PROFITS ADVANCE FOR MOST COMPANIES IN OGJ GROUP OF LARGE U.S. OPERATORS

Robert J. Beck
Economics Editor

Joan Bonfield Biggs
Statistics Editor

Oil & Gas Journal's group of 22 large U.S. oil and gas companies posted a sharp increase in revenue and profits in 1990 while boosting drilling activity.

Net profits for the group moved up 14.8% to $21.5 billion. The group's 1989 profits were down 12.2% from the year before.

Seventeen companies in the group listed higher earnings in 1990, while five showed a reduction. Only one, Occidental Petroleum Corp., had a loss last year.

Group revenues rose 18% in 1990 to $491.6 billion. In 1989, revenues increased 7.4%

There was little change in liquids or natural gas reserves for the group. Total liquids reserves slipped 0.4% to 32.5 billion bbl, while gas reserves inched up 0.7% to 128.4 tcf. In 1989, liquids reserves fell 1.3%, and gas reserves were up a modest 0.3%.

Writedowns associated with a variety of environmental issues were a major contributor to a sharp decline in group profits for 1989.

The increase in group earnings in 1990 helped raise some of the other measures of financial performance.

Return on total assets moved up to 4.6% from 4.3% in 1989. It was 5.4% in 1988. Return on stockholders equity rose to 12.2% from 11.5% in 1989. But net profits as a percent of revenues fell to 3.8% from 4%.

PRICES, PRODUCTION

Higher crude oil and product prices helped boost OGJ group revenues and profits in the wake of Iraq's invasion of Kuwait early last August.

The subsequent U.N. embargo of Iraqi and Kuwaiti oil resulted in a loss of world crude production in the last 5 months of 1990 that was made up by other countries. War jitters, however, set off a runup in prices in August, September, and October.

U.S. average crude oil production rose to 7.348 million b/d in the fourth quarter from 7.175 million b/d in the third. International Energy Agency data show total liquids production among members of the Organisation for Economic Cooperation and Development increased to 16.2 million b/d in the fourth quarter from 15.4 million b/d in the third.

The average price of U.S. crude oil jumped from $1 4.02/bbl in July to $21.85/bbl in August and $30.87/bbl in October. The average price of world export crudes moved up from $14.93/bbl in July to $33/bbl in October.

Prices slipped toward yearend, but the surge boosted average prices for the year to $20.03/bbl, up 26.3% from 1989. Average price for world export crudes was $21.35/bbl, up 28.2%.

U.S. production for 1990 averaged 7.301 million b/d, down 4.1% from 1989. Total U.S. liquids output, including NGL, averaged 8.925 million b/d in 1990, down 3.2% from a year earlier.

Production in areas outside the U.S., Organization of Petroleum Exporting Countries, and the former Communist countries moved up 3.1% to 15.236 million b/d. For the OGJ group, total liquids production fell 2.2% to 8.786 million b/d.

Exxon Corp.'s net liquids production dropped 92,000 b/d to 1.712 million b/d. Shell Oil Co.'s production was off 34,000 b/d at 541,000 b/d, and Amoco Corp. was down 33,000 b/d at 782,000 b/d. Oxy boosted net liquids production 11.1% to 219,200 b/d. Amerada Hess Corp. increased output 20,300 b/d to 174,700 b/d.

The average U.S. wellhead price for natural gas was $1.72/Mcf, barely up from $1.69/Mcf in 1989. U.S. marketed gas production also rose in 1990, increasing 2.4% to 18.469 tcf.

Worldwide net natural gas production for the OGJ group moved up 0.6% in 1990 to 31.1 bcfd.

Chevron Corp. boosted net gas production 11.8% in 1990 to 3.067 bcfd. BP (USA) production increased 29.1% to 315 MMcfd. Amerada Hess production advanced 26.2% to 705 MMcfd. Exxon gas production fell 1.2% to 5.318 bcfd, and Mobil Corp.'s production fell 2.1% to 4.447 MMcfd.

Net wells drilled by the group rose 23% to 7,522 in 1990. Group well completions dipped 22.7% in 1989.

Energy Information Administration (EIA) figures show total U.S. well completions increased 4% in 1990 to 29,040. Oil well completions moved up 7.1% to 11,140, while gas well completions were up 10.5% at 10,140. Dry holes fell 6.7% to 7,770.

There was no dramatic change in the group's total reserves picture in 1990. Liquid reserves were down 0.4% at 32.5 billion bbl, and natural gas reserves were up 0.7% at 1 28.4 tcf.

The group's liquids reserves to production ratio climbed to 10.15 years in 1990 from 9.96 years in 1989. The ratio for gas moved up slightly--to 11.33 years from 11.31 years in 1989.

REFINING, MARKETING

Group earnings from refining and marketing were mixed in 1990.

Product demand outside the U.S. rose, particularly in developing countries. U.S. refining margins increased last year, but this was offset by lower product sales.

Group earnings from U.S. refining and marketing operations were also mixed. Strong margins in the middle of the year--May through August--enabled some of the group to show gains for the entire year.

