Oil and gas companies' first quarter 2001 earnings soar

Service and supply companies' earnings benefited from increased spending spawned by high oil and natural gas prices during the first quarter, many of them said, while others noted that higher day rates for drilling rigs contributed to stronger gains.

Integrated energy companies such as Houston-based firms Enron Corp. and El Paso Corp. and Charlotte, NC-based Duke Energy Corp. also reported strong first quarters.

Refiners, on the other hand, reported merely average gains for the quarter. Some stated that refinery turnaround work played a part in lower profits, but many noted that strong industry fundamentals for refined products-particularly motor fuels-should help to drive higher earnings in the second quarter.

And petrochemical operations were hammered by the same high gas and oil prices that benefited the rest of the petroleum industry, as feedstock costs soared while demand slumped from a global economic slowdown.

BP

Surging North American natural gas prices and higher production levels spurred BP on to post its seventh successive record-setting quarterly results, with the supermajor recording profits of $4.1 billion in the first quarter, a 32% jump from a year ago.

The UK energy giant's exploration and production division turned in pro forma first quarter earnings of $5.14 billion, up $1.91 billion from the same period in 2000. Its gas and power unit's pro forma earnings were down slightly-to $112 million from $142 million-a fact explained by the "significant" contraction of NGL margins prompted by a rise in natural gas prices in the quarter.

BP's refining and marketing division turned in a pro forma result for the quarter of $994 million compared with $584 million a year ago.

"The trading environment remains broadly positive, in spite of the slowdown in the world economy," said BP Group Chief Executive John Browne. "Oil and natural gas prices have fallen back from peak levels, but both areas are expected to remain firm, with oil prices remaining broadly around the target range announced by the Organization of Petroleum Exporting Countries.

"[BP's] results reflects the positive environment but also continuing performance improvements, which are on track to achieve our announced targets, with high reported production being a particular feature," Browne stressed.

"Refining margins should remain relatively strong supported by low levels of product stocks, though with regional variations," Browne added.

Royal Dutch/Shell

Royal Dutch/Shell continued its record-setting ways with outgoing Chairman Mark Moody-Stuart reporting that the Anglo-Dutch energy group had chalked up best-ever earnings for the fifth quarter in a row.

Shell's adjusted "current cost of supplies" (CCS) earnings were nearly $3.9 billion, 23% higher than those of a year ago. Moody-Stuart credited "higher gas prices, higher refining margins, and increased liquefied natural gas volumes," for the record figure. He noted that reported net income for the quarter-$3.89 billion-was also a record.

Return on average capital employed on a CCS earnings basis for the 12 months to Mar. 31 was 20.7% compared with 14% a year ago, the Shell chairman emphasized.

Shell's E&P unit turned in record earnings of $2.85 billion, up 21% on the same period last year, on the back of higher gas realizations. The company's hydrocarbon production climbed by 3% last quarter.

The company's downstream gas and power division's earnings nearly tripled year-on-year to $355 million, while its oil products unit recorded a 62% rise in earnings of $958 million. Moody-Stuart said the single black mark was the fact that chemicals revenues dropped 83% to $53 million due to lower margins in almost all businesses.

Analysts Lehman Bros. said, "Shell's business mix, featuring low exposure to US gas and global oil production and a high exposure to Asian downstream has disadvantaged it this quarter. It has also been hit by the atrocious performance of its US downstream. Both these issues highlight the drive to make acquisitions.

"However, the underlying business performance continues to exceed expectations," the analysts added.

Texaco, Chevron

Texaco reported net income of $833 million, compared with $574 million for the same period last year. Texaco Chairman and CEO Glenn Tilton said it was the third consecutive quarter that Texaco's earnings surpassed $800 million.

"Propelled by strong worldwide crude oil and US natural gas prices, our up- stream results were their highest ever. Operationally, we exceeded our production target for the quarter," Tilton said. "Downstream earnings were mixed."

Commenting on Texaco's proposed merger with Chevron, Tilton said the two companies are making progress. The European Commission has approved the merger. The US Federal Trade Commission continues its review.

