WRITEDOWNS, SOFT GAS MARKETS TRIM PROFITS OF OGJ INDEPENDENTS' GROUP

June 3, 1991
Bob Williams Associate Managing Editor-News Joan Bonfield Biggs Statistics Editor A widely expected rise in 1990 profits stemming from a runup in oil prices did not happen for the group of 50 U.S. independent oil and gas companies the Oil & Gas Journal tracks. Instead, a string of special charges spurred big losses for a number of companies. In addition, an unexpectedly weak natural gas market also helped dampen upstream earnings for independents with reserves portfolios dominated by gas.
Bob Williams
Associate Managing Editor-News
Joan Bonfield Biggs
Statistics Editor

A widely expected rise in 1990 profits stemming from a runup in oil prices did not happen for the group of 50 U.S. independent oil and gas companies the Oil & Gas Journal tracks.

Instead, a string of special charges spurred big losses for a number of companies. In addition, an unexpectedly weak natural gas market also helped dampen upstream earnings for independents with reserves portfolios dominated by gas.

As a result, overall profits for the OGJ group of independents slipped 2.3% in 1990 from 1989 levels. That occurred despite the group's increase of 13% in revenues, largely on the strength of oil production and prices climbing 16% and 25%, respectively. The group's gas production rose 8%, while gas prices remained flat.

A few companies heavily skewed to oil saw profits about double year to year. However, the squeeze on revenues and profits from lower gas prices often more than offset increased gas production for many of the companies dependent on gas sales for most of their revenues.

The situation was even worse for companies that shut in gas rather than sell it at less than replacement costs, thereby slicing gas sales volumes as well.

The depressed North American gas market has lasted into 1991, and oil prices have fallen from second half 1990 highs.

Industry expectations are that oil prices overall will be lower in 1991 than they were last year, so it falls generally to increased gas prices and production in the second half to buoy profits enough to keep pace with 1990 levels.

Prospects in 1991 are for big asset writedowns and plunging profits for U.S. independents if oil prices fall much below current levels and gas prices don't rally in the second half.

GROUP CHANGES

The constantly changing face of the independent sector of the U.S. petroleum industry has resulted in another shuffle of the OGJ independents' group lineup.

Mission Resource LP, Walnut Creek, Calif., was dropped from the group after being added in mid-1990. A partnership of group member Santa Fe Energy Resources Inc., Houston, and an institutional investor acquired most of MRLP's assets with purchase of MRLP interests in California's South Belridge field for about $56 million. MRLP was expected to make a final distribution to unitholders last month, pending liquidation or other provision for remaining liabilities.

Geodyne Resources Inc., Tulsa, also was dropped this year--after being added at midyear 1990--to accommodate OGJ's earlier deadline this year for reporting group first half profits.

With a fiscal year ending Feb. 28, Geodyne's yearend results were unavailable at presstime.

Taking their places are American Exploration Co., New York, and Crystal Oil Co., Shreveport, La.

SPECIAL CHARGES

Among the companies reporting special charges accounting for big losses or a big drop in earnings in 1990:

  • Mesa Limited Partnership, Dallas, said its increased loss in 1990 resulted mainly from changes in gains and losses associated with property dispositions and securities transactions. The net loss for 1990 included $81 million in net losses related to sales of oil and gas leases, whereas the 1989 net loss included $29 million in net gains from properties and $50 million in net gains from securities transactions.

  • Forest Oil Corp., Denver, in reporting a seven-fold increase in losses year to year, cited an $84 million pretax decline in the book value of estimated oil and gas reserves in first quarter 1990 because of lower estimated prices attributable to future oil and gas sales. It also cited reorganization expense of $12.5 million in 1990.

  • Pacific Enterprises Oil Co., a unit of Pacific Enterprises, Los Angeles, took a fourth quarter charge of $175 million related to a writedown of oil and gas properties.

  • Enserch Exploration Partners Ltd., Dallas, reported an income drop of about $17 million due mainly to payment of $16 million in settlement of a lawsuit.

