INDUSTRY EARNINGS PLUMMET 34%

Robin Buckner Price Staff Writer Valerie Sanders Statistics Editor Earnings for the first 9 months of 1992 plunged from the year ago level for a sample of U.S. oil and gas companies. However, increased natural gas prices sparked improvement in the third quarter. Year to date earnings for a group of integrated and nonintegrated companies fell 34% to $8.6 billion compared to a year ago on revenues that fell less than 1%. But third quarter earnings for the group jumped 28% to $3.3 billion on

Jan. 12, 1993

10 min read

Robin Buckner Price
Staff Writer

Valerie Sanders
Statistics Editor

Earnings for the first 9 months of 1992 plunged from the year ago level for a sample of U.S. oil and gas companies.

However, increased natural gas prices sparked improvement in the third quarter.

Year to date earnings for a group of integrated and nonintegrated companies fell 34% to $8.6 billion compared to a year ago on revenues that fell less than 1%. But third quarter earnings for the group jumped 28% to $3.3 billion on revenues that increased 7% to $119.9 billion.

Special charges for restructuring, writedowns, and property dispositions continued to affect companies in the third quarter, but many in the Oil & Gas Journal sample reported lower operating expenses due to cost reductions implemented earlier.

In a turnaround from first half 1992, upstream earnings were a strong spot, particularly in the U.S., while the downstream sector continued to be plagued by flagging demand and weak margins.

Many companies see the future brightened by the increase in U.S. gas prices, while the fate of worldwide downstream earnings hinges on economic recovery.

YEAR TO YEAR COMPARISONS

A striking 70% of the group logged increases in third quarter profits in 1992 compared with 1991.

Slightly more than 25% of the group reported year to year increases in third quarter earnings in 1991 (OGJ, Dec. 2, 1991, p. 24). However, after 9 months in 1992 just 36% of the group has higher profits than at the same time the previous year.

Year to date results have been hampered by first half reports when the group of independents OGJ tracks saw earnings plunge to a net loss of $53.7 million, compared with net income of $353.5 million in first half 1991 (OGJ, Nov. 23, p. 24). OGJ's group of integrated oil companies logged a 47% decline in first half income compared with the year prior (OGJ, Aug. 31, p. 15).

The group's strong third quarter performance is due in large part to increased U.S. natural gas prices. After 9 months the group received an average $1.65/Mcf vs. $1.53/Mcf during the same period in 1991.

Crude oil prices averaged $17.90/bbl for the group, down 4% from 1991.

Gas production averaged 30.28 bcfd for the first three quarters of 1992, a 2% increase from the previous year, while oil production slipped 3% to 7.62 million b/d.

THIRD QUARTER PERFORMANCE

Earnings leader Exxon Corp. reported net profits of $1.135 billion in third quarter 1992, compared with $1.115 billion in 1991.

Exxon Chairman L.G. Rawl said, "The U.S. natural gas market has shown signs of recovery since an apparent bottoming out early in 1992. Increasing natural gas usage and the need to replenish below normal inventories led to improved results from this sector during the recent quarter."

Questar Corp., Salt Lake City, saw third quarter 1992 income increase to $6.2 million from $1.8 million in the same period of the preceding year.

R.D. Cash, Questar president, said "Because of our integrated operations we were able to take advantage of improved conditions in the natural gas market. The increased regional and national demand for natural gas meant our exploration and production companies were able to produce more gas, and our transportation operations delivered more gas."

Increasing demand for gas resulted in a 119% increase in third quarter production for Questar's Celsius Energy Co. and Universal Resources Corp. units, more than offsetting a 5% dip in gas prices.

SPECIAL PROVISIONS

As with the rest of 1992, special charges, mainly for property writedowns and restructuring, played a significant role in earnings.

Shell Oil Co.'s results after 9 months included a $100 million after tax charge for work force reductions logged in the third quarter.

Global Natural Resources Inc., Houston, incurred losses on the sale of producing leases that had contributed $8.5 million in oil and gas revenues to the first 9 months of 1991.

Oryx Energy Co., Dallas, said third quarter earnings included $2 million in net gains from the disposal of assets, including $43 million mainly from gas processing plant sales, offset by a $141 million provision for the special relinquishment of U.S. nonproducing leases.

Phillips Petroleum Co.'s 9 month earnings included a $62 million work force reduction charge, a $26 million extraordinary loss for early retirement of high cost debt, and a $19 million charge for gas imbalance positions.

Property damage and business interruptions caused by Hurricane Andrew cost Texaco Inc. $28 million in the third quarter, and Unocal Corp. had a $32 million charge for restructuring.

Special items in the third quarter for Chevron Corp. included a foreign exchange loss of $98 million, compared with foreign exchange gains of $21 million in third quarter 1991.

Mobil Corp.'s third quarter was hit by a $68 million charge for restructuring, $50 million for writeoff of a nonproducing lease, and $13 million in costs related to damage from Hurricane Andrew.

Mobil Chairman Allen E. Murray said, "At midyear (1992) we announced we expected U.S. salaried payroll to be down about 2,000 people or 10% by yearend 1992. We remain on track to realize this objective. In fact, we are proceeding on a wider front and at a faster pace.

