US oil, gas companies' second quarter, first half 2001 earnings jump

Aug. 13, 2001
With few exceptions, second quarter and first half earnings showed impressive gains for the US oil and gas industry.

With few exceptions, second quarter and first half earnings showed impressive gains for the US oil and gas industry.

Integrated firms and independent exploration and production companies alike posted sharp income gains on increased production and higher natural gas prices. Contributing to those gains for many independent E&P firms were strong price hedging programs implemented to shore up their earnings prospects (see related story, p. 22).

And refiners' earnings also gained, as strong demand for products led to increased margins and high utilization rates. The other side of the downstream sector did not fare as well, as high feedstock costs and reduced demand owing to an economic downturn deflated petrochemical earnings.

Click here to enlarge image

Comparing a sampling of US-based operating companies' earnings shows increases of 23% and 36% in the second quarter and first half, respectively, vs. the year-earlier periods (Table 1).

Click here to enlarge image

Service and supply firms benefited from robust drilling, which lifted rig utilization and prices for equipment and services. Earnings for this group declined 14% for the quarter but gained 16% in the first half in a year-to-year comparison (Table 2).

Meanwhile, earnings gains were healthy, albeit relatively more modest, for a sampling of Canadian companies (see related story, p. 24).

ExxonMobil

ExxonMobil Corp. recorded second quarter revenues of $56.456 billion, up from $55.956 billion from last year, while second quarter earnings decreased to $4.46 billion from $4.53 billion the same period last year.

But excluding merger effects and special items, ExxonMobil's second quarter earnings increased 6% from the same quarter last year to $4.38 billion, or $0.64/share, reflecting its June 20 two-for-one stock split. This was slightly lower than Wall Street analysts' expectations.

"The improvement in earnings reflected higher US natural gas realizations and refining margins, both of which were very strong early in the second quarter but declined significantly as the quarter progressed," said ExxonMobil Chairman Lee R. Raymond.

"The decline in these key earnings drivers along with crude oil prices has continued into the third quarter," Raymond added.

Upstream earnings were $2.85 billion, up $85 million from a year earlier and setting a second quarter record. Stronger refining and marketing margins boosted downstream earnings 27% higher than a year ago to $1.267 billion.

Chemicals earnings, excluding net gains on asset management activities, were $142 million, down on higher feedstock costs and lower volumes caused by weak economic conditions in the manufacturing sector in the US. Outside the US, increased volumes were offset by lower margins and higher expenses associated with additions to capacity.

First half 2001 revenues for the world's largest oil company were $113.756 billion vs. $110.037 billion for the first half of last year, while net income for the first 6 months was $9.46 billion compared with $8.01 billion for the period a year ago.

Chevron, Texaco

Chevron Corp. reported net income of $1.324 billion for the quarter and $2.924 billion for the half. Earnings per share for the quarter were $2.05 compared with $1.71 for last year's second quarter.

"We had an excellent second quarter," said Chevron Chairman and CEO Dave O'Reilly. "Our upstream business-exploration and production-continues to be the major contributor to overall profits. However, the improvement in earnings from the year-ago quarter was largely driven by our US downstream operations-refining, marketing, and transportation."

Regarding the company's worldwide E&P operations, O'Reilly noted that Chevron boosted net oil-equivalent production in both the second quarter and the first half of 2001 by 3% compared with the same periods last year. "I'm especially pleased that natural gas production in the US rose 2% from the 2000 second quarter, the result of a focused drilling effort in the Gulf of Mexico. This production increase came at a time when our average US natural gas realization improved 65% from last year's second quarter to $5.52/Mcf." The company's average US crude oil realization of $23.87/bbl was down 6% from the second quarter of last year.

International E&P quarterly earnings of $557 million were down 4% from a year ago, primarily resulting from the $48 million write-off of an unsuccessful well off Azerbaijan. Meanwhile, net liquids production increased due mainly to higher output in Kazakhstan. Net natural gas production surged 9% as a result of higher production in Kazakhstan, Canada, and Argentina but was partially offset by declines in Nigeria and the UK.

