Continued low oil and gas prices and recession in the U.S. and eastern Europe choked 1991 earnings for the group of 22 U.S. companies Oil & Gas Journal tracks.
Net income for the group fell 24% in 1991 to $15.7 billion, compared with a 14% gain posted in 1990 when earnings were $20.7 billion. Total revenues for the period were down just 5% to $449.7 billion.
Exxon Corp. was the only company in the group that reported a more profitable year in 1991.
The group's fourth quarter 1991 profits fell 47% from 1990's last quarter to $2.6 billion. Fourth quarter 1990 net income had risen 188% from the 1989 period to $4.9 billion. The group's fourth quarter earnings also were down 7% from the 1991 third quarter (OGJ, Dec. 2, 1991, p. 24).
The only bright spot was international downstream operations, which benefitted from strong product demand in the Asia-Pacific region and colder weather and robust refining margins in Europe. As with 1990 earnings, companies with downstream operations in those areas fared better than those without (OGJ, Apr. 15, 1991, p. 21).
Chevron Corp. Chairman Ken Derr summed up his company's results, which generally reflected the group's performance:
"While our U.S. petroleum results were disappointing, our international operations performed at near record levels. Overall, 1991 was a tough year for the oil industry, with depressed natural gas prices and downstream margins in the U.S.
"The recession has continued to weaken demand for most refined and chemical products at a time of ample crude oil and natural gas supplies and industry-wide overcapacity for commodity chemicals. The predictable result has been intense competitive pricing, poor sales margins, and reduced sales volumes.
"However, unlike U.S. markets, our international petroleum operations turned in an excellent year, with international refining and marketing earnings, excluding special items, almost doubling."
The earnings outlook for 1992, at least at this early stage, is not much better. Demand and prices are expected to continue to be low in the near term, and the world economy is expected to remain weak.
SPECIAL CHANGES
Special charges, many related to restructuring and environmental projects, took a big toll on group earnings in 1991.
Sun Co. said its $387 million loss for 1991 included special charges totaling $437 million taken during the first 9 months.
But Sun Pres. Robert H. Campbell said major restructuring completed in fourth quarter 1991 leaves Sun better able to cope with the sluggish econoMY.
"With our restructuring in place and our refineries in good shape, we feel well positioned to take full advantage of the recovery when it occurs," he said.
Chevron booked restructuring charges of $185 million and provisions for environmental and litigation issues and other items totaling $203 million.
ARCO Chairman Lodwrick M. Cook said, "In response to the unfavorable economic climate and ARCO's revised downward expectations for domestic natural gas prices over the long term, we initiated staff reductions, restructuring our Lower 48 operations, and property sales and writedowns during the third quarter of 1991. The charges related to these changes significantly impacted this year's results."
The company's 1991 net income of $704 million included after tax special charges totaling $295 million.
Phillips Petroleum Co. wrote down $244 million on its Offshore California investments and booked charges of $30 million for project cancellations.
Shell Oil Co.'s $23 million loss in the fourth quarter included after tax special charges totaling $117 million for future environmental remediation and a provision for future claims and litigation settlements.
Amoco Corp. cut its fourth quarter net income to $153 million from the original $200 million when the U.S. Circuit Court of Appeals ruled against the company over the Amoco Cadiz supertanker oil spill off France (OGJ, Feb. 3, p. 30).
Many companies are switching to the Financial Accounting Standard 106 relating to provision for postretirement benefits. That move cost several companies in 1991 -Pennzoil Co. took a one time noncash charge of $49 million-and soon will affect others because the accounting method will be required for most companies.
OIL PRICES, DEMAND
Oil prices in 1991 fell sharply from 1990 levels when prices spiked after Iraq's invasion of Kuwait and the United Nations embargo of oil shipments from the two countries. Following the rapid drop in prices that accompanied the allied forces' success in driving Iraq from Kuwait in first half 1991, prices increased gradually in second half, then fell again at yearend.
World export crude prices averaged $22.26/bbl in january 1991, then fell to $17.01/bbl in February as the Persian Gulf conflict continued amid a surge in production from Saudi Arabia and others to offset the shortfall of Iraqi/Kuwaiti supplies.
Hostility in the Middle East ended in late February, and in March 1991 the average price fell to $16.01/bbl, marking the lowest monthly average for the year.
The average price of world export crude rose to $16.42/bbl in April and $16.85/bbl in May before slipping to $16.33/bbl in June 1991. The average price then saw successive monthly increases to $16.99/bbl, $17.24/bbl, $18.54/bbl, and $19.77/bbl. Prices slipped again in November to $19.33/bbl and plunged to an average 516-82/bbl in December.
The direction of the average wellhead price of light sweet U.S. crude matched that of world export prices, opening the year at $19.58/bbl in January, falling to $15.08/bbl in March, and rising to $17.68/bbl in October.
