LACK OF ACCOUNTING CHANGE BUOYS EARNINGS FOR OGJ GROUP

Robert J. Beck
Economics Editor

Valerie Sanders
Statistics Editor

First half earnings for Oil & Gas Journal's group of 22 large U.S. oil companies rocketed from a year ago.

Earnings for the group totaled $8.3 billion, compared with a puny $1.2 billion for the same period in 1992. The big advance stemmed largely from one time charges that shrank earnings in first quarter 1992.

Last year, adoption of accounting rules associated with future post retirement costs caused one time charges. As a result, 12 companies in the group posted losses. For the first half this year only one of the companies booked a loss.

Group profits totaled $4.2 billion in the second quarter of this year, up 58.9% from the same period in 1992. Profits for the first quarter of this year were $4.1 billion, a big turnaround from a $956 million loss in first quarter 1992. Most of the companies posted the one time charges in the first quarter of last year.

U.S. exploration and production earnings improved this year, largely because of much higher natural gas prices and slightly higher gas production. Crude oil prices and production were down from first half 1992.

Results from non-U.S. exploration and production were mixed, Average first half world oil export prices were down from year ago levels. However, for some companies this was offset by increased production in some areas of the world and decreased exploration costs.

Earnings from refining/marketing and chemicals were somewhat mixed, with the group posting no clear trend. Several companies booked improved earnings from refining/marketing outside the U.S. The gains flowed from greater sales and lower costs due to restructuring and improved efficiency.

Refining margins in the U.S. were described as anywhere from depressed to improved, but margins outside the U.S. were generally higher. They reflected lower crude oil costs and steady product prices.

Most companies described the chemicals business as somewhat depressed as a result of sluggish economic growth and worldwide surplus capacity. Margins were weak due to higher unit costs and competitive markets. However, a number of companies booked higher earnings compared to those of a year ago. But most of the improvements were due to extraordinary one time charges or benefits flowing from restructuring.

There was little change in group revenue from a year ago. First half revenues were up 0.1% at $212.1 billion. Higher natural gas prices were offset by lower world crude oil prices and weakness in some product prices.

Crude and product prices slipped in the second quarter from a year ago. As a result, revenues were $107 billion, down 0.3% from 1992.

Fifteen companies reported their capital and exploration spending for the first half, with 11 showing a decline.

Spending by the 15 companies fell 5.4% to $15.1 billion. This year's spending represented 211% of earnings. Last year the group spent $16 billion while posting a first half profit of only $1.1 billion.

Exxon led the way with first half outlays of $3.7 billion, down 7.9% from last year. Companies that disclosed increases in spending were Amoco up $131 million, Occidental up $253 million, Murphy up $170 million and Kerr-McGee up $36 million.

OIL AND GAS PRICES

The OGJ group's first half results reflect in large measure U.S. crude oil prices that were higher than the previous year but were slipping at midyear. But a sharp rise in gas revenue was the main reason for improved U.S. exploration and production earnings.

Average first half spot price for West Texas intermediate was $19.50/bbl compared with $18.83/bbl for first half 1992. But spot price in June 1993 was only $19.25/bbl vs. $21.50/bbl in June 1492.

Refiners also noted higher costs of feedstock.

The Energy Information Administration listed U.S. refiners' cost of crude oil at an average $17.88/bbl for the first 5 months of 1993, up 4.1% from $17.17/bbl for the same period of 1992.

Even so, refiners' margins remained positive. Wright Killen data list average Gulf Coast cash operating margins for the first 5 months of 1993 at $1.25/bbl, up from 93/bbl last year.

A bright spot for the group was the U.S. gas market, where prices and production advanced this year.

First half 1993 average spot price was $1.978/Mcf, up 44.7% from $1.367/Mcf in the same period last year. In addition, U.S. marketed gas production for the first 5 months of 1993 was up 3. 1 % from 1992 at 7.943 tcf.

Eighteen companies reported world gas production totaling 28.7 bcfd, up 0.8% from first half 1992. Their world liquids production totaled 7.69 million b/d, down 4.2% from the first half of 1992.

Downstream, 14 companies reported refinery runs for first half 1993 that moved up 1.2% to 13.24 million b/d. And 16 companies reported world petroleum product sales of 19 million b/d for first half 1993, up a bare 0.9%.

Twelve reported their average crude oil sale price-$15.95/bbl, down 0.7% from $16.07/bbl in 1992. Only 11 of the companies disclosed average natural gas price for the first half-$2.03/Mcf, up 37.4% from $1.48/Mcf in first half 1992.

U.S. E&P

Most companies in the OGJ group listed an earnings advance from U.S. exploration and production, buoyed by natural gas, in first half 1993. At the same time, more efficient operations lowered costs and lifted profits. The improvement was offset in part by reduced crude oil production for many companies.

Exxon's first half earnings from U.S. E&P operations jumped to $490 million, up $184 million from the same period in 1993. Lower operating costs were a major factor. Exxon's first half U.S. crude oil and natural gas liquids production averaged 554,000 b/d, down from 602,000 b/d last year. But this was more than offset by a gain in gas production available for sale-up 12.2% to 1.72 bcfd.