Sharply higher margins and sales volumes boosted Chevron's earnings for US refining, marketing, and transportation to $327 million for the quarter, compared with second quarter 2000 earnings of $167 million.

Chevron's capital and exploratory ex- penditures were $3.3 billion for the first half of 2001, up from $2.4 billion in the first 6 months of last year. Seventy percent of these outlays were for worldwide E&P activities.

Completion of Chevron's merger with Texaco Inc., announced Oct. 16, 2000, is expected within the original 12-month time frame. Discussions continue with the US Federal Trade Commission, though the European Union has already approved the merger.

Texaco also recorded second quarter earnings that exceeded year-ago levels but were not as strong as those recorded in the first quarter.

For the second quarter, Texaco posted earnings of $784 million, or $1.44/share, up from $625 million and $1.14/share for the same period last year.

Texaco Chairman and CEO Glenn Tilton said that this quarter's results included record earnings in the US downstream, benefiting from robust refining margins and strong refining runs. Tilton also noted that, although refining margins have contracted, marketing margins have increased from their low levels early in the second quarter.

"Looking to the future," Tilton added, "we continue to strengthen our upstream portfolio." Texaco is looking toward its Blind Faith discovery in Mississippi Canyon Block 696 and the Champlain discovery on Atwater Valley Block 63 to add to its future production and reserves.

Higher natural gas prices improved Texaco's US E&P earnings in the first half of this year to $1 billion from $647 million for the period a year earlier.

First half refining, marketing, and distribution earnings in the US moved up to $196 million from $45 million last year, but outside the US such earnings were $62 million vs. $90 million last year. The decline is attributed to weak marketing margins in the UK, where the company was unable to recover higher supply costs in the marketplace; lower refining margins and trading results in the Asia-Pacific region; and lower marketing results in Latin America.

Phillips

Phillips Petroleum Co. reported second quarter results that were 19% better than the company's first quarter earnings. Stronger refining, marketing, and transportation results led to net income of $618 million, or $2.40/share, compared with $442 million, or $1.73/share, for the same period a year ago.

Primarily due to higher oil production in Alaska, Phillips recorded production in the second quarter of 823,000 boe/d, up 21% from the same quarter last year. Phillips CEO Jim Mulva commented, "Overall, US crude production was up 61%, while non-US crude production was up 2%, primarily due to increased output in Norway and Nigeria."

Mulva added, "Our gas gathering, processing, and marketing segment results were up from the same period last year, primarily due to lower operating costs. Natural gas liquids prices were slightly higher than a year ago but declined from average prices in the first quarter."

Phillips's downstream performance in the second quarter surpassed not only that for a year earlier but also for the first quarter. "Our refineries ran at 99% of rated crude oil capacity, providing strong operating performance that enabled us to capture the benefits of improved margins," Mulva said.

Occidental

Occidental Petroleum Corp. announced second quarter net income of $473 million, or $1.27/share. This compares with year-ago earnings of $564 million for the second quarter.

However, for the first half of this year, Oxy's net income was $957 million, up from $835 million for the same period of last year. "Strong energy prices, particularly in California's natural gas market, resulted in outstanding earnings and cash flow for the second quarter and the first half of this year. The chemical segment returned to profitability in the second quarter after experiencing losses for the previous 2 quarters," said Oxy's Chairman and CEO Ray R. Irani.

Irani added, "We have used our free cash flow to reduce debt by approximately $480 million during the first 6 months, raising the debt reduction total to nearly $3.3 billion [relative to] our pro forma peak debt of $9.2 billion in April 2000."

Independent E&P

Anadarko Petroleum Corp., Houston, reported that net income of $1.50/share for the second quarter, vs. $0.48/share for the same quarter last year, reflects higher oil and gas production and higher natural gas prices, as well as a lower tax rate in Canada that increased earnings by $31 million, or $0.12/share.

Anadarko Chairman and CEO Robert J. Allison said, "We continued to show excellent volume growth, both quarter-to-quarter and year-to-year, putting us ahead of our forecasts. Total production volumes were up more than 10% over the first quarter of this year, and they increased 271% from the second quarter of 2000."