The price the OGJ group received for crude in 1991 fell 16% from 1990 levels to an average $17.21/bbl. Oil price declines amounted to 11-22% among group members.
Continued economic woes in the U.S. and eastern Europe drove down product demand, creating a downhill race between crude and product prices late in the year.
"Unfortunately, refinery margins declined sharply in December as petroleum product prices fell faster than crude oil costs," said John R. Hall, Ashland Oil Inc. chairman.
"Soft demand and market fears of a growing crude oil surplus should Iraq succeed in reentering the market led to an industry wide selloff, and wholesale product prices plunged. This resulted in a $4 million operating loss for Ashland Petroleum Co."
U.S. EXPLORATION, PRODUCTION
Decreased oil and gas prices stunted U.S. exploration and production earnings for the OGJ group and were a driving force behind the group's overall poor financial showing. None of the companies reporting prices realized an oil or gas price increase during the year.
Even earnings leader Exxon's U.S. E&P earnings of $627 million were down 50% from $1.26 billion in 1990. Gas production fell 7% and oil production 3%. The company noted the average price it received for crude declined $10/bbl in a year to year comparison.
Chevron's U.S. E&P earnings of $285 million compared with $772 million in 1990. Liquids production in the U.S. declined 1%, gas production fell 11%, and Chevron said new production almost offset normal field declines and property sales.
Mobil Corp.'s operating earnings in U.S. E&P of $192 million were down $152 million from last year as a 2% increase in liquids production and 5% increase in gas production were offset by lower prices. Mobil also said its exploration expenses were lower in 1991, reflecting a deferral in the gas program due to lower prices and in the oil program because of a lack of opportunities.
Amoco's U.S. E&P operations earned $595 million in 1991, compared with $861 million in the prior year.
Texaco Inc. posted U.S. E&P earnings of $619 million, down from $816 million in 1990, with stable liquids production and only a slight decrease in gas production.
USX-Marathon Group's net loss of $71 million in 1991 compares with net operating income of $508 million in 1990 that included a fourth quarter charge of $129 million related to the integration of some of Texas Oil & Gas Co.'s operations. Liquids production for the company in 1991 fell 1% to 195,000 b/d, and gas production slipped 81% to 1 bcfd.
INTERNATIONAL UPSTREAM
The international upstream sector was plagued by many of the same problems bedeviling the U.S. upstream.
Low oil and gas prices, decreased production, and increased expenses held down earnings, although some companies benefitted from a second half cold spell in Europe that boosted gas prices.
Sun's Campbell said international E&P results were lower due to reduced oil production and prices and higher exploration expenses. The unit posted a $38 million loss in 1991, compared with a $7 million loss in 1990.
"However," Campbell said, "our international exploration and production unit now has a more focused mission and should benefit from a streamlining of operations that occurred in 1991."
International E&P operations at Amoco earned $214 million in 1991, down from $860 million in 1990 in response to reduced liquids prices and volumes. Amoco's fourth quarter international upstream earnings were hit by higher dry hole costs of $60 million.
Exxon's earnings from international E&P fell by $279 million to $2.5 billion as lower crude prices were largely offset by higher gas volumes and prices. Gas production increased 9% mainly due to colder weather in Europe. Increased production from North Sea fields more than offset reductions in Canada, and liquids production rose 2% during 1991.
Mobil's earnings in international E&P declined 7% from 1990. However, Mobil Chairman Allen E. Murray noted increased exploration outlays in the international arena were offset by decreased expenses in North America.
Chevron's international E&P earnings were strong, but they failed to match 1990 A,hen prices were higher. The company increased net liquids production 6% and gas production 7%.
Texaco's international upstream operations earned $350 million, compared with $532 million in 1990. The decrease stemmed from lower crude oil prices, partly offset by increased production from the Duri steamflood in Indonesia.
U.S. REFINING, MARKETING
U.S. refining and marketing earnings were down in 1991 due to weak product demand caused bi, the recession. The year opened with decreasing crude prices yielding better product margins, but it was not enough to carry the group because competition drove product prices down as the year continued.
Many special charges went to the refining segment for current or planned environmental work.
Chevron lost $153 million in U.S. refining and marketing during 1991, compared with earnings of $376 million in 1990. Results in 1991 included special charges totaling $335 million for environmental cleanup, the Port Arthur refinery reconfiguration and litigation matters, unfavorable prior year tax adjustments, and asset writedowns.
Even excluding special items, Chevron's earnings declined significantly because of weak demand and competitive pricing. Its overall refined product sales volumes in the U.S. slipped 3% from 1990, but Chevron noted gasoline volumes increased 1%.
Chevron cited refinery downtime in 1991 as a factor in reducing product yields while increasing maintenance costs and outside product purchases.
