Bob Williams
Senior Staff Writer
Repercussions from the Persian Gulf crisis have caused mixed results in third quarter earnings for U.S. oil companies.
Upstream profits in the third quarter generally were up sharply because of the spike in oil prices following Iraq's Aug. 2 blitz of Kuwait.
However, earnings plunged for refining/marketing businesses because they were unable to pass through higher crude costs. Higher feedstock costs and dampened demand from a sluggish economy pared petrochemical earnings.
The upshot: Despite hundredfold hikes in quarterly earnings for some companies, overall profits for the group of 22 integrated U.S. oil companies Oil & Gas Journal tracks rose only 19.3% to $5.5 billion from third quarter 1989.
Third quarter earnings reports for oil companies have been carefully monitored amid claims by politicians and lobbyists of war profiteering and gasoline price gouging during the Persian Gulf crisis.
The furor erupting from a spike in gasoline and other petroleum products prices after the crisis began led to calls for reviving the oil industry's "windfall profits" tax.
In response to President Bush's call for price restraint, most major refiner/marketers held retail prices down even as spot and futures crude prices spiraled up as tensions rose in the Persian Gulf region. That proved costly to downstream profitability and triggered charges of predatory pricing and renewed independent marketers' calls for divorcement.
However, a study by the Energy Information Administration found that higher prices for gasoline and other petroleum products after the Iraqi invasion of Kuwait did not result in runaway profits for U.S. oil companies (see story, p. 24).
API GROUP EARNINGS
The OGJ group earnings increase compares with a 16.8% year to year rise to $4.5 billion in third quarter earnings for 20 leading U.S. oil companies the American Petroleum Institute tracks.
API said the increase was due mainly to special nonrecurring items that on net hiked third quarter earnings by $640 million. Such items increased third quarter earnings by only $53 million in 1989.
"When special items are excluded, oil company net income was essentially unchanged between the two third quarters at $3.8 billion," API said.
In the first 9 months, net income fell 6.1 %to $13.1 billion from the year before for the API group of companies, which included Oryx Energy Co. and excluded Coastal Corp., Louisiana Land & Exploration Co., and British Petroleum Co. plc's U.S. unit.
Total nonrecurring items amounted to about $1.1 billion in net gains in both years, so the decline in operating income year to year was about the same as the decline in net income, API said.
Although API group revenues jumped in the third quarter and 9 months vs. 1989, profits fell. API group annualized year to date net income as a percent of stockholders' equity fell to 13.4% in 1990 from 14.5% in 1989.
API noted the profits of a sample of leading nonoil companies also declined but remained above that of the oil companies.
"The largest decline in operating income, 70.6%, was reported by Sun Co., the largest independent refiner in the sample, while the largest increase, 700%, was reported by Oryx, the largest independent producer in the sample.
"For the sample as a whole, increased earnings from petroleum exploration and production were almost completely offset by lower earnings from petroleum refining and marketing operations and chemical operations."
GOUGING DENIED
API Pres. Charles Dibona said earnings reports showed oil companies have acted "responsibly and certainly have not gouged the American consumer."
In testimony last month before the Senate committee on governmental affairs, DiBona pointed out that gasoline prices rose by much less than crude oil prices after Iraq's invasion of Kuwait.
"For example, between Aug. 2 and the end of September, the spot price for crude oil rose 44/gal but the retail price rose only 24/gal," DiBona said. "From June 15, when crude prices started rising to the peak, crude oil rose nearly 60, while gasoline rose almost 30."
Correspondingly, DiBona noted, declines in crude prices since they peaked in October have not been matched penny for penny because gasoline prices had not climbed as high as crude prices.
DiBona also noted U.S. gasoline prices have risen much less than those in western Europe and Japan. Department of Energy data show that during July 30-Oct. 15, the average retail gasoline price excluding taxes rose 27/gal in the U.S., compared with increases of 71/gal in Japan and 46-58/gal in western Europe.
"Finally," DiBona said, "the oil company third quarter profit reports that have been released so far corroborate the fact that oil companies have acted with considerable restraint.
"Based on reports from 16 leading petroleum companies, total operating income was up only 5% from last year's third quarter and well below the level for 1988's third quarter."