At Chevron, first half earnings from the U.S. E&P sector more then doubled, increasing to $414 million from $191 million last year.

Earnings benefited from reduced operating expenses, lower exploration expenses, and higher natural gas prices. Those benefits were partly offset by lower average crude oil realizations and lower volumes of oil and gas production.

The lower volumes were due mainly to sales of producing leases in second half 1992. First half U.S. net liquids production fell to 398,000 b/d from 455,000 b/d in the same period of 1992. Net gas production slipped 16% to 2.06 bcfd.

Mobil posted first half earnings from U.S. E&P of $261 million, up from only $71 million in first half 1992. The gain reflected higher gas prices, lower operating expenses resulting from restructuring and cost reduction programs, and lower exploration outlays.

That was offset by lower production volumes. Mobil's net liquids production fell 5% to 302,000 b/d in first half 1993. Net production of natural gas was down 7% to 1.6 bcfd.

Texaco's U.S. E&P 1993 net income was up 49.5% from a year earlier, at $296 million. Earnings were reduced by a decline in oil and gas production resulting from normal reservoir decline.

Texaco's U.S. net liquids production fell 12,000 b/d to an average 426,000 b/d for the first half of this year. Net gas production of gas fell 6.2% to 1.74 bcfd.

Shell's first half E&P earnings moved up to $251 million from $218 million in first half 1992. Key factors were higher natural gas prices and lower operating costs, reflecting benefits from performance improvement programs launched in early 1992. That was offset by reduced production. U.S. crude oil flow fell 51,000 b/d to average 347,000 b/d for first half 1993. NGL production was off 3,000 b/d at 54,000 b/d. On the other hand, gas production was up 11 MMcfd at 1.491 bcfd.

NON-U.S. E&P

Earnings from non-U.S. E&P operations were mixed.

In contrast to most of the U.S. results, some companies posted increased production levels outside the U.S. But non-U.S. earnings did not benefit from the sharp rise in gas prices at home.

Chevron's first half international E&P earnings slipped to $307 million from $349 million in first half 1992. Earnings this year were trimmed by special charges related to prior year tax adjustments and asset writeoffs.

Results benefited from higher production volumes and lower exploration expenses. Net liquids production moved up 6.9% to 540,000 b/d. Increases occurred mainly in Papua New Guinea, which went on stream in mid-1992, and Russia's Tengiz field, which began joint venture operations last April.

International gas production rose 4.8% to 485 MMcfd.

Mobil's first half earnings from international E&P jumped 52% to $647 million from $425 million in 1992. That included a benefit of $86 million from resolution of tax issues related to production.

Liquid production outside the U.S. moved up 22, 000 b/d to 521, 000 b/d for first half 1993. That included increases of 36,000 b/d in Nigeria and 9,000 b/d in the U.K., offset in part by declines in Canada, Indonesia, and Norway.

Net gas production outside the U.S. advanced 6.1% to 3.12 bcfd. U.K. production was up 68% at 407 MMcfd.

Exxon's first half non-U.S. upstream earnings fell $132 million from a year ago to $1.167 billion this year. Liquids production outside the U.S. averaged 1.113 million b/d compared with 1,117 million b/d in 1992. Non U.S. gas production slipped 4.6% to 4.15 bcfd.

Amoco's non-U.S. operations posted a first half loss of $41 million compared with a $120 million loss in first half 1992. This year's loss came from a $170 million charge associated with a write down of Congo E&P operations to current recoverable value.

Non-U.S. liquids production slipped 26,000 b/d to an average 369,000 b/d for first half 1993. On the other hand, gas production rose 8.9% to 1.69 bcfd.

Phillips' first half net income from non-U.S. E&P was $77 million, up from $71 million in 1992. Earnings rose even though oil production fell 9,000 b/d to 106,000 b/d, including a 5,000 b/d drop in Norway.

Unocal earnings from non-U.S. upstream operations fell $20 million to $102 million for first half 1993. Slightly lower production and prices caused the decline. Crude oil production slipped a bare 1.2% to 98,800 b/d. Average price of crude outside the U.S. dipped 1.1% to $16.42/bbl.

U.S. REFINING, MARKETING

Year to year changes in profits from U.S. refining operations varied, with some companies posting gains and others showing a decline or even a loss.

Most noted lower operating costs as a result of restructuring and cost containment efforts. Some posted special charges related to future environmental costs and restructuring.

U.S. petroleum product demand moved up, and some prices were a little higher. But this was offset by increased feedstock costs.

Shell's first half net income from oil products sales was $170 million, a big turnaround from a loss of $24 million in first half 1992. Earnings benefited from a cost management program, a lower level of refinery turnarounds, and a new catalytic cracking unit at its 215,000 b/cd Norco, La., refinery. First half refined product sales advanced 84,000 b/d to average 1.159 million b/d. Revenue from refined products increased 10.2%.

