MANY U.S. COMPANIES POST BIG INCOME GAINS

The spike in oil prices stemming from the Persian Gulf war has yielded sharply higher fourth quarter 1990 profits for many U.S. oil and gas companies. The price surge buoyed upstream earnings, leading to a more than fourfold gain in overall net income last quarter from fourth quarter 1989 for a sample of companies reporting early returns. However, earnings in fourth quarter 1989 were generally depressed for the industry. Special charges had slashed more than $2 billion from the sampled

Feb. 4, 1991

7 min read

The spike in oil prices stemming from the Persian Gulf war has yielded sharply higher fourth quarter 1990 profits for many U.S. oil and gas companies.

The price surge buoyed upstream earnings, leading to a more than fourfold gain in overall net income last quarter from fourth quarter 1989 for a sample of companies reporting early returns.

However, earnings in fourth quarter 1989 were generally depressed for the industry. Special charges had slashed more than $2 billion from the sampled companies' profits in fourth quarter 1989.

At the same time, mostly depressed margins accounted for small gains or losses in refining operations for the quarter as refiners failed to recover crude cost increases. Petrochemical profits slid as well in response to higher feedstock costs and reduced demand caused by a sluggish economy.

Fourth quarter results generally expanded upon the earnings trend seen in third quarter 1990, with the Persian Gulf confrontation in full swing but with no shots yet fired between Iraq and the U.S. and its allies (OGJ, Dec. 3, 1 990, p. 22).

However, generally depressed profits in the first half of 1990 compared with the year ago period to some degree offset an overall improvement in second half profits, leading to mixed results for the year (OGJ, Oct. 22, 1990, p. 42).

ANALYSTS' PROJECTIONS

Salomon Bros. estimates exploration and production earnings for the fourth quarter increased 128% from fourth quarter 1989 for 12 large U.S. oil firms it tracks. But refining and marketing profits fell 19% and chemicals slipped 30%, it said.

For six multinational majors it tracks, the New York investment firm estimates exploration and production earnings increased 74%, while refining and marketing profits fell 2% and chemicals income dropped 14%.

Merrill Lynch's review of fourth quarter earnings estimates for the six largest international majors showed similar results.

Refining and marketing profits are expected to account for less than 20% of those companies' fourth quarter earnings, down slightly from 1989, Merrill Lynch said. Meanwhile, 1990 chemical earnings are expected to account for less than 10% of operating earnings and will be down by about 20% from 1989 levels.

1990 PERFORMANCE

Chevron Corp.'s 1990 performance mirrored that of many major companies. Chairman Ken Derr said the year could be split into pre-and post-Middle East crisis periods.

"Prior to Iraq's invasion of Kuwait in August, Chevron's earnings were up sharply mainly due to strong product margins," Derr said.

"After the August invasion, margins fell because product prices could not keep pace with rapidly rising crude oil costs.

"However, these same high crude oil prices benefitted the upstream part of our business ... in the second half of 1990."

Derr added that operational earnings were about the same for both halves, "although for different reasons."

Unocal Corp.'s earnings breakout illustrated the sharp contrast between upstream and downstream yields.

Its full year profits from exploration and production totaled $695 million, up from $450 million in 1989. Fourth quarter 1990 earnings were $213 million, up from $100 million a year ago.

Meantime, Unocal's refining, marketing, and transportation operations logged earnings of $92 million in 1990, down from $157 million in 1989. For the fourth quarter, earnings were only $17 million, compared with $85 million in the same period of 1989.

Amoco Corp.'s earnings report underscored the sharp movements in crude oil prices.

"The fourth quarter saw a continuation of the extreme price volatility that has affected the industry since Iraq's invasion of Kuwait," said Chairman Richard M. Morrow.

In fourth quarter 1990 the price Amoco received for its crude ranged from about $25/bbl to more than $40 and averaged more than $10 higher than the level of 1989's fourth quarter. By yearend 1990 Amoco's prices had fallen from the fourth quarter peak to about $28.

"In fact, today crude oil prices have returned to about where they were before the Iraqi invasion, even after the many swings that were seen in the last several months," Morrow said in a Jan. 21 news release.

Oryx Energy Co., Dallas, last October moved to head off the jarring effects of a price roller coaster this year.

It bought put options covering 12 million bbl of oil production for first half 1991 with a net realized price of $23/bbl. The options allow Oryx to participate in price increases while setting a floor in the event of price decreases.

Oryx produced 20 million bbl of U.S. crude during second half 1990.

DOWNSTREAM SQUEEZE

Among refiners, Texaco Inc. cited its price experience of December 1990 as a measure of downstream performance.

In that month, Texaco's U.S. wholesale gasoline prices fell 16/gal, while crude oil costs fell only 4/gal. That put a squeeze on margins.

Those market conditions and depressed downstream margins continued in early January in response to slackening demand and ample product inventories.

Phillips Petroleum Co. had much the same experience with prices.

The company's motor fuel margins have declined 68% since the Persian Gulf crisis began last August and reached their lowest point of 1990 in December. In fourth quarter 1990 Phillips' wholesale gasoline prices fell 24%, while the cost of crude oil declined only 14%.

ARCO Chairman Lodwrick M. Cook reminded shareholders that voluntary price restraint helped put a damper on 1990 downstream earnings.

He said, "When President Bush called for price restraint last August, ARCO responded immediately by freezing gasoline prices for 2 weeks. We ended that first freeze only when a supply/demand imbalance occurred and caused runouts at many of our stations.

"Again on Jan. 16, when the war began, ARCO said to help dampen concerns of motorists about rising prices and supply it would not increase its prices to dealers.

"Throughout this time of volatility in crude oil and products markets, ARCO has maintained its low price policy. "

Ashland Oil Inc. Chairman John R. Hall said his firm's disappointing results were due to the faltering U.S. economy as well as the Persian Gulf crisis.

Although crude prices jumped in September, Hall said, "product prices were weak, as mild winter weather, weaker economic conditions, and price driven consumer conservation efforts resulted in lower demand.

"Consequently, refinery margins were poor throughout the quarter, and refiners were unable to adequately recover crude oil cost increases."

Diamond Shamrock Refining & Marketing Co. also saw its refinery margins in December plunge to their lowest level in 3 years, but Chairman Roger R. Hemminghaus said the company saw good results in its retail business.

"During periods of crude oil price volatility," Hemminghaus said, "retail margins generally move in the opposite direction from refining margins."

Shell Oil Co. Pres. Frank H. Richardson said his company's refining and marketing income fell $273 million to $333 million in 1990 from 1989, and chemical products income dropped $297 million.

Those figures, he said, more than offset higher exploration and production earnings. In fourth quarter 1990 alone, Shell's chemical earnings were $80 million, down $4 million from the same 1989 quarter, even though the latest period included a gain of about $25 million from an asset sale.

Exxon Corp.'s chemical sales volumes remained strong, but increased industry production capacity and higher feedstock costs undermined profits.

Earnings from Exxon chemical operations totaled $518 million in 1990, down $564 million from 1989. U.S. operations earned $354 million, a slide of $328 million, while non-U.S. earnings fell $236 million to $164 million.

Union Texas Petroleum Holdings Inc., Houston, reported an average ethylene price of 24/lb for 1990, off from 30 in 1989. On the other hand, its average world price for oil was up about 28% at $19.73/bbl.