OGJ GROUP PROFITS SLIDE IN 1992 DESPITE LATE YEAR RECOVERY

Massive restructuring efforts and increased U.S. natural gas prices sparked an impressive hike in fourth quarter 1992 earnings for a group of large integrated U.S. petroleum companies Oil & Gas journal tracks.

But the boost was not enough to save the group from a big profit decline in 1992 compared with 1991.

Combined net income for the group fell 39% in 1992 to $9.4 billion on revenues that declined less than 0.4% to $447.4 billion. The group logged a 24% decline in earnings in 1991 compared with 1990, when earnings increased 14% year to year.

Fourth quarter 1992 earnings jumped a striking 67% vs. fourth quarter 1991, an indication things might be turning around for the industry. In the fourth quarter, 68% of the group posted higher earnings than in the same period in 1991, while for the year only 27% of the group reported higher earnings than in 1991.

The group was hit by special charges throughout the year, mostly related to restructuring moves, and mandatory accounting changes hurt earnings hard late in the year.

U.S. upstream operations were an unusual strong point for the group last year, as its natural gas prices increased almost 10% vs. 1991. Still, the group's U.S. gas production declined 2%, and its U.S. liquids production and crude prices declined for the year.

Overall, non-U.S. drilling and production did not offer much relief as companies appeared to throttle back some programs in that arena, and prices for gas and crude were down across the board for the group.

U.S. refining and marketing suffered throughout the year from too much capacity and depressed demand, market factors that hit non-U.S. downstream operations as well.

Chemical earnings began to show signs of improvement, as several companies reported increased sales volumes and benefits from expanded product lines.

The outlook for 1993 remains hinged on recovery from an economic slump that has spread from the U.S. and Europe to the Asia-Pacific region, sustained higher prices for U.S. natural gas, and increased oil prices. The latter is tied to production constraint by members of the Organization of Petroleum Exporting Countries.

SPECIAL ITEMS

Charges for restructuring, environmental considerations, and property writedowns were logged throughout the year.

And late in the year, many companies adopted two new accounting standards that reduced earnings. Statement of Financial Accounting Standards (SFAS) 106 is an accounting change covering postretirement benefits, and SFAS 109 is a deferred income tax accounting change,

USX-Marathon Group made the two accounting changes in 1992, both reflected in the company's first quarter 1992 net income. Adopting SFAS 106 cost Marathon $147 million net of income tax and SFAS 109 cost $184 million.

Amoco Corp. adopted the same accounting standards. The cumulative prior year's effects of the changes, which reduced first quarter 1992 earnings, totaled $924 million. Excluding those charges, Amoco's net income would have been $850 million. The company also logged charges of $805 million for a strategic reassessment of business operations, partly offset by favorable items totaling $180 million.

Coastal Corp. posted a noncash $125 million pretax charge for restructuring refining and marketing operations in the fourth quarter, a key factor behind the company's loss for the year.

"All of Coastal's major operating segments performed at or above our expectations except refining and marketing," said James. R. Paul, Coastal president.

ARCO's 1992 results included a net charge of $392 million after tax because it adopted the two new accounting standards. But the company posted a $140 million benefit in 1992 from a settlement on assets nationalized by Iran and recognition of a previously deferred part of the gain from the 1989 sale of a majority interest in Lyondell Petrochemical Co. common stock. That benefit was partly offset by charges related to ARCO Chemical's withdrawal from Yukong ARCO Ltd. (OGJ, June ')?, 1992, p. 40), a South Korean joint venture, and charges for future environmental costs.

Mobil Corp.'s 1992 results included special charges of $49 million for restructuring, $123 million for property writedowns, and $60 million for environmental charges, all charged to fourth quarter earnings. The special charges were offset in part by benefits from asset sales of $85 millon and inventory, tax and other adjustments for $78 million.

Occidental Petroleum Corp.'s fourth quarter included a noncash after tax charge of $600 million to write down the value of its coal assets and provide for expected liabilities associated with its exit from that operation.

Chevron Corp.'s earnings benefitted by $546 million from special items, mostly gains from asset sales. The company said its program to dispose of marginal and nonstrategic assets generated pretax cash proceeds in 1992 of about $1 billion.

Unocal Corp. realized $198 million after taxes in 1992 from asset sales that were part of a debt reduction program announced in April and another $235 million from assets offered prior to the April announcement.

Unocal Chairman Richard J. Stegemeier said, "This quarter begins to reflect the major changes we've made in our operating structure over the past few years, as well as a significant improvement in earnings from continuing operations.