Texaco's first half net income from manufacturing, marketing, and distribution segment fell 25.2% below the year ago level to $116 million. The company blamed slim margins on the East and Gulf coasts because of excess supplies of products and scheduled downtime of processing units. Product sales averaged 817,000 b/d for the first half, down 80,000 b/d from 1992.

Exxon reported higher earnings from U.S. refining and marketing. First half earnings increased to $134 million from $70 million in 1992. The increase flowed from lower operating expenses which were the result of restructuring and cost control efforts. But Exxon's product margins in the U.S. remained depressed. U.S. product sales fell 47,000 b/d to an average 1.12 million b/d in the first half this year.

Mobil posted a first half loss of $51 million from U.S. refining and marketing. That compared with a loss of $49 million in the same period of 1992. However, the loss this year was due to a $108 million charge for future environmental cleanup costs at service stations.

Excluding one time charges, operating earnings were $57 million, up $101 from first half 1992. The year to year improvement was due to better refinery performance, including benefits from the Beaumont plant upgrading project and notably lower operating expenses resulting in part from restructuring.

Chevron posted a first half loss of $407 million from U.S. refining and marketing compared with a profit of $127 million last year.

The sharp drop was due to a second quarter special charge of $604 million. A restructuring provision of 5532 million was for the expected financial effects of a decision to sell the Port Arthur and Philadelphia refineries and consolidate and reorganize marketing in the U.S. Southeast.

ARCO refining and marketing posted first half profits of $172 million, down from $181 million in 1992. The second quarter drop occurred this year as a result of weaker gasoline prices and higher product purchases.

Phillips' first half earnings from petroleum products moved up $28 million to $68 million. The gain was a result of higher sales prices and volumes and improved refinery operations. They were partly offset by higher feedstock costs and pipeline' abandonment costs.

NON-U.S. REFINING, MARKETING

Earnings from refining operations outside the U.S. were generally higher in first half 1993 than a year earlier.

The improvement was mainly from increased sales and higher margins in the rapidly expanding economies in the Far East, which more than offset sluggish conditions in Europe.

Exxon's non-U.S. refining and marketing earnings moved up $18 million to $610 million for first half 1993. Margins were higher particularly in the Far East and Europe. There was little change in international product sales. Sales in Europe barely moved up 2,000 b/d to 1.852 million b/d. Canadian product sales fell 7,000 b/d to 498,000 b/d. Product sales in other non-U.S. areas were up 63,000 b/d to an average 1.383 million b/d for first half 1993.

Texaco's first half earnings from non-U.S. manufacturing, marketing, and distribution increased $101 million to $243 million. Refined product sales rose 84,000 b/d to 1.489 million b/d. The largest gain was in the Eastern Hemisphere, where sales increased 55,000 b/d to 731,000 b/d. Improved results reflected stronger margins in Latin America, mainly Brazil, as well as the Caltex operating areas. Margins in Europe remained depressed.

Mobil's international refining and marketing earnings moved up $195 million to $321 million in first half 1993.

Results in the Pacific Rim, particularly Australia, Singapore, and Japan, improved on the strength of higher margins, strong refinery performance, and increased product sales reflecting market growth in that area. Results in Europe improved from the year before but still remained depressed due to lower demand resulting from a lingering recession. Petroleum product sales in Europe moved up 14,000 b/d to 781,000 b/d. Product sales outside of the U.S. and Europe increased 93,000 b/d to 1.021 million b/d.

Chevron's international refining and marketing posted profits of $129 million compared with $64 million in first half 1992. The 1993 results included a gain of $13 million from the sale of the Central American retail marketing. Operations improved due to higher sales volumes and margins, particularly in the Caltex operating areas. International refined product sales were up 21,000 b/d at 900,000 b/d.

Conoco's international downstream operations posted after tax operating income of $81 million, up from $72 million in 1992. The increase in earnings was mainly a result of lower costs.

OUTLOOK

The International Energy Agency predicts continued modest growth in world petroleum product consumption. Demand for the second half of the year will be 67.4 million b/d, up 0.8% from the first half.

Demand among members of the Organization for Economic Cooperation and Development will lead the way, increasing 1.8% to 39.5 million b/d on the strength of a slight increase in economic activity.

C.I.S. and eastern Europe demand is forecast at 6.75 million b/d, down 6.9% from the first half.

For the rest of developing countries of the world, second half demand is expected to move up 1.7% to 21.15 million b/d.

According to IEA projections, first half 1994 will see a modest increase in OECD demand, a stabilization of demand in the C.I.S. and eastern Europe, and continued growth in developing countries, particularly those in Asia.

World demand for first half 1994 will average 68.05 million b/d, up 1.8% from first half 1993. OECD demand will be up 1.9% from the first half this year at 39.55 million b/d. C.I.S. demand will be 6.75 million b/d, the same as second half 1993 but down 6.9% from the first half level. And demand in the developing countries will average 21.75 million b/d for first half 1994, up 4.6% from the same period this year.

Increased demand in the OECD and Asian developing countries should be a positive indicator for OGJ group companies, boosting product revenues and possibly profits.

Copyright 1993 Oil & Gas Journal. All Rights Reserved.