Second quarter earnings suggest beginnings of recovery

Aug. 9, 1999
Early reports of energy firms' second quarter earnings indicate that the worst is probably over for the industry.

Second quarter earnings suggest beginnings of recovery

Early reports of energy firms` second quarter earnings indicate that the worst is probably over for the industry.

Losses are not near as common as they have been in the past few quarters (see story below). Second quarter 1999 results are mixed, however, when compared with the same period in 1998. At that time, the effects of the extended downturn were just beginning to set in.

Many companies view the rise in oil prices as largely responsible for improved results this quarter, although a continued slump in downstream earnings offset that for many companies-especially those with non-U.S. refining capacity. Persistent belt-tightening also played a role in the nascent industry recovery.

Integrated companies
Integrated oil companies are, in general, encouraged by the improvements in industry fundamentals that took place during the second quarter.

"The long-awaited recovery in crude oil prices gave our exploration and production operations a boost in the second quarter," said Chevron Corp. Chairman Ken Derr. "The average spot price for West Texas Intermediateellipsewas $17.66/bbl for the quarter-the highest level since the fourth quarter of 1997 and 20% higher than last year`s second quarter.

"Unfortunately," said Derr, "operational problems at our California refineries prevented us from realizing the benefits of a strengthened refined products market on the (U.S.) West Coast. We have estimated that these refinery upsets reduced second quarter earnings by about $100 million.

"Likewise, earnings from our international refining, marketing, and transportation businesses declined sharply, as Caltex operations in the Far East continued to suffer from weak refined product margins." (Caltex Petroleum Corp. is an Asian refining joint venture of Chevron and Texaco Inc.)

Chevron posted net income of $350 million for the quarter, down from $577 million in second quarter 1998.

Mobil Corp.`s second-quarter 1999 earnings were $749 million vs. $642 million last year.

"The upstream benefited from higher worldwide crude oil prices and lower operating expenses," said Mobil Chairman Lucio Noto. "We continued to see the benefits from our refocused investment programellipseand from asset rationalizationellipseThese benefits were offset somewhat by higher exploration expenses, lower natural gas prices, and a 3% decline in production vs. the second quarter of last year."

In the U.S. downstream, Mobil saw record earnings for both the second quarter and the first half, despite a decline in refining margins.

Outside the U.S., he said, "ellipseRefining margins continued to collapse in the face of product oversupply, and marketing margins eroded as product prices lagged the increase in crude oil costs and were impacted by competitive pressures in several markets."

In general, said Noto, "Higher crude oil prices were more than offset by lower worldwide natural gas prices, weaker margins in refining and marketing-especially in Mobil`s international markets-and lower petrochemical margins."

Canadian integrated firms Imperial Oil Ltd. and Petro-Canada noted the same opposing trends in their upstream and downstream businesses.

"I`m encouraged by the improved prices for crude oil and natural gas," said Imperial Chairman Bob Peterson, "but abnormally low industry product margins continued to have a negative impact on overall results." His firm logged net earnings of $96 million (Canadian) for the quarter vs. $109 million last year.

Petro-Canada`s earnings for the period were $64 million (Canadian) vs. $25 million in second quarter 1998. Pres. and CEO Jim Stanford said, "Petro-Canada`s upstream business delivered an impressive improvement during the second quarter, thanks to increased commodity prices and production volumes, while downstream earnings were constrained by a tough business environment."

A sampling of earnings for other integrated petroleum companies follows, with second quarter 1999 results listed first, followed by the same period in 1998, with losses shown in parentheses: Exxon Corp., $1.2 billion vs. $1.6 billion; ARCO, $313 million vs. $154 million; and Amerada Hess Corp., ($21.7 million) vs. ($34.3 million).

Downstream operators
U.S. independent refiners fared pretty well during the second quarter.

Tosco Corp. reported a decline in net income to $84.6 million from second quarter 1998`s $100.3 million. Chairman Thomas O`Malley said, "These results are satisfactory, given the volatile industry fundamentals during the quarter, combined with the loss of production from the Avon refinery."

This San Francisco-area refinery was shut down for the entire period because of damage resulting from a fatal fire (OGJ, Mar. 8, 1999, p. 40).

"Tosco`s retail system enjoyed an excellent quarter," O`Malley continued. "Refining results on the West Coast were reasonable, but the East Coast experienced poor margins."

United Refining Co., operator of a 65,000 b/d refinery at Warren, Pa., logged net income of $9 million for second quarter 1999, compared with a loss of $2.3 million for the period last year. The gain is attributable to increased plant utilization and a resultant rise in wholesale product sales.

Ultramar Diamond Shamrock Corp. reported earnings of $48.4 million vs. ($52.6 million) last year.

Upstream independents
Without low downstream margins to drag them down, independent oil and gas producers saw improvements in their operating results during the second quarter.

Enron Oil & Gas Co. reported net income of $20.6 million vs. $13.3 for the same period a year ago.

"Second quarter 1999 North America wellhead natural gas prices averaged $1.93/Mcf, down slightly from an average of $1.96/Mcf in the second quarter of 1998," said the company. "North America crude oil and condensate prices received by EOG were $16.10/bbl for the (period)ellipsean increase of 26% compared to $12.82/bbl a year ago."

EOG Pres. and CEO Mark Papa said, "EOG was the second most active driller in the U.S. for the first half of 1999. This aggressive drilling activity, coupled with the increase in North American production, demonstrates EOG`s ability to stay focused and return a strong performanceellipse."

Cabot Oil & Gas Corp. recorded a net income of $960,000 for the second quarter vs. $3.1 million for the same period last year. This is a big improvement over Cabot`s $2.4 million loss for the first quarter.

"Driving the return to profitability was an increase in production, lower administration and exploration expenses, and a $974,000 pretax gain from the sale of a non-strategic property," said the company. "However, the second quarter profit contribution, compared to the same quarter last year, was reduced by lower April natural gas prices (and increased expenses)."

The company expects further improvement in its financial results this year. Based on expected strengthening in natural gas prices, Cabot`s board last month approved a $13 million increase to the 1999 capital budget, bringing the total for the year to $68 million.

Canadian independent PanCanadian Ltd. is also planning to increase spending in response to the recovery. The company outpaced its year-ago performance by a factor of nearly two, recording net income of $64 million for second quarter 1999 vs. $34 million in 1998.

"Encouraged by the positive business environment, we have increased our 1999 capital spending program by $120 million to about $770 million," said Pres. and CEO David Tuer. "The majority of this increase will be directed to oil development in Western Canada."

Despite this, says Tuer, the company remains focused on natural gas.

A sampling of earnings for other independent producers follows, with second quarter 1999 results listed first, followed by the same period in 1998, with losses shown in parentheses: Vastar Resources Inc., $48.3 million vs. $32.8 million; Ocean Energy Inc., $1.3 million vs. ($134.8 million); and Burlington Resources Inc., $15 million vs. $23 million.