OGJ GROUP WEATHERED TOUGH TIMES UPSTREAM AND DOWNSTREAM IN 1991

Joan Bonfield Biggs
Statistics Editor

Robin Buckner Price
Staff Writer

With an upstream sector hit by low oil and gas prices and downstream operations squeezed by weak petroleum demand, 1991 was a tough year for the group of 22 major integrated U.S. companies Oil & Gas Journal tracks.

The brief respite caused by the oil price spike in second half 1990 ended abruptly early in first half 1991, and it turned into a year of buckling down for most companies. They shed non-core assets, implemented strategic restructuring moves, and reduced staff.

Although low prices slowed overall drilling activity for the group, oil and gas production increased slightly, and most companies reported reserves gains.

Recession in the U.S. and Europe depressed demand for the group's refined products enough to pinch downstream earnings even as buoyant Asia-Pacific demand helped jack up world product sales.

As Coastal Corp. noted in its annual report, "Nineteen ninety-one was a tough year to be in the energy business. The industry suffered a series of severe blows all year long. The aftermath of the Persian Gulf war, warmer than usual weather, and a stubborn worldwide recession combined to lower demand in some areas, put unprecedented pressures on refining margins, and lowered prices."

For now, the outlook for 1992 doesn't appear much brighter for the group.

GROUP PERFORMANCE

Depressed market conditions upstream and downstream caused group earnings to fall 24% from 1990 to $15.8 billion on revenues that fell 5% to $460 billion (OGJ, Mar. 2, p. 16).

Total working capital fell to a negative $4.8 billion, and funds from operations slid 11% during 1991 to $38.3 billion.

Total assets slipped slightly more than 1% to $398.7 billion in 1991.

The group's world liquids production increased slightly to 8.8 million b/d even though 55% of the group reported a decrease in liquids production.

Natural gas production rose 1.5% to 30.4 bcfd.

Worldwide drilling was off nearly 13% at 6,559 net wells, with 68% of the group reporting fewer wells drilled.

Worldwide reserves for the group fell to 32.2 billion bbl of liquids, down 2%, and 144.8 tcf of natural gas, down 1%.

Crude runs to stills were off 0.2% to 15.2 million b/d, but refined product sales increased nearly 2% to 20.7 million b/d.

FINANCIAL YARDSTICKS

Key indicators show the group's financial performance in another steady slide similar to that in 1980-88.

Return on stockholder's equity and total assets peaked in 1980 in response to high crude prices, mirroring the trend in profits for that period (OGJ, May 27, 1991, p. 25). Profits as a percent of revenue peaked in 1979 at 6%.

All three indicators declined fairly steadily in 1981-87 as oil prices plunged.

The price collapse of 1986 spawned restructuring efforts in 1987 that boosted group financial performance in 1988, Prices remained low through the period, but demand bolstered earnings in the downstream sector.

Oil prices remained relatively weak during 1988-90, when they spiked in response to Iraq's invasion of Kuwait. Return on stockholder's equity rose to 12.3% in 1990 from 11.5% in 1989, and return on total assets rose to 4.6% from 4.3%.

With demand for refined products and chemicals sagging as a result of the recession and oil and gas prices falling last year, it was hardly surprising that all three indicators registered declines in 1991.

PRICES

Driving the OGJ group's poor financial performance in 1991 was worldwide low crude prices and near record low natural gas prices in the U.S.

The average wellhead price of U.S. crude in 1991 was $16.50/bbl, down 18% from 1990. The average price in 1990 of $20.03/bbl was up from $15.85/bbl in 1989. World export crude fell 17% in 1991 to an average $17.80/bbl. In 1990 the average world price had moved up 28.2% from the prior year to $21.35/bbl.

Several companies reported shutting in U.S. gas production in 1991 in response to gas prices that fell 8-17% for companies in the group. That practice continued early this year as Chevron Corp. curtailed an undisclosed volume of gas production (OGJ, Feb. 3, Newsletter).

FINA Inc. curtailed about 3 bcf of gas production in 1991 due to low prices--it received an average price of about $1.49/Mcf--and began trading gas futures, which generated nearly $1 million through hedging a portion of production.

