash flow from operations in 1989 stemming from higher oil prices, increased gas production, and lower interest expense. Anadarko posted higher earnings in 1989 despite slippage of 10/Mcf in average gas price for the heavily gas weighted firm,
Anadarko's production of crude and condensate climbed by only 1.3% for oil in 1989 from the year before, but revenues from crude and condensate sales jumped to $75.9 million from $58.4 million on the strength of a 22% boost in average oil price.
SLUGGISH GAS PRICES
Weak gas prices squeezed earnings for some independents in 1989 and first quarter 1990.
Mesa Limited Partnership, Amarillo, cited low gas prices, coupled with higher interest and depreciation charges, in its 1989 earnings reversal. Mesa said the decline in its average 1989 gas price stemmed from a slide in higher priced Gulf Coast production and an increase in lower priced Midcontinent production.
The plunge in spot market gas price in the first quarter of this year in part led Forest Oil Corp., Denver, to take a noncash writedown of $84 million on its oil and gas reserves. It expects the writedown to slice first quarter earnings by about $55 million.
Forest blamed the writedown mainly on Securities and Exchange Commission rules requiring a quarterly calculation of the value of oil and gas reserves based on current spot market prices.
"Such a calculation ignores the historical seasonal volatility of natural gas prices as well as that demonstrated in the futures market for natural gas," Forest said.
Another factor in Forest's writedown was a revision in reserves and production rate estimates related to two of three platforms the company set recently in the Gulf of Mexico. Forest is paring its estimate of reserves associated with the platforms, which started up late in first quarter 1990, by about 7 bcf of gas and 800,000 bbl of oil net to the company.
FINANCIAL DETAILS
Writedowns and accounting changes had significant effects on independents' earnings in 1989.
In addition to its first quarter 1989 benefit of $85 million for changes in accounting methods, Oryx's 1988 net loss of $305 million included a $260 million after tax charge for the writedown of assets and other matters.
Ocean Drilling & Exploration Co., New Orleans, reported first quarter 1990 results that included an extraordinary credit of $7.1 million. That represented a federal income tax benefit from utilization of a financial net operating loss carryforward.
Adopting the Statement of Financial Accounting Standard No. 96 on reserves values resulted in an $8.8 million credit to 1989 first quarter net income for Noble Affiliates Inc., Ardmore, Okla. Without the accounting change, Noble's income would have jumped by 70% in first quarter 1990 from the year before.
RESTRUCTURING MOVES
Restructuring rippled through the OGJ group of independents in 1989-90 in the form of converted limited partnerships, spinoffs, mergers, and asset sales.
Freeport McMoRan Energy Partners Ltd. and parent Freeport McMoRan Inc. in November 1989 disclosed plans to convert FMP from a master limited partnership to a publicly traded corporation, a move completed by the end of first quarter 1990. The new company is Freeport McMoRan Oil & Gas Co.
Another limited partnership in the group may disappear this year, this time through merger. Hallwood Energy Partners LP, Dallas, agreed to acquire Quinoco Energy Inc., general partner of Energy Development Partners Ltd. (EDP), with plans to merge EDP into Hallwood. However, two EDP unitholders in February sued Hallwood and EDP in a Delaware court to block the merger.
Santa Fe Energy Resources Inc. parent Santa Fe Pacific Corp. (SFP), Chicago, plans to split into three independent entities chiefly through spinoffs of its petroleum and realty units. SFP will distribute prorata the more than 80% interest it owns each in Santa Fe Energy and Santa Fe Pacific Realty Corp. to SFP stockholders, contingent upon refinancing of outstanding debentures and an Internal Revenue Service ruling that the spinoffs will constitute a tax free dividend. SFP expects to complete the spinoffs in the third quarter.
Efforts to raise cash to trim debt or boost drilling outlays by selling assets marked many independents' 1989 operations.
Maxus Energy Corp., Dallas, sliced its reserve base by 51 million bbl through the sale of its Canadian subsidiary, nonstrategic U.S. assets, and a 10% interest in its Northwest Java production sharing contract for a combined $316.8 million, Maxus used about $129.8 million of those proceeds to pay debt.
REPLACING PRODUCTION
Some of the independents in the OGJ group maintained a strong performance in replacing production while keeping finding costs down.
Anadarko in 1989 replaced 111% of its production of oil and gas, the eighth straight year it more than replaced production. Its U.S. finding cost in 1989, including the effect of additions, revisions, and acquisitions, averaged $5.82/bbl of oil equivalent (BOE). That's up from its 1984-88 average of $4.13/BOE but less than an industry average U.S. finding cost of $7.04/BOE in 1984-88 that Anadarko cited.