SECOND HALF RALLY

A big jump in oil prices stemming from the Persian Gulf crisis reversed what would have otherwise proven a grim year for OGJ independents group profits.

In first half 1990, weak oil and gas prices were instrumental in the group's 6 months earnings plunging about 67% from the prior year period (OGJ, Oct. 22, 1990, p. 43). The second half was a different story after Iraq's Aug. 2 blitz of Kuwait, with U.S. crude futures soaring to more than $40/bbl in October from about $17/bbl in early August.

According to Energy Information Administration data tracking a group of 31 U.S. independent oil and gas producers, profits in the third quarter jumped to $121 million from $21 million in third quarter 1989. The EIA group's revenues in third quarter 1990 jumped 26.2% to $2.3 billion from the prior year. The trend of higher profits held in the fourth quarter, although slippage in crude prices reined income growth slightly compared with third quarter year to year changes. Crude prices fell through most of the fourth quarter but still remained an average 55% above fourth quarter 1989 levels with the average refiner's acquisition cost of imported crude at $29.15/bbl, EIA reported.

As a result, a group of 25 independent producers EIA monitored in the fourth quarter tallied a 365% jump in income to $365.3 million from the prior year period. Of those 25, only three reported year to year income declines.

But the second half surge masked what otherwise would have been a lackluster year at best, according to EIA data.

"Despite the substantial income gains of the independent oil and gas producers in (second half) 1990, their profitability for all of 1990, as measured by return on stockholders' equity, was only 2 percentage points above that of U.S. nonenergy companies," EIA said.

"This was the first time since 1982 that independent producers were more profitable than U.S. nonenergy companies. However, annual return on stockholders' equity for the major petroleum companies and independent refiners remained below that of U.S. nonenergy companies."

DEPRESSED GAS PRICES

Depressed gas prices figured heavily in big losses posted by some companies.

Arkla Exploration Co., Shreveport, La., reported a drop in year to year income despite a fourth quarter turnaround--from fourth quarter 1989--stemming from higher oil prices, increased oil and gas production, and reduced operating expenses in 1990.

Arkla Chairman Carl Quinn cited lower margins on gas purchased for resale, increased depletion and depreciation expenses, and low wellhead prices during the summer. In addition, he noted, Arkla Exploration's earnings were hit by a reduction in the company's estimate of usable tax credits for 1990. The company had expected being able to use substantial tight sands tax credits. However, it chose not to record certain of the credits related to 1990 production because of the uncertainty of the level of parent Arkla Inc.'s final 1990 consolidated taxable income arising from certain nonrecurring tax reductions.

Even companies reporting earnings gains--mainly from higher oil prices and production--kept a tight rein on gas production because of depressed market conditions. Noble Affiliates Inc., Ardmore, Okla., kept its 1990 gas flow about flat with 1989 levels in line with wellhead prices that fell 70/Mcf on the year. Noble Pres. Robert Kelley noted his company selectively produced from its gas leases in 1990, based on spot market prices.

"Noble's productive capacity remains in excess of its average production for the year, and spot market pricing will continue to dictate future production levels," Kelley said.

Not all independents saw gas prices slide in 1990.

DeKalb Energy Co., Denver, nudged up its average gas sales price 30/Mcf, at the same time boosting its Canadian gas production to fit available transportation and storage.

Despite weak natural gas markets in the U.S. and Canada, DeKalb maintained its average gas prices through what it called "an innovative marketing program." DeKalb exports Canadian gas to the U.S., where it is stored in Michigan until peak demand season.

"We exported gas from Canada during the offpeak season, roughly May through October, and began withdrawing the gas from storage and pricing it last November," said DeKalb Chairman Bruce Bickner. "This program has allowed us to negotiate term contracts with industrial users who require a firm supply of gas throughout the year."

RECORD EARNINGS FOR SOME

Apache Corp., Denver, reported record earnings in 1990, up 82% from the previous year. Its earnings per share jumped 41% from the 1990 level despite an increase of 10 million outstanding shares.