Texaco received $7.14/Mcf for gas during the first quarter, 191% higher than last year. It received $24.31/bbl for crude for the first quarter, down slightly from last year.

Production for the first quarter was 534,000 boe/d, 12% lower than last year. The reduction stemmed from sales of noncore producing properties and from lower production in California caused by high gas prices that made some steam-assisted recovery uneconomical.

Texaco's quarterly operating expenses were 13% higher because gas prices led to higher utility expenses and production taxes. Exploratory expenses for the quarter were $33 million before tax, $14 million higher than last year.

Chevron reported net income of $1.6 billion, up from $1.04 billion the year prior.

Chevron Chairman and CEO Dave O'Reilly said, "We've started off the year on a very high note. Our first quarter results continue a trend that carried us to record earnings in 2000. Our return on capital employed for the past 12 months was a solid 23%."

Chevron's first quarter average sales realization increased to $7.57/Mcf from $2.40/Mcf. Average US crude oil realizations dropped 6% to $24.50/bbl.

"Both our domestic and international downstream businesses recovered from the depressed earnings of a year ago. Margins strengthened this year, with higher product prices," O'Reilly said.

He said the combined companies should achieve a $1.2 billion/year in targeted cost savings.

Conoco

Conoco's net income was $653 million for the first quarter compared with $399 million for the same period last year. Revenue for the most recent quarter was $10.6 billion compared with $8.7 billion last year.

Archie Dunham, Conoco chairman and CEO, said 25 wildcat wells and nine ap- praisal wells are slated to be drilled this year.

"We're off to a good start, with two North Sea exploration wells already declared commercial. Also, a recent development in Viet Nam has significantly in- creased production on the Rang Dong field," he said (OGJ, Apr. 30, 2001, News- letter, p. 8).

"The second quarter is expected to be another good quarter for earningsellipsean increase in Conoco's worldwide crude oil and natural gas liquids production during the quarter is expected to offset the anticipated seasonal decrease in North Sea production. As a result, worldwide production should be up about 5% over last year's second quarter," he said.

Independent E&P

Anadarko reported net income of $664 million for the first quarter compared with $51 million for the same period last year. Cash flow from operations during the first quarter was $1.1 billion, up from $135 million in the first quarter of 2000.

Robert J. Allison, Anadarko chairman and CEO, said, "Our first quarter earningsellipsecome within striking distance of earning almost as much as we did for all of 2000, which was $796 million."

Apache reported record net income of $282.2 million, up from $109.5 million in the prior-year period. Cash from operations rose to $557 million, compared with $300.8 million in the year-earlier period. Revenues increased 77% to $795.1 million.

Natural gas production increased 33% to a record 988 MMcfd. Apache expects to produce 1.15 bcfd of gas and 165,000 b/d of liquids during the second quarter.

Mitchell, meanwhile, reported first quarter earnings of $122.9 million, compared with $43.3 million for the same period last year.

Gas revenues increased $156 million because of higher volumes and prices. Gas sales volumes also increased sharply over last year's first quarter, rising 35% to 369 MMcfd.

Gas sales prices averaged $6.87/Mcf for the quarter, up $3.98 from the prior-year period.

George P. Mitchell, chairman and CEO said, "We are one of only a few exploration and production companies that are projecting double-digit gas production growth this year and the only company with a 3-year compounded organic growth target of over 20%."

Service-supply

Tulsa-based Helmerich & Payne Inc., which is an operating company as well as a drilling contractor, recorded the highest quarterly income in its history, it said. The company reported first quarter 2001 earnings of $41.7 million on revenues of $221.6 million.

The company cited the "significant increase" in natural gas prices as the primary driver behind its oil and gas division's operating profits.

The firm participated in the drilling of 40 wells, a majority of which are producing, completing, or waiting on connections with pipelines. Seven of these were dry holes, the company noted.