The year-over-year volume gain for Anadarko was mainly due to the acquisition of Union Pacific Resources Group in July 2000 and to increased production in Texas, the Gulf of Mexico, and Alaska.

Burlington Resources Inc., Houston, recorded second quarter earnings of $231 million, or $1.10/share, compared with $0.43/share during the same quarter last year. For the first half, net income was $567 million vs. $171 million for the period a year ago.

In July, Burlington's board approved an increase in the company's 2001 capital budget to $1.4 billion from $1.2 billion. Half of the additional capital is earmarked for natural gas producing basins in North America, while the remainder will cover increased service costs.

Kerr-McGee Corp., Oklahoma City, reported second quarter net income of $175 million on sales of $939.5 million, down from $334.7 million in net income and $1.06 billion in sales the prior quarter.

Kerr-McGee Chairman and CEO Luke R. Corbett commented, "We have supplemented our drilling success with the announced agreement to acquire HS Resources [Inc.], a core US onshore asset."

Kerr-McGee's capital expenditures for the second quarter, excluding acquisitions, were $494 million compared with $151 million in the previous year's second quarter; for the first 6 months, such spending totaled $886 million vs. $235 million for the same period last year.

Pioneer Natural Resources Co., Irving, Tex., posted net income of $28.3 million for the second quarter. For the same period last year, the company reported a net loss of $16.1 million.

Pioneer increased production 6% over the first quarter, while production costs were $0.71/boe lower-at $4.88/boe-as a result of reductions both in field fuel costs and in production taxes due to lower gas prices. Second quarter sales averaged 34,482 b/d of oil and 366 MMcfd of natural gas.

First half net income for Pioneer was $96.3 million compared with $11 million for the first 6 months of last year.

Duke

Duke Energy Corp., Charlotte, N.C., announced second quarter earnings of $419 million on operating revenues of $15.58 billion. With all numbers adjusted for its Jan. 26 two-for-one stock split, this translates into per-share earnings of $0.54, up from $0.44 for the same period a year ago.

Duke attributes its 43% increase in quarterly revenues over the prior year to continued expansion of North American wholesale natural gas and power sales and natural gas transmission growth in the eastern US.

Duke Chairman and CEO Richard B. Priory said, "We are creating regional energy businesses that take advantage of continued worldwide energy demand growth."

Duke's energy services group, including North American wholesale energy and international energy, posted earnings before income tax (EBIT) of $328 million for the quarter, a 58% increase over the same period last year.

Duke's North American energy segment reported year-to-date EBIT of $559 million, a 212% increase from a year ago. This growth is due to expansion of the company's wholesale energy asset portfolio, which in the past year has grown 50% to more than 12,600 net Mw of merchant power generation in operation or under construction.

Duke Energy Field Services (DEFS), which posted a 17% increase in second quarter EBIT over the same period in 2000, benefited from cost reductions and asset integration as well as two acquisitions: Canadian Midstream Services Ltd., which doubled Duke's natural gas processing capacity in western Canada, and Gas Supply Resources Inc., a propane distribution company serving New England.

Year-to-date EBIT for DEFS was 44% higher than a year ago due to combining Duke's natural gas gathering and processing businesses with Phillips's gas processing and marketing business, as well as last year's acquisition of assets from Conoco Inc.

Kinder Morgan

Houston-based Kinder Morgan Energy Partners LP, the largest master limited partnership, reported earnings of $104.2 million for the second quarter and $205.9 million for the first half of the year.

Analysts Dain Rauscher Wessels commented, "It was a stellar quarter for the partnership, as it outpaces expectations with $0.72/unit in net income for the limited partners. Continued internal growth and acquisition growth provide better-than-expected results."

Kinder Morgan Energy Partners, anticipating continued growth, declared a two-for-one split of its common units-effective Aug. 31.