A solid reserves base in Indonesia and the U.S. enabled Maxus to sustain its strong production replacement profile. Maxus replaced 156% of its oil and gas production in 1989 at a finding and development cost of $3.17/BOE. For 1986-89, it replaced 152% of production On the other hand, Pogo Producing Co., Houston, replaced only 25% of its gas production and 66% of its liquids production in 1989. Because Pogo's partners or operators chose to delay drilling a number of development wells in the Gulf of Mexico, the company was forced to slice its 1989 capital budget to $29.1 million from a programmed $37.6 million.
Pogo Pres. William Liedtke Jr. said Pogo and partners will pursue previously budgeted drilling and drill additional wells in the Gulf of Mexico in 1990. That should result in addition of meaningful reserves and increased deliverability, he said. Further, Pogo expects drilling on Eugene Island Block 330 plus workovers on other oil producing Gulf of Mexico blocks will reverse the company's recent decline in liquids production.
Companies are replacing production through increased drilling as well as revisions and acquisitions.
Apache Corp., Denver, replaced 147% of its record 1989 production with reserve additions totaling 152 bcf of gas equivalent (bcfge). Of that, 104 bcfge came from drilling and the balance from revisions and acquisitions.
HOT TECHNOLOGIES
Production among some companies in the OGJ group of independents is benefiting as they move more into attractive new technologies such as horizontal drilling and coalbed methane development.
Oryx and Burlington Resources' Meridian Oil Inc. unit are established as leaders in horizontal drilling (OGJ, Apr. 23, p. 21; OGJ, Nov. 6, 1989, p. 22). Among the latest to join that group is Wolverine Exploration Co., Fort Worth. Wolverine completed its first horizontal well at the turn of the year, a Cretaceous Austin chalk discovery at Palmeras Ranch in Dimmit County, Tex. Its 1 79-1-H Little flowed 1,720 b/d of 37 gravity oil and 670 Mcfd of gas through a 48/64 in. choke with 230 psi flowing tubing pressure. Wolverine followed that with plans for another Austin chalk horizontal well at Halsell Ranch.
Devon Energy Corp., Oklahoma City, set reserves and production records in 1989, largely on the strength of its coalbed methane operations in the Northeast Blanco Unit of the San Juan basin in Northwest New Mexico. Devon's Northeast Blanco gas reserves jumped by 185% to 90.3 bcf in 1989.
Devon last week revealed a further increase in its unit interest, adding about 24.8 bcf of reserves through purchase from an undisclosed operator for $7.2 million. It plans to spend another $5.5 million to develop reserves associated with the new interest. The acquisition, along with others in second half 1989, boosts Devon's total reserves to 213 bcfge.
CAPITAL SPENDING UP
Most independents in the group boosted capital spending in 1989 in response to higher prices and plan further hikes in 1990.
Maxus jumped its exploration and development budget to $320 million in 1990, up from about $200 million in 1989. The increase stems from an E&D program budgeted at about $129 million in the company's Southeast Sumatra production sharing contract area, where Maxus plans to drill about 50 wells and install production platforms in Intan and Widuri fields in 1990. Production from the two is to start up in late 1990, reaching 120,000 b/d and building to 220,000 b/d in 1991.
Pogo hiked its capital budget by 33% to $50 million in 1990 to accelerate development drilling in the Gulf of Mexico. More than 75% of that budget is earmarked for development drilling.
Plans call for Pogo and partners to drill about 10-14 wells on Eugene Island Block 330, five or six wells on Eugene Island Block 212, and three or four wells on West Cameron Blocks 586-587.
Exploration figured heavily in some independents' budgets for 1990.
Exploration accounts for $56 million of FMP's capital budget of $188 million for 1990.
FMP's spending this year represents a 42% increase from spending in 1989 and almost double the 1988 outlays.
ENVIRONMENTAL COSTS
Independents, notably those holding or previously owning downstream businesses, are beginning to feel the pinch from soaring costs of environmental mitigation and compliance.
Maxus retained responsibility for certain liabilities of the chemical business it sold to Occidental Petroleum Corp. in 1986, as well as other businesses disposed of or discontinued. It will be responsible for remediation of its closed Newark, N.J., chemicals plant at a cost of about $10 million and for remediation of its closed Kearny, N.J., chromate plant for about $8 million.
Further, Maxus holds responsibility for a share of remediation of third party sites, where estimates of such costs are not available.
Maxus expects spending for environmental compliance to climb to about $18.7 million in 1990 and $23.1 million in 1991 from about $16.6 million in 1989 and $15.3 million in 1988.
Copyright 1990 Oil & Gas Journal. All Rights Reserved.