Earnings from Helmerich's contract drilling operations were up "sharply" year-over-year, the firm said. These gains were not affected by the increase in the company's land and offshore rig operations in the US, which was offset by "sluggish" demand in international markets, particularly in Venezuela.

"An overall increase in US land rig day rates of 19% over the previous quarter and 60% over last year's [first] quarter, helped push operating profit for the US land rig segment up by 21%ellipse," the company said.

BJ Services Co., Houston, reported first quarter net income of nearly $81 million on $550 million in revenues. This compares to net earnings of almost $30 million on revenues of more than $390 million during the first quarter of 2000.

The company also reported increases in pressure pumping revenues in both the US and Mexico as well as in other markets. BJ Services' non-US revenues increased by 20%, driven primarily by natural gas drilling in Canada, the company said.

Dallas-based Santa Fe International Corp. pulled in net income of $34.4 million on revenues of $167.3 million. This compares with earnings of $18.3 million on $132.5 million in revenues for the first quarter of 2000.

"The recovery in Santa Fe's worldwide activity continues at a measured pace," said Pres. and CEO Sted Garber, "consistent with our expectations.

"As the year progresses, we expect to see improvement in our land results driven primarily by a stronger market in Venezuela," Garber noted.

Enron

Energy marketer and trader Enron reported better-than-expected 2001 first quarter earnings on big increases in retail energy services and higher wholesale trading volume. During a conference call, CEO Jeffrey Skilling said that wholesale and retail services volumes are still expanding rapidly.

Enron reported first quarter net income of $406 million, up from net income of $338 million in the comparable 2000 period. The results exclude a nonrecurring after-tax gain of 2¢/share from accounting changes. Revenue for the quarter rose 281% to $50.1 billion.

For the quarter, the company reported a 65% increase in energy volumes to 69 trillion btu equivalent/day (tbtue/d), a 59% increase in new retail energy services contracts to $5.9 billion, and a sevenfold increase in broadband network services delivered.

Skilling said all regions and products contributed to the record results, with Enron's North American natural gas and power businesses leading the increase in profitability. European wholesale earnings also increased, as liquidity and market access on the continent continued to advance.

Wholesale physical volumes experienced growth across all regions in the first quarter, the company said. The results included a 65% increase in total wholesale volumes to 69 tbtue/d, a 55% increase in natural gas volumes to 36.5 tbtu/d, and a 109% increase in power volumes to 232 million Mw-hr.

In North America, the company reported a 32% rise in natural gas volumes to 27.8 tbtu/d, and a 90% increase in power volumes to 195 million Mw-hr.

He said more than $525 billion of total gross value has been transacted on Enron Online since inception in late 1999. More than 275,000 transactions totaling $162 billion were conducted in the first quarter of 2001.

Enron's retail energy services reported first quarter earnings before interest and taxes (EBIT) of $40 million.

Transportation services reported $133 million in EBIT in the first quarter, compared with $128 million in the comparable 2000 quarter. Skilling said several pipeline expansion projects are under way, including 625 MMcfd of new capacity to Florida, to be completed in two phases beginning the second quarter of 2001, and a 150 MMcfd addition to California to be completed in 2002.

Duke Energy

Duke Energy surprised analysts with first quarter income of $454 million, compared with $388 million for the same period in 2000.

Revenue increased to $16.5 billion from $7.3 billion for the comparable quarter last year. Analysts quizzed executives during a conference call about the source of the "earnings surprise." Some analysts wanted to know if gas sales in California were responsible for most of the increased income.

"The earnings surprise came from across the company-not just selling gas in California," said CEO Richard Priory.

He said Duke Field Services, Duke Energy International, and Duke Energy North America's first quarter performance beat company expectations. Looking forward, executives said the company will continue to grow at 10-15%/year. Priory said he is comfortable with achieving growth at the higher end of that range for 2001.

Turning towards California, where the company operates merchant power plants, executives said a reserve of $110 million taken in the fourth quarter for receivables was sufficient and conservative. They said no additional reserves are needed in this quarter. Unpaid balances have actually declined, they said.