"Combined with a first quarter charge of $86 million, total year to date restructuring provisions are $154 million, which covers all segments of our business and will result in higher productivity and significantly greater savings than originally estimated."

REDUCED EXPENSES

The group also benefitted from previous restructuring efforts, as many companies reported reduced operating expenses.

Amoco Corp. benefitted from lower operating expenses as it began to see the effects of its cost reduction programs that were announced in the second quarter.

Shell reported substantial progress in its objective to achieve at least $800 million before tax and operating and cost improvements by yearend 1994. The company expected to realize two thirds of the benefits by yearend 1992.

Louisiana Land & Exploration Co. reported third quarter 1992 dry hole and exploratory charges fell a sharp 39% from the same period a year ago due to reduced exploratory drilling and a higher success rate. The company also realized a decline of more than 8% in general, administrative, and other expenses due to cost reduction actions taken earlier in the year.

Of its third quarter performance, Kenneth Derr, Chevron chairman, said in addition to benefiting from higher crude and U.S. natural gas prices, the company began to see the effects of reorganization and cost reduction efforts. The company's operating expenses adjusted for special items declined 11% from 1991's third quarter and were down 8% in 1992.

Derr expects further cost reductions in fourth quarter when its work force reduction programs will be largely complete.

UPSTREAM EARNINGS

Driven in part by increased U.S. gas prices, the group's exploration and production operations in general fared better than in 1991.

Dean Witter noted the group of U.S. companies it tracks reported upstream income up 53% in third quarter 1992 compared with 1991's third quarter. The analyst said its group saw third quarter 1992 exploration expenses decline 21% from the year ago period.

Swift Energy Co., Houston, increased net income in the quarter and 9 month periods and Pres. A. Earl Swift said, "The company was able to achieve these results by posting increases in each of our three major lines of business ... Revenues from oil and gas sales increased 53%, earned interest and fees from partnerships and joint ventures increased 35%, and well supervision fees increased 32%.

Swift increased its drilling activity in the first 9 months of 1992, drilling four wildcats and 17 development wells. All but four wells were successful in adding oil and gas reserves, and the company said those reserves were added at a cost of less than $2/bbl of oil equivalent.

Chevron's U.S. exploration and production earnings increased to $253 million in the third quarter compared with $29 million in third quarter 1991, but non-U.S. exploration and production earnings totaled $89 million, including foreign exchange losses of $63 million, compared with $191 million in third quarter 1991.

Amoco's U.S. exploration and production operations earned $256 million in third quarter 1992 compared with $139 million in 1991's third quarter, due mainly to increased gas production and prices and lower exploration expenses. Non-U.S. exploration and production earnings declined to $60 million in third quarter 1992 from $97 million in third quarter 1991, due to lower crude sales volumes and unfavorable currency effects.

Cliffs Drilling Co., Houston, said daywork drilling revenue declined in U.S. and non-U.S. markets. Third quarter contract renewals on the company's two jack up rigs operating in Lake Maracaibo, Venezuela, were about $5,000/day/rig less than the previous contracts.

DOWNSTREAM EARNINGS

Downstream earnings around the world reflected weak refining margins and a downturn in national economies.

Dean Witter noted lackluster demand for gasoline and other petroleum products combined with ample supplies to erode earnings from downstream operations.

Its group reported refining and marketing income down 19% worldwide.

Sun Co. Inc. reported a third quarter loss of $320 million due to writedowns associated with implementation of a new business strategy and other activities.

Chairman Robert H. Campbell said the key to the company's new strategy is growth in value added businesses, which he identified as branded gasoline marketing in the U.S. Northeast, chemicals, lubricants, and logistics. As part of that effort the company decided to withdraw from branded gasoline marketing in Oklahoma, Missouri, and Iowa and to reconfigure its Tulsa refinery to produce mainly lubricants.

Chevron's U.S. refining and marketing earned $73 million in the quarter compared with a loss of $10 million the same time in 1991 when a $53 million environmental provision was logged. The company's refining and marketing outside the U.S. lost $4 million in third quarter compared with earnings of $136 million in 1991.

Chevron said the weak global economy held down product prices in spite of a slight increase in total sales volumes.

WHAT'S AHEAD

With continued stable oil and gas prices, the OGJ sample group is poised to benefit in all sectors from a sustained economic recovery.

But Dean Witter said 1993 crude oil prices may only approximate 1992's average unless oil demand shows some gains. It predicts natural gas realizations will settle at lower levels in 1993. The analyst said most companies will have favorable earnings comparisons for the next several quarters, due mainly to strong natural gas prices, cost cutting efforts, and generally weak earnings comparisons with prior periods.

Many companies voiced optimism about further earnings increases in fourth quarter 1992.

Snyder Oil Co., Fort Worth, had eight drilling rigs running in Wattenberg field in Colorado as of late October and planned 70 wells to be drilled by yearend 1992.

The company expects earnings to increase sharply in the fourth quarter, reflecting rapid increases in production, higher gas prices, and an approximate 40cts/Mcf benefit in the price received for gas production generated by Section 29 tax credits.

James W. Kinnear, Texaco president, said, "Faced with continued soft conditions in the refined product market, we will maintain our emphasis on the control of costs and expenses. We also will devote the necessary resources to improving productivity, maintaining operational competitiveness, and strengthening our financial position."