Refining margins were strong during the driving season and hit a peak in August. After the Iraq invasion of Kuwait, product prices moved up faster than crude prices. However, in ensuing months of the crisis restraint in raising product prices led to lower margins. In December margins turned negative as reduced demand depressed product prices.

For the year increased capacity utilization and improved refinery efficiency helped bolster margins for some companies. The average refinery utilization rate inched up to 87.3% in 1990 from 86.3% the year before. Gulf Coast refining margins as computed by Wright Killen & Co. averaged $1.69/bbl, compared with 99 cents/bbl in 1989.

World demand for oil products was static at 65.7 million b/d. Demand in OECD countries also remained constant at 37.5 million b/d.

U.S. petroleum product demand fell 2.4% to 16.916 million b/d. Demand for motor gasoline, one of the more profitable products, fell 1.6% to 7.213 million b/d. These reductions in demand reduced refining/marketing revenues and offset some of the gain from improved refining margins.

For the OGJ group worldwide refined product sales rose only 0.7% to 20.4 million b/d. Crude runs to stills fell 0.4% to 15.1 million b/d.

The average U.S. refiner acquisition cost of crude oil advanced 23.7% in 1990 to $22-23/bbl. The average pump price of all types of motor gasoline increased 14.8% to $1.217/gal. The average retail price of No. 2 distillate for home heating increased 18% to $1.062/gal.

PROFITS BREAKOUT

The year started off poorly with group first quarter 1990 profits at $5.6 billion, down 26% from the same period in 1989. Higher crude oil prices boosted feedstock costs and contributed to a sharp drop in chemical earnings and some weakness in refining profits.

Group profits in the second quarter showed a gain of 11.1% from the year before at $5.2 billion. Slumping crude prices helped improve refining earnings. However, chemical earnings remained depressed due to industry overcapacity and a decline in demand.

The average price of world export crude oil was $18.23/bbl in the first quarter and $14.43/bbl in the second.

Third quarter group profits were $5.5 billion, up 19.3% from third quarter 1989. The jump in crude prices after the seizure of Kuwait sparked upstream profits. However, refining margins and profits slid. The average price of world export crude oil jumped to $23.36/bbl in the quarter.

The group posted fourth quarter profits of $5.1 billion, up 188.8% from fourth quarter 1989. The main reason for the huge increase was the spike in oil prices. in the fourth quarter the average price of world export crude was $29.38/bbl, up 68.7% from fourth quarter 1989.

The improvement from the increase in prices was partially offset by a fourth quarter drop in product demand. World demand averaged 65.6 million b/d, down 2.2 million b/d from the same period a year earlier.

In 1989 several of the companies in the group made substantial extraordinary charges related to environmental issues. Such charges by Phillips Petroleum Co., Chevron, and Exxon in 1989 amounted to $3.17 billion. The three companies had marked declines in earnings in 1989 and a rebound in 1990.

Last year Chevron had net income of $2.157 billion, up from $251 million in 1989. Phillips posted earnings of $779 million, compared with $219 million the year before. And Exxon had profits last year of $5.01 billion, up 42.7% from 1989.

Oxy listed one time restructuring charges of $2.129 billion in 1990, resulting in a net loss of $1.695 billion for the year.

Among companies that reported a drop in 1990 earnings, Texaco Inc. was down 39.9%, Shell 26.3%, Pennzoil Co. 9.4%, and Kerr-McGee Corp. 3.8%.

Texaco's decline was due to an extraordinary gain that inflated 1989 income. Its net income for 1989 included a net restructuring gain of $1.552 billion, largely from the sale of Texaco Canada. Without that gain in 1989, Texaco earnings would have been up 68.4% in 1990.

Shell blamed its earnings drop on lower income from petroleum refining/marketing and chemicals. Substantially higher environmental costs and increased refinery maintenance and scheduled shutdown costs were the major reasons for the decline. The decline in chemicals earnings was due to lower selling prices and higher raw material costs.

Pennzoil's decline stemmed mainly from a shift of proceeds from the Texaco settlement from short term securities to a long term investment in Chevron common stock. This reduced interest income and led to the decline in overall profits.

Excluding a charge from the sale of its soda products division, Kerr-McGee's income moved up 12% in 1990.

EARNINGS PATTERN

OGJ group profits hit a high of $30.2 billion in 1980 on the strength of much higher crude oil and product prices. But following the peaking of oil prices group profits fell steadily to a low of $11 billion in 1987, down 63%.

Profits bounced back in 1988 to $21.5 billion on the strength of more efficient operations in general and improved downstream earnings specifically.

In 1989 profits slipped to $18.7 billion mainly because of the large environmental writedowns. Last year did not include huge writedowns, and profits moved back to a level close to 1988 at $21.5 billion.

Other group financial performance indicators have gone through a similar cycle.