OGJ GROUP UPSTREAM BUOYANT
A 32% increase in third quarter average crude oil prices for those companies in the OGJ group that reported oil prices accounted for most of the group's 22.7% surge in revenues.
In the third quarter, Unocal Corp.'s average worldwide crude price of $20.22/bbl was up by $6.30/bbl from the second quarter and $4.60/bbl from third quarter 1989. Kerr-McGee Corp.'s average worldwide crude price jumped to $22.64/bbl in the third quarter from $16.85/bbl in third quarter 1989. For the two companies' average crude prices in the U.S., the quarter to quarter increases were not as sharp at 31% and 29%, respectively.
The price surge largely offset the fact that the group's average oil production fell by 4.4% and average gas prices dipped 8.7% from a year ago. Sliding crude production and flat gas production generally stemmed from the larger companies' efforts to rationalize assets. Some of the biggest declines in oil production occurred at companies such as Chevron Corp., where a strong campaign is under way to sell marginal properties.
Ashland Oil Co.'s upstream business almost doubled its operating income to $40 million due to increased production and higher oil and gas prices. Murphy Oil Corp. earnings in the third quarter, excluding unusual items, jumped to $17.2 million from $2.5 million the year before. However, Murphy profits slipped from $18.2 million in the second quarter.
"The extent of improvement in upstream profits from higher oil prices was muted in high tax jurisdictions such as the U.K. and Gabon, where the government extracts 84% and 73% (respectively) of any improvement," said Murphy Pres. Jack McNutt.
In contrast with the big jump in crude oil prices, natural gas prices fell for all the companies reporting them in the third quarter. Murphy reported a drop to about $1.30/Mcf for Louisiana Gulf Coast spot deliveries in August-September from $1.40/Mcf in July.
At those prices, the company withheld discretionary volumes, which cut into upstream earnings. During October, spot prices increased to $1.60, and sales resumed.
REFINING/MARKETING DEPRESSED
Refining/marketing profits plunged in the third quarter after a generally strong first half.
As a result, OGJ group companies reported generally mixed results in refining/marketing earnings for the 9 months, as margins roamed all over the map before the Middle East eruption and the current standoff.
A severe crunch on marketing income dragged down downstream earnings in the third quarter.
BP said its worldwide refining and marketing business had a mixed result, with refining performing strongly but marketing unable to pass the full price increase through to consumers, particularly in the U.S., partly because of President Bush's appeal for price restraint.
ARCO refining/marketing earnings in the third quarter rose to $138 million from $119 million the year before. The company said higher crude oil costs and the effect of its 2 week products price freeze in August eroded profit margins in the last half of the quarter.
"However, strong performance early in the quarter and ancillary business improvements increased earnings," ARCO said
Sun Chairman Robert McClements Jr. noted that the Middle East crisis hurt the company's earnings because of the resulting crude price runup. Sun more than 2 years ago spun off its U.S. upstream assets, which evolved into Oryx.
McClements blamed a third quarter year to year drop in refining/marketing earnings from $73 million to $14 million on the company's "inability to fully recover its increased crude oil costs in the marketplace."
He said, "This is clearly one of the most volatile quarters in the history of the refining and marketing business. The 3 months of the quarter were dramatically different, as we went from a strong summer performance to a period after the Aug. 2 invasion of Kuwait when the cost of crude oil more than doubled.
"Prices for gasoline, our major product, were unable to keep pace with significant, frequent increases in raw material costs. The wholesale margins for residual fuel, distillate, propane, and asphalt were even more negatively affected."
Mobil Corp.'s third quarter U.S. refining/marketing earnings plummeted to a loss of $22 million from a profit of $104 million the year before. Mobil said the decline reflected higher crude oil and purchased product costs that increased more than its selling prices, as well as refinery turnarounds that resulted in lower gasoline and distillate production and higher expenses.
Murphy's McNutt said his company's downstream margins syncopated with oil prices. Very strong margins experienced in the second quarter continued through July, became erratic in August, and were severely squeezed during September.
McNutt said, "U.S. margins turned negative during late September and early October as some integrated companies bowed to political and public pressure to restrain cost passthrough and in effect subsidized refining and marketing losses out of radically improved production profits.