U.S. UPSTREAM

Increased natural gas prices in second half 1992 helped the group out of the slump that dominated U.S. upstream operations most of the year.

Restructuring efforts and a focus on core assets helped companies reduce operating costs.

Mobil Chairman Allen E. Murray said, "Upstream operations benefitted from significantly higher natural gas prices in the U.S. and from reduced costs associated with our continuing restructuring program in North America, where pretax operating expenses declined about $1.20/bbl vs. fourth quarter 1991.

Pennzoil Co. Pres. James L. Pate said, "Pennzoil's oil and gas segment had an excellent year, highlighted by the acquisition of over $1.1 billion in oil and gas operations from Chevron Corp., virtually doubling our oil and gas business." The Chevron acquisition (OGJ, Nov. 9, 1992, p. 42) generated about $100 million in after tax cash flow in second half 1992 before an $11.7 million adjustment for nonrecurring closing costs.

Marathon's U.S. upstream operating income in the fourth quarter was $28 million, compared with a loss of $24 million the prior year, mainly due to increased natural gas prices and a natural gas purchaser buying out a contract in 1992. For the year, upstream operating income-totaled $127 million vs. $94 million the year prior.

Amoco Corp. saw fourth quarter earnings jump to $548 million vs. $153 million the same time in 1991. Amoco Chairman H. Laurance Fuller said, "U.S. exploration and production operations were primarily responsible for the improved performance, reflecting higher natural gas prices and production levels and lower expenses.

NON-U.S. UPSTREAM

Earnings from non-U.S. exploration and production were generally lower, with sliding production because of reservoir declines playing a big part. Yet most companies were able to reduce costs in the sector, which partly offset the production declines.

Natural declines in North Sea volumes and pipeline curtailments of Colombian production were the main reasons for Louisiana Land & Exploration Co.'s liquids volume decline.

Marathon's international E&P operations income plunged to $3 million in fourth quarter 1992 from $37 million the year before, and for the year it was $61 million vs. $156 million. The declines were mainly due to decreased liquids liftings from the U.K. North Sea and lower natural gas prices.

ARCO's increased international crude and natural gas liquids production was offset by reservoir declines and Lower 48 lease divestitures.

Exxon Corp.'s non-U.S. E&P earnings increased slightly as higher production volumes and lower operating expenses offset lower crude and natural gas margins.

Chevron's international E&P earnings totaled $594 million in 1992 vs. $717 million in 1991. Gains on asset in the North Sea, Sudan, and Canada were partly offset by a $110 million fourth quarter writedown of its Canadian Beaufort Sea leases. Crude production from Papua New Guinea and increased production in West Africa more than offset declines in production from the North Sea and Indonesia.

Mobil's worldwide exploration costs were lower, reflecting a slower paced, more selective program.

U.S. REFINING, MARKETING

Companies with downstream operations on the West Coast generally fared better in 1992 vs. 1991 due to stronger gasoline prices and better margins in that area. But refinery downtime and a general surplus of products kept U.S. refining and marketing earnings in check for most of the group.

Ashland Oil Inc. had a difficult fourth quarter due to poor refining margins, but retail gasoline margins were strong. The company said its SuperAmerica retail unit had its best quarter in 3 years.

Chairman John R. Hall said weak refinery margins resulting from too much supply and not enough demand were a common problem for the industry.

Hall said, "U.S. petroleum product demand was up about 2.6% on average compared with a year ago," he said. "However, high U.S. refinery runs and the addition of oxygenates to the gasoline pool to comply with environmental regulations led to excess gasoline supply. The margin squeeze resulted in an $8 million operating loss for Ashland Petroleum."

Sun Co. Inc. has a new strategy to combat the depressed U.S. downstream sector that includes focusing on its value added U.S. refining and marketing businesses.

"One of our goals in refining and marketing is to reduce the impact on our bottom line of wholesale fuel margins, which have significantly depressed earnings for the past 2 years due to high refinery utilization rates and a continuing oversupply of product in the marketplace," Sun Chairman Robert H. Campbell said.

Chevron's U.S. refining and marketing earnings turned around in 1992, totaling $297 million, compared with a loss of $153 million in 1991. The improvement resulted from higher product margins and enhanced refinery operations. Margins improved on lower operating costs and higher West Coast gasoline prices vs. 1991 when intense competition kept a lid on prices.

Including the noncash charge for restructuring, Coastal's refining and marketing operations lost $192.1 million vs. a loss of $99.3 million in 1991. Losses were posted in downstream operations in fourth quarter 1992 and fourth quarter 1991 as well.