Return on assets hit a peak of 9.3% in 1980, then slid to 2,4% in 1987. It rebounded to 5.7% in 1988 but slipped to 4.3% in 1989. Last year there was some improvement to 4.6%

Return on stockholders equity followed a similar pattern, hitting a peak of 21% in 1980 and then falling to a recent low of 5.6% in 1987. This measure bounced back to 14.8% in 1988, slipped to 11.5% in 1989, and moved up to 12.2% in 1990.

Profits as a percent of revenues peaked in 1979 at 6.1%. This measure slipped to 2.4% in 1987, then jumped to 5.4% in 1988. However, with revenues rising faster than profits the ratio slipped to 4% in 1989 and 3.8% in 1990.

GROUP SPENDING

The swing in group spending has not been as pronounced as the shift in financial performance.

Group capital and exploration outlays climbed to a peak in 1981 at $66.9 billion. Then spending fell, along with prices and profits, and hit a recent low of $30.8 billion in 1987. With improvements in crude oil and product prices and financial performance, spending moved up to $40.1 billion in 1988, $41.3 billion in 1989, and $42.1 billion last year.

The increase in 1990 occurred in spite of a decrease of $3.5 billion in spending by Exxon, whose outlays in 1989 were inflated by the $3.9 billion purchase of Texaco Canada. Excluding this Exxon purchase in 1989, OGJ group spending last year was up 14.5% from 1989.

Eighteen of the companies increased spending in 1990, while only four reported decreases.

Group spending as a percent of profits slipped to 195.9% in 1990 from 220.5% in 1989. During 1980-90 this ratio has averaged 230.5% for the group.

Indications are strong that spending will increase this year. OGJ's annual capital and exploration expenditures survey showed that U.S. companies plan to boost their U.S. spending 13.4% in 1991 (OGJ, Feb. 18, p. 21). And 35 companies surveyed had plans to increase their non-U.S. spending 22.4% this year.

OUTLOOK FOR 1991

Price stability during the past few months has provided some optimism for a good financial year in 1991 for the companies in the OGJ group.

Through the first third of 1991 crude oil and petroleum product prices have held up well. Although prices have slipped from high levels at the beginning of the year they have remained well above year ago levels.

Through the first 4 months of 1991 the price of world export crude oil averaged $17.93/bbl, compared with $17.41/bbl in 1990. However, a year ago prices began to weaken in April and by the first week of May had fallen to $14.65/bbl. This year prices during the first week of May averaged $16.90/bbl.

For the week of May 1 0 the average price of light sweet crude on the U.S. futures market was $21.66/bbl, up 15.8% from a year ago.

Prices have held up even though product demand is down from last year. EIA reports U.S. demand for petroleum products through the first 122 days of 1991 averaged 16.519 million b/d, off 2.4% from the same period of 1990. The drop in demand has been blamed on a slowdown in U.S. economic activity.

EIA expects U.S. demand to average 16.67 million b/d for the year, down 1.5% from 1990. A forecast prepared by the supply and demand committee of the Independent Petroleum Association of America pegs 1991 demand at 16.819 million b/d, down only 0.6% from 1990.

Both forecasts expect economic activity and petroleum product demand to improve in the second half of the year.

EIA projects the average cost of crude oil imported into the U.S. at $18.24/bbl this year, down from $21.78/bbl in 1990. Crude prices are not expected to surge during the last 5 months of the year as they did in 1990.

EIA believes U.S. natural gas wellhead prices will average $1.74/Mcf, compared with $1.72/Mcf in 1990.

The agency projects the average price for motor gasoline at $1.21/gal for 1991, compared with $1.22/gal in 1990. The wholesale price for No. 2 home heating fuel oil will slip to 650/gal from 700 last year.

IEA predicts world demand for petroleum products will rise 100,000 b/d in 1991 to 65.8 million b/d. However, excluding the U.S.S.R. and eastern Europe the increase in demand will be 1.3%, or 700,000 b/d, to 56.1 million b/d in 1991 from 55.4 million b/d in 1990.

Demand for OPEC oil is one of the critical factors in determining world crude oil prices. Assuming no net change in inventory levels in 1991, demand for OPEC crude oil will average 22.6 million b/d. This would be down only slightly from 23.1 million b/d in 1990, when 1 million b/d was added to world stocks. Any additions to stock levels during 1991 would boost demand for OPEC oil, IEA says demand for OPEC crude oil will be the lowest in the second quarter at 21 million b/d. It will advance slightly to 21.7 million b/d in the third quarter, then jump to 24 million b/d in the fourth quarter because of seasonal demand. Any weakness in prices will show up in the spring and summer when demand for OPEC crude oil is lowest and spare productive capacity is readily available.

With production from Iraq and Kuwait curtailed, most of OPEC's excess capacity is in the hands of a few countries. That makes it easier for OPEC to monitor the excess production and support prices. OPEC has set its production quota at 22.3 million b/d for second quarter 1991.

Under current conditions it's likely the industry will avoid a price collapse in 1991 in spite of the economic recession in the U.S. And increased demand outside the U.S. should help boost industry revenues. So this could be another profitable year for the OGJ group.

Copyright 1991 Oil & Gas Journal. All Rights Reserved.