Executives pointed out revenue from power sales in California had been booked even though some of those receivables had not been collected yet. The majority was sold forward last year on long-term contracts.

Analysts questioned whether revenue might be higher if the power had not been sold forward given the extremely bullish prospects on power for the summer.

"We hedged the gas contracts at the same time we sold the power forward," said Harvey Padewer, group president Duke Energy Services.

The Energy Services group, which includes North American Wholesale Energy, International Energy, and other segments, reported earnings of $428 million before taxes, a 208% increase over first quarter 2000. Wholesale Energy contributed $348 million of that sum-a 324% increase over first quarter 2000.

El Paso

With Coastal Corp., Houston, incorporated into operations, El Paso Corp. reported first quarter EBIT and adjusted for nonrecurring items of $1.09 billion, up 42% from $769 million in last year's comparable quarter.

Charges for the merger, completed in the first quarter, took $890 million after tax from earnings and are expected to lop off another $400 million from income after tax in the second or third quarter.

Including other charges for losses on the disposition of assets, the company reported a first quarter loss of $400 million on revenue of $17.8 billion, compared with income of $428 million on revenue of $9 billion for the comparable 2000 period. The company added that cost savings from the merger are coming in better than expected.

Coastal Corp. became El Paso Produc- tion Co. (EPPC) and reported that increased production helped boost EBIT to $248 million from $154 million in the 2000 first quarter. But El Paso conceded that expenses are increasing for the production company because of industry conditions.

"We have delays in completing wells because some of the rigs in service now were stacked and less efficient," said Rodney Erskine, president of EPPC. Erskine explained that it takes about 60 days to spud and complete a development well, or about 25% longer than usual.

"The service industry is simply overloaded, causing the rig delays," he said.

Costs are also rising because the company has to drill more just to maintain flat production year over year in some areas, Erskine said. In the San Juan basin, the company put twice as many rigs to work, but gas production has remained flat, he said.

Merchant energy is a bright spot. EBIT for the quarter was $394 million, up from $152 million in the comparable 2000 quarter. Ralph Eads, president of the merchant energy group, attributed the improvement to higher transaction volumes, risk management and customer solutions, higher margins, and increasing fee-based income from power assets and financial services.

The pipeline segment of El Paso reported an 8% increase in income before interest and taxes to $422 million in the 2001 first quarter, compared with $390 million in the comparable period last year. But the growth rate was "unique" to the quarter, said John Somerhalder, president of the pipeline group.

Looking forward, he projected that income from pipelines will increase 2-5%.

Refiners

Tosco Corp., Old Greenwich, Conn., reported earnings for the quarter of nearly $87 million on $6.4 billion in revenues. Tosco's Chairman and CEO Thomas D. O'Malley, called the company's results "mediocre."

He said, "Our refining system performed largely in line with our expectations. We had scheduled a very substantial maintenance program during the first quarter of 2001." Due to this scheduled-and in some cases unscheduled-maintenance, Tosco ran some of its refineries at lower capacity levels, thus affecting first quarter earnings.

Tosco's retail system, the company said, "has generally performed well." The only exception, O'Malley noted, were markets in southern California, an area where the company dominates.

"The Southern California market is still difficult," he said. "We are in the process of reevaluating our cost structure in retailing. We must, and will, become more cost-effective in this area."

Ultramar Diamond Shamrock Corp., San Antonio, reported first quarter net earnings of more than $136 million vs. $69 million earned in the first quarter of 2000. UDS pulled in quarterly revenues of $4.2 billion compared with $3.6 billion during the previous first quarter.

The company attributed its successful quarter to "good industry fundamentals, reliable operations, and a strong competitive position," said Jean Gaulin, UDS chairman and CEO.

"The US retail business continues to be impacted by low retail fuel margins, said Chris Havens, executive vice-president, marketing, "and we are taking steps to improve our competitive position." Retail margins, Havens noted, have been under pressure for the last 18 months, due to increased competition and volatile product prices on the wholesale market.