FINA's average wellhead crude price fell 17% in 1991 to $18.59/bbl.

Amerada Hess Corp.'s average U.S. natural gas sales price in 1991 was $1.66/Mcf, compared with $1.86/Mcf 1990 and $1.59/Mcf in 1989. Its average worldwide price of crude was $20.54/bbl in 1991 vs. $21.76 in 1991 and $16-46 in 1989.

Shell Oil Co.'s average U.S. crude price fell to $16.06/bbl from $19.65/bbl in 1990. Its average price for natural gas was $1.70/Mcf, the lowest since 1980.

ARCO's average price of U.S.crude was $16.72/bbl in 1991, compared with $20.85/bbl in 1990, while U.S. gas averaged $1.54/Mcf, compared with $1.67/Mcf in 1990. ARCO International's average crude price declined as well, to $18.67/bbl from $20.15/bbl in 1990, but its gas price increased to $3.16/Mcf from $3.08/Mcf in 1990.

An exception to the trend was Ashland Oil Inc., with an average U.S. crude price that jumped to $23.41/bbl from $19.55/bbl in 1990. Ashland's fiscal 1991 ended Sept. 30, which included the final 4 months of 1990, when oil prices jumped during the Persian Gulf crisis. Its average gas price in the U.S. fell to $2.56/Mcf from $2.67/Mcf in 1990.

UPSTREAM OPERATIONS

Lower crude oil and natural gas prices crimped worldwide drilling activity in 1991 but did not rein the group's worldwide net oil and gas production. Both rose slightly.

That compares with Energy Information Administration's estimate of worldwide crude production averaging 60 million b/d in 1991, down 1% from 1990, and production from the Organization of Petroleum Exporting Countries averaging 24 million b/d in 1991, up 1% from the prior year.

U.S. crude and condensate production averaged 7.4 million b/d in 1991, a 0.2% increase from 1990. EIA said it marked the first increase in U.S. oil production since 1985. And U.S. gas production totaled 17.9 tcf in 1991, about the same as in 1990.

Conoco Inc. focused upstream operations in 1991 on getting the most value from existing reserves and securing diversified new sources of petroleum production. Its U.S. production increased 9% on an oil equivalent basis, and worldwide it replaced 115% of production, increasing reserves by 28 million barrels of oil equivalent (BOE). The company drilled 22 discoveries worldwide.

Mobil Corp.'s upstream earnings fell, but production increased 5% from 1990 to 1.6 million BOE/day. The company replaced 101% of reserves and acquired 27 million acres of exploration acreage. Mobil said its overseas natural gas business is thriving, but it has slowed U.S. gas development programs because of depressed prices.

Shell's exploration and production earnings declined 66% to $241 million, but the company said it focused on investments with near term improved financial results and stabilizing U.S. natural gas and oil production that had been declining since 1986. Shell's crude and condensate production averaged 400,000 b/d, about flat with 1990, as new production offset declines in older fields. Non-U.S. crude production averaged 81,000 b/d, also flat with 1990.

Phillips Petroleum Co.'s crude production was down 1%. Natural gas production inched up 2%, mainly due to production from the Gulf of Mexico and New Mexico's San Juan basin. The company replaced 64% of worldwide production and 79% of U.S. production on an oil equivalent basis. Exploration and production earnings were $183 million, compared with $550 million in 1990, due mainly to low prices.

Sun Co.'s international exploration and production results declined in 1991 because of a 16% decline in crude prices, a 13% decrease in crude production, and higher expenses resulting from an expanded exploration program. International production averaged 47,600 b/d in 1991, compared with 54,700 b/d in 1990 and 50,600 b/d in 1989. Part of the decline was due to maintenance shutdowns in the U.K. North Sea.

Chevron's worldwide upstream earnings were $1 billion in 1991, down from $1.3 billion in 1990. U.S. exploration and production earnings totaled $285 million, compared with $772 million in 1990. International exploration and production earnings fell only slightly to $717 million from $771 million in 1990.