Apache cited record oil and gas production and higher oil prices for its 35% jump in cash flow from operations to a record $173.7 million. Although its average oil price for the year at more than $21 /bbl was up almost $4/bbl from 1989 levels, it climbed to as much as $26.24/bbl in the fourth quarter.

Andadarko Petroleum Corp., Houston, logged a record $204 million in cash flow in 1990 vs. $202 million in 1989 largely on the strength of sharply higher prices for its liquids. Because of lagging prices, Anadarko revenues from gas sales fell to $252.5 million from $274 million in 1989 despite a slight increase in production.

Earnings of Oryx Energy Co., Dallas, jumped sharply with the combination of higher oil prices and production. In the fourth quarter alone, the company's revenues shot up almost 150% from the prior year period. Oryx averaged $30.58/bbl in the fourth quarter, its highest quarterly average in more than 5 years. Lower prices in the first half held the company's 1990 average oil price to $22.28/bbl--still a jump of 32% from the 1989 average.

In October, Oryx bought put options covering 12 million bbl of crude production for the first half with a net realized price of $23/bbl. Oryx produced 20 million bbl of crude in the U.S. in second half 1990. The put options allow the company to participate in price increases while establishing a floor in the event of price decreases.

Maxus Energy Corp., Dallas, reported a significant turnaround in year to year earnings on the strength of higher crude, natural gas, and natural gas liquids prices in 1990 and despite a decline in crude and condensate production.

Maxus worldwide crude sales in the fourth quarter fell to 49,900 b/d from 59,700 b/d in fourth quarter 1989 while its average world oil price in a comparison of the two periods jumped to $29.77/bbl from $17.52/bbl.

DRILLING, PRODUCTION RESULTS

Higher oil prices generally helped stimulate drilling, production enhancement, and acquisition activity in the U.S., all of which boosted production for many of the independents in the OGJ group.

However, high debt loads and continuing efforts to streamline operations spurred asset sales for others, thus paring production from year ago levels.

Arkla Exploration logged another record year for company drilling activity. In 1990, it participated in 147 oil and gas wells, broken out as 41 exploratory and 106 development. Of those, the company had 101 successful completions--81 gas, 20 oil. Arkla Exploration has averaged almost 100 wells/year the past 7 years.

Non-U.S. operations boosted Oryx production by 70,000 b/d of oil and 54 MMcfd of gas. Oryx acquired a large package of British Petroleum Co. plc international assets last year.

Maxus reported its share of total Indonesian crude sales fell to 39,300 b/d in the fourth quarter from 49,400 b/d in fourth quarter 1989. In a comparison of the same periods, Maxus crude sales from South Sumatra dipped to 25,200 b/d from 27,500 b/d. Those declines reflect the effect of higher worldwide prices for crude on the cost recovery portion of net entitlements, Maxus said.

Other independents in the group attributed overall production increases to non-U.S. operations.

Hadson Energy Resources Corp., Oklahoma City, cited a jump in offshore Western Australia production for its 44% year to year increase in oil output. Hadson hiked its interests in Harriet field there in late 1989 and early 1990 and participated in a successful infill and workover campaign in the field in second quarter 1990.

Hadson's net Harriet oil production jumped to 3,200 b/d in the fourth quarter from 2,100 b/d in fourth quarter 1989.

RESERVES, FINDING COSTS

U.S. independents continue to pursue low cost approaches to replacing production while maintaining their asset bases.

In 1990, Anadarko replaced 100% of reserves on an oil equivalent basis for the ninth consecutive year. During 1985-89, Anadarko replaced 159% of production compared with an industry average of 75%. For 198690, Anadarko production replacement was 139%.

Anadarko's U.S. finding cost covering additions, revisions, and acquisitions in 1990 was $5.29/BOE vs. the U.S. industry average of $5.83/BOE for 1985-89.

For 1986-90, Anadarko's U.S. finding cost averaged $4.22/BOE.

Mesa drilled 151 wells in 1990, replacing 50% of its gas, NGL, and crude production at a gas equivalent cost of 50 cents/Mcf.

Copyright 1991 Oil & Gas Journal. All Rights Reserved.