INDUSTRY EARNINGS PLUNGE FROM 1990 LEVEL

Earnings of U.S. oil and gas companies for the third quarter and first 9 months have fallen sharply from year ago periods, according to a sampling of 51 integrated and nonintegrated companies.

Overall, earnings for the sample group fell 46% in the third quarter 1991 to $2.6 billion on revenues that slipped 8% in a comparison of the two periods. That in turn pulled the group's earnings for the 9 months down almost 14% from a year ago.

That contrasts with first half earnings that were flat for the OGJ group of integrated companies (OGJ, Sept. 2, p. 21) and up sharply for the OGJ group of independents (OGJ, Oct. 21, p. 26) in a comparison with 1990's first half. Companies from both groups are included in this informal sampling of earnings for the most recent reporting period.

THIRD QUARTER COMPARISON

Almost three-fourths of the group reported lower third quarter net profits this year compared with last.

Only 26% of the sampled group reported higher year to year revenues in the third quarter, yet 60% are ahead on revenues for the year.

Generally, U.S. petroleum company profits in the most recent reporting period fared poorly by comparison with a 1990 quarter that saw oil prices spike after Iraq's invasion of Kuwait. Profits for the OGJ group of integrated companies during third quarter 1990 rose 19.3% from third quarter 1989 (OGJ, Dec. 3, 1990, p. 22).

Failing crude prices and continuing depressed natural gas prices took their toll in the third quarter. For the sampled companies, oil production slipped and natural gas production rose slightly as many producers sought to compensate for record low spot gas prices by boosting output.

Another contributing factor was weak demand owing to recession in the U.S. and Europe. For some of the big integrated companies, however, international operations upstream and downstream proved the sole bright spot in third quarter earnings.

The bleak outlook in the U.S., notably for the gas industry, had led many companies to implement restructuring programs or take special charges related to asset writedowns, which also has squeezed earnings.

THIRD QUARTER PERFORMANCE

Exxon Corp. led the way among the sampled companies, posting net profits of $1.1 billion for the quarter, up 4% from same time last year. The company said improved product margins were a major factor, in addition to higher crude production, increased refined product sales, and improved efficiencies at refineries and chemical plants.

Although noting depressed prices have limited earnings growth, Exxon continued to increase spending in the most recent period.

"Capital and exploration spending continued to increase during the third quarter,"said Exxon Chairman L.G. Rawl. "We project total 1991 investments of about $9 billion. This would be the highest spending level excluding acquisitions since the mid-1980s."

Texaco Pres. James W. Kinnear, whose company's profits dropped 25% in the quarter, summed up industry results saying, "Petroleum markets in the third quarter last year reflected the impact of Middle East hostilities. The OPEC basket of crude oil prices averaged about $24,60/bbl at that time, contrasted with approximately $18.70/bbl in the current quarter. U.S. crude prices reflected the same pattern and contributed to the decrease in upstream earnings. The economic slump in the U.S. and several other major markets in turn has depressed the margins in chemicals as well as petroleum products."

SPECIAL CHARGES

Several companies recorded hefty special charges during the third quarter, many related to restructuring.

Sun Co. reported a net loss of $436 million for the quarter compared with net profits of $25 million for the same time last year.

It cited special charges related to corporate restructuring and losses from discontinued operations. Before special items Sun broke even for the quarter.

ARCO posted a third quarter loss of $156 million, including about $340 million after tax in net charges related to personnel reductions, property sales, and writedowns.

The personnel charges stem from cuts totaling about 2.100 employees, up from the 1,500 originally estimated.

Chevron Corp. took a $157 million charge to third quarter earnings for environmental, restructuring, and other items.

And Mobil Corp.'s third quarter earnings were hit by a $30 million charge for settlement of antitrust/price fixing litigation in California (OGJ, Aug. 26, p. 71).

UPSTREAM EARNINGS

In general, the sample group's exploration and production earnings were down during the third quarter because of lower crude and natural gas prices. In most cases, decreased expenses were unable to offset decreased revenues.

For those companies reporting oil production, output the first 9 months fell 2% from same time last year to 5.994 million b/d, mirroring a 2% drop in the average price of oil for those companies reporting oil prices. About 39% of those reporting logged increases in crude production, while 78% of the companies reporting average crude prices noted a decrease.

Similarly, gas production increased 4% to 24.8 bcfd, as the reporting companies' average gas price fell 4%.

For several companies, production fell because of unusual circumstances besides just depleting reserves faster than they could be replaced.

Oryx Energy Co.'s third quarter crude production fell 26% as a result of asset sales and a pipeline disruption in the North Sea.

Enron Oil & Gas Co., Houston, increased natural gas volumes slightly, despite a nearly 13% drop in prices.

However Enron Chairman Forrest E. Hoglund said, "We continue to be unwilling to sell at maximum deliverability in the current natural gas price environment. Consequently, we curtailed approximately 40% of the company's deliverability during the quarter."

DOWNSTREAM MIXED

Overall results from downstream operations were mixed, but companies with international downstream operations generally fared better.

While Europe joined the U.S. in a recession that pulled product demand down, increased demand among the buoyant economies of many countries in the Asia-Pacific region boosted earnings in operations there.

In general, U.S. downstream operations gained some on last quarter, but margins were still down compared with last year overall. Decreased demand and increased output fueled fierce competition, which in many cases offset the slight gain in margins.

"Worldwide marketing and refining operating earnings were substantially above last year's unusually depressed level, when rapidly escalating crude oil costs were not being fully recovered in product prices," said Mobil Chairman Allen E. Murray.

"Results this year, however, were adversely affected by the impact of the economic slowdown in some of our key markets that dampened industry demand and increased competitive pressures, particularly in Australia and on the U.S. West Coast. Excellent refinery performance continues to be a strong contributor to earnings," he added.

OUTLOOK

Several companies voiced optimism for earnings for the fourth quarter and beyond, expecting improvement in oil and gas prices. But most companies are adjusting operations to fit the current market climate instead of waiting on prices to get better, hence the wave of restructurings and streamlining steps sweeping industry today.

For some companies expecting improved results in the current quarter, acquisitions and mergers have fueled increases in production, which in many cases offset declines in prices.

Apache Corp., Denver, increased production to 33,700 b/d during the third quarter from 9,900 b/d same time last year, due in large part to acquisitions.

Apache Chairman Raymond Plank said, "With postacquisition oil production running three times last year's at prices above $20/bbl and with higher gas production and prices, we expect a strong fourth quarter."

Prospects for downstream improvement are less certain, with the level of export volumes from the Soviet Union, Iraq, and Kuwait still in question, which could strongly affect prices and margins.

Ashland Oil Inc. Chairman John R. Hall said, "We are optimistic that crude oil prices will moderate and demand will improve. Gasoline inventories are about 6% below last year and should remain low as refiners maximize heating oil production this winter. Low inventories should position the industry for better refinery margins when demand begins its seasonal spring rebound."

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