Exxon Corp.'s upstream earnings totaled $3.1 billion in 1991, compared with $4 billion in 1990. The company said higher volumes of crude production in the North Sea offset declines elsewhere, and higher natural gas volumes and prices overseas offset soft gas markets and weak prices in the U.S. About 70% of the company's total natural gas sales were made outside the U. S.

Louisiana Land & Exploration Co. saw oil and gas revenues fall $75 million from 1990's level. Crude oil volume in the U.S. fell 600 b/d, North Sea production fell 1,900 b/d, and other non-U.S. production fell 800 b/d. U.S. gas deliveries declined marginally.

DOWNSTREAM OPERATIONS

Shutdowns, recession, and competition crimped U.S. downstream earnings, while operations outside the U.S. saw increased margins and sales.

Sun Chairman Robert McClements Jr. said in Sun's annual report, "One of the long held 'truths' in the oil business was that it was comparatively immune to economic downturns--that demand for petroleum products was, in economists' terms, relatively inelastic and therefore the industry was not subject to economic swings.

"But the quotation marks around 'truths' are there for a reason. As the events of the past year painfully demonstrated, the oil industry's fortunes are tied firmly to the well being of our nation."

Sun's refining and marketing earnings after tax totaled $105 million in 1991, down from $155 million in 1990.

ARCO's products division earned $266 million in 1991, compared with $439 million in 1990. ARCO Chairman Lodwrick M. Cook noted the West Coast was hit particularly hard by recession, and for the first time in recent memory in the five states comprising ARCO's retail marketing area, gasoline demand was down from the previous year.

FINA's downstream operations reflected economic recession and the shutdown of units at its Port Arthur, Tex., refinery for modernization. But the company increased branded gasoline sales in spite of sluggish U.S. demand.

Coastal's refining and marketing operating profit fell to $24.9 million in 1991 from $243.4 million in 1990. The company blamed continued warm weather, low priced natural gas competing with heating oil, and the U.S. recession.

Amerada Hess pointed to the volatility of product prices caused by fluctuating supplies and general economic slowdown affecting its refining and marketing results. The company reported a loss of $126 million in refining and marketing in 1991, compared with income of $376 million the prior year.

LL&E's operating profits from refining declined modestly in first half 1991. Refining margins were improved in the first half, but sales volumes were down from the previous year. As the year went on margins deteriorated, and LL&E posted a pretax operating profit of $11 million, down $6 million from 1990.

Companies with a strong concentration of downstream operations outside the U.S. generally fared better.

Texaco Inc. said higher refined product margins in Europe, Latin America, and the Pacific Rim boosted downstream earnings and offset some of the effects of depressed downstream margins in the U.S.

Murphy Oil Corp.'s refining, marketing, and transportation earnings were up 6% from 1990 to $43.3 million, with non-U.S. operations accounting for the gain. The company's average gross margins in the U.S. were up 7%, but sales were down 2%. Margins in the U.S. and U.K. were strong early in the year but declined as the year wore on.

Exxon's record earnings in 1991 were underpinned by downstream earnings of more than $2.5 billion, nearly double 1990 earnings. Its U.S. and non-U.S. refining and marketing results were up substantially from the previous year. Exxon said earnings were enhanced by substantially improved operating performance at major plants.

The company's petroleum product sales increased 2%. More than half of Exxon's worldwide sales are concentrated in Europe and the Asia-Pacific region. Exxon said in the last 5 years those areas accounted for about two thirds of the volume growth in product sales.

CHEMICALS

Flagging chemicals earnings for the most part crossed geographic boundaries due to excess capacity.

Phillips resumed production of polyethylene in 1991 after a 2 year hiatus. By yearend, capacity was restored to 1.2 billion lb/year, about 67% of that in place prior to a 1989 explosion and fire at its Houston chemical complex. Another 600 million lb/year of capacity is to be in operation by yearend.

Phillips' chemicals net income was down 36% at $186 million in 1991, including income from business interruption insurance related to the Houston accident, due mainly to slack demand from the recession.

Mobil cited surplus capacity and recession-driven lack of demand in its chemical earnings decline. Amoco said its chemicals earnings fall of $140 million to $68 million stemmed from an industry-wide downturn and excess capacity for commodity chemicals.