Amerada Hess Corp.'s refining and marketing lost $126.3 million in 1991, compared with income of $240.3 million in 1990. Refining and marketing operations lost $82.7 million in fourth quarter 1991, compared with earnings of $116 million the same time last year, Downstream earnings in 1990 included $87.3 million from settlement of business interruption insurance claims and $114.6 million from petroleum trading activities.
In contrast, Exxon's earnings from U.S. refining and marketing increased $436 million to $514 million in 1991, and Mobil's U.S. downstream business in 1991 earned $214 million, about the same as 1990.
NON-U.S. REFINING/MARKETING
Strong margins in the first quarter, combined with increased demand in parts of Europe, Latin America, and the Pacific Rim bolstered non-U.S. downstream earnings for the group. But as the year wore on, recession in key European markets began to trim profits.
Three fourths of Exxon's record $5.6 billion net income and all of its earnings growth came from sources outside the U. S.
Exxon's earnings from international refining and marketing jumped $805 million to $2.04 billion. The company reported higher worldwide product sales and good operating performance at refineries for the year, but saw weaker prices for petroleum products and a $114 million decline in earnings during the fourth quarter.
Chevron's international refining and marketing profits advanced to $486 million in 1991, compared with $387 million in 1990, on sales volumes that increased 7%.
Mobil reported international downstream operating income of $799 million, $347 million higher than 1990. Mobil's operations in Germany, Singapore, and New Zealand were at all time highs, and several refineries had record production.
Murray said Mobil's earnings in international refining and marketing improved because of tightness in refinery capacity. The company reported strong marketing results due to favorable lag effects and increased product sales, especially in premium product lines. Mobil's fuel oil upgrading unit in Singapore and other non-U.S. capital investments made big contributions to profits.
Ashland Pres. Jack W. McNutt said, "Unit margins and sales volumes declined in the U.K. and western European markets. With soft market demand because of current economic conditions and market fears of a growing crude oil surplus, product prices have fallen faster than crude oil costs. Currently margins are negative in the U.S. and breakeven in the U.K."
CHEMICALS
Across the board, weak industry demand driven by the recession in the U.S. and surplus capacity for commodity chemicals depressed the OGJ group's earnings in that sector.
Exxon's 1991 earnings from chemicals were about flat compared with 1990, at $514 million and $522 million respectively, despite weaker economic conditions in 1991 and soft margins for some key products. Earnings for the U.S. chemicals unit fell by $14 million to $340 million, but international operations increased earnings by $6 million to $174 million.
Texaco's petrochemical earnings were down by $25 million at $23 million in 1991.
The company said lower earnings worldwide reflected decreased sales prices and volumes.
Mobil's chemical unit posted earnings of $217 million, down $105 million from 1990.
Chevron's chemical earnings in 1991 were $151 million, up from $34 million in 1990 when the division took a $158 million hit in special charges.
ARCO Chemical Co. reported 1991 net income of $188 million, compared with $351 million in 1990.
Alan R. Hirsig, ARCO Chemical president, called 1991 "a very difficult year" as world economies showed little sign of recovery.
"However," he said, "our continued efforts to expand into new markets throughout the world helped us maintain our sales volumes in spite of this difficult environment.
"The recession's impact was most evident in our margins, which declined in methyl tertiary butyl ether and styrene. MTBE margins in 1991 were down significantly from 1990, particularly in Europe, due to lower prices for premium unleaded gasoline and higher feedstock costs. Styrene margins also continued to deteriorate throughout the year as a result of lower prices and increased industry capacity."
WHAT'S AHEAD
With the Organization of Petroleum Exporting Countries failing to make a commitment to significant production cuts (OGJ, Feb. 24, p. 36), prospects for a crude price increase soon are not good.
Industry's capital and exploration spending, a key indicator of economic health, is projected to be down 6% for U.S. projects in 1992 and up just 3% for non-U.S. projects (OGJ, Feb. 24, p. 26).
British Petroleum Co. plc Chairman Robert Horton said industry faces the unprecedented combination of low oil prices and economic downturn affecting all business sectors.
"Trading conditions for the first half of 1992 are likely to be broadly similar to those for the previous 6 months," he said. "Improvements in refining and marketing margins and a rise in demand for chemicals will depend on economic revival, which is difficult to predict."
Salomon Bros. noted production from Kuwait is increasing, resumption of production from Iraq is a possibility, the U.S. and European economies are gripped by recession, and world oil inventories are high and growing.
The New York investment firm said, "Our conclusion is that a crunch lies ahead in oil prices, and its occurrence is nearly unavoidable. We believe oil prices will drop to $15/bbl or below at some point in the next several months before economic recovery and multilateral production cuts eventually stabilize prices."
Copyright 1992 Oil & Gas Journal. All Rights Reserved.