The products pipelines segment of Kinder Morgan contributed $84.1 million to the partnership's second quarter earnings on volumes of 198 million bbl. The natural gas pipelines segment had net income of $32 million, transporting 108 bcf during the quarter, and the CO2 pipelines segment contributed $23.8 million to earnings with 93 bcf in volumes. The bulk terminals and liquids terminals segments also chalked up higher earnings for the quarter.

Refiners

Valero Energy Corp., San Antonio, reported that second quarter net income set a record at $274.8 million, or $4.23/share.

Due to strong discounts for sour crude-Valero's primary feedstock-and the full quarter's contribution from West Coast operations acquired during second quarter 2000, operating income for the quarter increased to $464 million from $158 million for the same period last year. Also, gasoline margins were strong during April and May, but these gains were partially offset by lower margins for the company's petrochemical products and higher retail costs.

Valero recently completed its acquisitions of Huntway Refining Co. of Newhall, Calif., and El Paso Corp.'s Corpus Christi, Tex., refinery and pipeline products system, and in May the company announced that it would acquire Ultramar Diamond Shamrock Corp., also based in San Antonio, for $6 billion. This acquisition is expected to close in the fourth quarter.

Like Valero, UDS posted record net income for the second quarter at $3.63/ share, or $266.4 million, compared with the same period last year, when net income was $1.47/share, or $128.5 million.

UDS Chairman and CEO Jean Gaulin explained the results, saying, "This quarter really highlighted our integrated approach to refining and marketing. During the first 2 months of the quarter, our refineries ran at high utilization rates to bring the improved industry spread to our bottom line. As refining margins declined in the final month of the quarter, our wholesale and retail units posted very strong results."

Tosco Corp., based in Old Greenwich, Conn., reported second quarter net income of $286.4 million on sales of $6.8 billion. This represents record earnings for what may be Tosco's last full quarter as an independent company, as its merger with Phillips Petroleum is expected to be completed by the end of September.

Service-supply

Schlumberger Ltd., taking a $280 million charge related to acquisitions, posted a loss of $93.3 million for the second quarter. Excluding this one-time charge, earnings were $187 million compared with $156 million a year earlier.

Revenues for Schlumberger's oil field services segment, headquartered in Paris, increased 44% from the second quarter of 2000 and 6% from the first quarter of this year.

Offshore drilling contractor Global Marine Inc., Houston, recorded net income of $84.3 million, which includes a one-time gain of $22.8 million on the sale of a special-purpose rig. For the first half of the year, earnings were $125 million.

Global Marine's fleet utilization during the second quarter averaged 99% with an average day rate of $75,500. During the same period a year earlier, utilization averaged 84% with a day rate of $59,400.

The company remains optimistic that, despite the change in the natural gas market that has caused prices to recoil recently, the long-term supply problem in North America remains unresolved. Global Marine Chairman, Pres., and CEO Bob Rose commented, "The ever-increasing depletion rates from smaller and smaller reservoirs should create a supply problem that only additional drilling can remedy. That's why we think US Gulf of Mexico peak day rates are ahead of us, not behind us."

Drilling contractor Nabors Industries Inc., Houston, beat the $0.59/share consensus estimate among Wall Street analysts, announcing earnings of $0.63/ share, or $104 million. Second quarter 2000 net income was $24.1 million.

Noting that the softening in the natural gas market has diminished demand growth for drilling rigs in the US Lower 48, Nabors Chairman and CEO Eugene M. Isenberg said that the company "has initiated voluntary rate concessions to our highest-volume customers. We intend to monitor this market closely to ensure [that] we remain generally competitive in all regionsellipse"

Houston-based Weatherford International Inc.'s earnings of $0.46/share for the second quarter were well above the consensus estimate of $0.40/share. Net income was $56.4 million on revenues of $573 million vs. last year's second quarter net income of $13.2 million, or $0.12/ share, on $421.8 million in revenues.

The largest contributor to Weatherford's revenues was the drilling and intervention segment, with net revenues in the second quarter of $336.9 million, followed by artificial lift systems, with net sales of $147.8 million, and completions systems, with net revenues of $88.3 million.