"European downstream margins remained strong throughout the quarter, partly because Europe was more dependent on Iraqi and Kuwaiti crude oil and partly because high marginal taxes on foreign production compelled cost passthrough."
One integrated company's downstream operations fared very well in the third quarter. Amerada Hess Corp.'s almost fivefold increase in third quarter income was paced by a jump in refining/marketing earnings to $279.5 million from $33.3 million in third quarter 1989.
Amerada Hess Chairman Leon Hess recently told a congressional committee hearing on speculation in oil futures markets his company's hedging in the futures market was largely responsible for the big earnings jump.
PETROCHEMICALS
Occidental Petroleum Corp., which has no refineries, saw its net income before extraordinary items jump 68% to $111 million in the third quarter from the year before, largely on the strength of upstream earnings growth.
However, higher feedstock costs squeezed petrochemical margins, and a sluggish economy trimmed sales prices in all major chemical product areas for Oxy. As a result, Oxy's chemical earnings fell to $152 million in the third quarter from $254 million in third quarter 1989.
ARCO's petrochemical businesses also were stung by market and economic swings in the third quarter.
Its intermediate chemicals and specialty products segment earned after tax income of $49 million vs. $78 million in third quarter 1989.
"Margin gains in propylene oxide and derivatives as well as in methyl tertiary butyl ether were offset by lower styrene margins and lower domestic volumes in all major product lines," ARCO said.
"The reduced volumes resulted primarily from the July 5 explosion and shutdown of ARCO Chemical's Channelview, Tex., plant. In relation to this accident, the third quarter 1990 ARCO Chemical results reflect a $28 million net before tax charge that includes a $50 million accrual for business interruption insurance."
Third quarter after tax earnings for ARCO's other petrochemical business, a 49.9% equity interest in Lyondell Petrochemical Co., dropped to $25 million from $37 million in third quarter 1989.
Lower olefins margins this year were only partially offset by increased olefins sales volumes.
CAPITAL SPENDING
The mixed earnings results and uncertainty over oil prices may explain why the OGJ group capital and exploration outlays rose by only about 5% in the third quarter from the year before.
Chevron's worldwide capital and exploration spending fell by $100 million to $1 billion in the third quarter and rose by $100 million to $2.8 billion in the 9 months from the same 1989 periods. The company also added $100 million to its 1990 budget for increased development drilling to quickly increase its U.S. production.
Mobil's worldwide capital and exploration spending jumped by $392 million to $1.18 billion in the third quarter and by $500 million to $2.8 billion for the 9 months.
"Mobil has identified large profitable investment and growth opportunities and as result, capital and exploration spending increases are forecast to continue," the company said. It cited the Pacific Rim area as a target for market share growth in petroleum products. Mobil recently announced its agreement in principle to purchase Esso Australia's downstream assets, increasing its Australian market to more than 20% from 14%.
Exxon's big drop in capital and exploration spending-$5.7 billion in the first 9 months from $9.6 billion in the same period in 1989-stemmed from the $4.5 billion it spent last year for acquisitions, including a $3.9 billion outlay for Texaco Canada.
Similarly, Amerada Hess spent $1.1 billion for oil and gas properties in the U.K. North Sea and Gulf of Mexico in third quarter 1989, compared with an outlay of $216 million for Canadian properties in third quarter 1990, accounting for its big drop in capital spending.
OUTLOOK
OGJ group company executives generally remain sanguine about profits and spending in the near term because of uncertainty about what might happen in the Middle East.
"Earnings for the first 6 months of this year turned out about as expected," said Mobil Chairman Allen Murray. "However, results for the third quarter were disappointing due to the runup in crude and purchased product costs and inability to recover these costs in the marketplace.
"We hope there will soon be a return to stability in the Middle East and crude prices will come down from the recent record high levels. Coincident with this, I would expect earnings to be back on track with the goals we have set. "
Ashland Chairman John Hall noted that recently "refinery margins have come under additional pressure from rapidly escalating crude oil costs, and we will have a difficult December quarter unless margins improve.
"However, we have become accustomed to volatility in daily crude oil prices and in monthly and quarterly profits. Over time, the refining business has been profitable, and we believe the outlook will be favorable for the refining business after the Middle East crisis is resolved."
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