Marathon blamed intense pricing competition throughout its product marketing area and turnaround costs at its 225,000 b/d Garyville, La., refinery for depressed product margins.

But ARCO, s refining and marketing operations earned $346 million in 1992, compared with $266 million in 1992, due to higher margins in its five state West Coast marketing area.

LL&E said lower feedstock costs, reduced operating expenses, and modestly higher sales volumes led to fourth quarter pretax operating profits of $2.2 million from refining operations, compared with $100,000 in fourth quarter 1991.

And FINA Pres. Ron W. Haddock noted, "Excluding the adoption of FAS 106, the major factors responsible for the lower earnings were the lowest industry refining margins in several years and equipment downtimes at our refineries."

Mobil saw higher sales volumes, improved profitability in marketing, improved refinery operations, and the initial-benefits from its restructuring programs boost U.S. downstream operations in the fourth quarter. However, the improvements were dampened by the reduced cost advantage for the heavier, high sulfur crudes it processes.

Unocal posted refining, marketing, and transportation earnings of $102 million for 1992, a 44% increase from the year prior. Improved U.S. West Coast refining margins and stronger earnings from its Uno-Ven joint venture in the Midwest were responsible. However, the gains were offset in part by losses from Southeast U.S. marketing operations, which it is phasing out.

NON-U.S. DOWNSTREAM

Non-U.S. refining/marketing, usually a bright spot for major companies, in 1992 experienced the same woes that plagued the U.S. downstream sector. More than ample supplies and weak economies generally offset strong margins and increased sales.

Non-U.S. refining and marketing earnings slid to $111 million for Chevron, compared with $486 million in 1991. The company noted weak global economic conditions held down product prices, shrinking margins in all its areas of operations. The year's results included $14 million in foreign currency losses, compared with $19 million of currency gains in the 1991 fourth quarter.

Murphy cited a drop of 16% in margins for its U.K. and western European marketing unit but a rise of 16% in sales volumes in the fourth quarter.

Texaco's results for the fourth quarter and year reflected significantly lower refinery margins in Europe, due mainly to surplus products as well as unit downtime at its Pembroke refinery in Wales. In its affiliate Caltex areas, margins weakened mainly in third quarter 1992.

Mobil's international refining and marketing earnings in fourth quarter were the highest since second quarter 1991.

"Our operations in the Pacific Rim posted one of the best performances in recent years," Murray said. "Results in Europe continued to be hurt by weak industry refining margins caused by ample crude and product supplies and stagnant economies. However, this decline was partially offset by strong marketing performance, ongoing expense reduction efforts, and better trading results."

CHEMICALS

The group's chemicals operations appear to be easing out of a slump, as many reported increased sales for major products groups.

FINA continued to increase its share of polystyrene and polypropylene markets, logging record sales in both lines. Haddock noted the company entered the polyethylene market with the acquisition of a high density polyethylene plant in Bayport, Tex. (OGJ, Sept. 7, 1992, p. 35), a move that had a negligible effect on 1992 earnings but is expected to make significant contributions in the future.

ARCO Chemical posted after tax income of $210 million in 1992 vs. $192 million in 1991, logging increased sales volumes for all major products.

Mobil's chemical earnings remained depressed during the fourth quarter, a reflection of the weakness in key non-U.S. markets and intense competition.

Amoco's chemical operations benefitted in the fourth quarter from higher sales margins in major product lines and cost reduction efforts.

OUTLOOK

The OGJ group pins much of its hopes for 1993 on improving worldwide economies, stable natural gas prices, and increased oil prices.

Higher natural gas prices in second half 1992 have continued into early 1993, and if that trend continues, the group will be in a better position to capitalize on restructuring efforts.

LL&E's Steward noted that 1992 began with historically low domestic natural gas prices, and "we ended the year with the highest fourth quarter average price for domestic natural gas since 1984. We believe 1993 will bring more stability for this rapidly evolving market. Coupled with anticipated increases in our production volumes in 1993 and 1994, this has made us increasingly optimistic about LL&E's prospects for the future."

An upturn in downstream operations still hinges largely on world economic recovery. Several companies reported signs of improvement in the sector.

Coastal cited an anticipated drop in industry's U.S. refining capacity, growing product demand, and increasing markets for environmentally preferred products as reasons for cautious optimism for the future of its refining and marketing segment.

And Ashland's Hall noted, "Looking ahead, with an improving economy we expect strong results for the rest of the year from our nonrefining businesses. While refinery margins currently are disappointing, we anticipate that demand will continue to strengthen as we move into the spring and summer driving season. We remain cautiously optimistic that 1993 can be a better year for the refining industry than 1992."

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