ARCO's chemicals earned $188 million in 1991, compared with $351 million in 1990.

FINA's chemicals earnings fell 35% to $101 million due to surplus supplies and soft demand. But FINA said chemicals continued to be the most significant contributor to profits.

Exxon's chemicals earnings were $512 million in 1991, down less than 2% from the prior year.

Ashland Chemical reported near record operating income despite the recession. Operating income from chemicals totaled $97.8 million in 1991, compared with $69.7 million in 1990.

SPENDING

Capital and exploration spending for the group totaled $45.9 million in 1991, up nearly 8% from 1990.

Just 32% of the group reported a decrease in expenditures.

Many cited increased outlays for field development programs and refinery modernization and expansion projects.

Exxon's capital and exploration spending totaled $8.8 billion, compared with $8.3 billion in 1990. Exploration and production spending totaled $5.4 billion, up 14% from the prior year, reflecting increased offshore development in the U.S., North Sea, and Malaysia. The company spent $1.9 billion on refining and marketing in 1991, up just 4% from 1990, essentially all on retail marketing.

Mobil's upstream capital and exploration spending in 1991 was up 43% from 1989, with an increased shift outside the U.S. Capital outlays in refining and marketing increased 78% during the same period because of refinery upgrades and increased environmental expenditures.

Phillips' spending in 1991 was essentially flat with 1990 at about $1.4 billion.

The company noted that during 1989-91 about 78% of its capital expenditures were in the U.S.

OGJ's annual capital spending survey showed U.S. companies plan to spend $32.5 billion for U.S. upstream and downstream projects in 1992, and non-U.S. spending this year is expected to total about $18.3 billion (OGJ, Feb. 24, p. 25).

PROFITS BREAKOUT

The year opened on a high note with the group's earnings hitting $7 billion for first quarter 1991, up from $5.1 billion in fourth quarter 1990.

But second quarter 1991 earnings fell 47% to $3.7 billion, and in third quarter 1991 earnings were 30% lower than in the second quarter.

The group reined the fall in fourth quarter 1991, with net income of $2.6 billion, essentially flat with third quarter results.

In first quarter 1991, half of the group reported lower earnings than the prior year's first quarter, in the second quarter 71% of the group's earnings were lower than the previous year's second quarter, in the third quarter 76% of the group's net income was lower year to year, and in the fourth quarter 90% reported losing ground from the prior year.

None of the group reported a net loss in first quarter last year, but one company did in the second quarter, four reported losses in the third quarter, and five reported fourth quarter losses. All group members reported lower revenues in 1991, except Ashland, which saw a 4% increase.

OUTLOOK FOR 1992

The year does not appear off to a good start for U.S. integrated companies.

Smith Barney, assessing 14 majors, predicted first quarter earnings from operations 54% lower than a year ago and 16% lower than fourth quarter 1991 (OGJ, May 4, Newsletter).

Many analysts see economic recovery weak at best well into 1992, which will continue to pinch oil and gas demand and increase competition in downstream segments.

Oil and natural gas prices remain a big question.

The Organization of Petroleum Exporting Countries meets again late this month to discuss production levels. Resumption of exports from Iraq and expansion of production in Kuwait could add to the supply glut, particularly if Saudi Arabia refuses to cut production in response.

But companies reported they are prepared to face challenges in 1992.

Chevron Chairman Kenneth T. Derr said his company's international operations provided most of the good news in 1991, and that is where the company expects to see most of its opportunities for growth and financial rewards. He noted Chevron's confidence in the future is reflected in its planned 1992 capital and exploratory program of $5.3 billion, up 10% from the previous year.

The company has developed "strategic intents," to shift exploration and production emphasis to international projects, generate $1 billion/year from U.S. exploration and production operations, reshape U.S. refining and marketing into a top competitor, take advantage of refining and marketing growth opportunities in the Far East through its 50% owned Caltex Petroleum Corp., expand petrochemical businesses in areas where Chevron holds a competitive advantage, be selective in funding noncore businesses, and focus on cost reduction in all areas.