Oil companies log record earnings in second quarter

A surge in oil and natural gas prices to historic highs lifted second quarter earnings for virtually all industry participants. The difference that a year can bring was apparent as both major and independent producers compared their often-record earnings for the recent quarter to the low financial levels they suffered through in 1999.


Sam Fletcher
OGJ Online

A surge in oil and natural gas prices to historic highs lifted second quarter earnings for virtually all industry participants. The difference that a year can bring was apparent as both major and independent producers compared their often-record earnings for the recent quarter to the low financial levels they suffered through in 1999.

"The second quarter was great, and the third quarter is shaping up as more of the same, with slightly lower oil prices and better gas prices," said Stephen A. Smith, who tracks the exploration and production market at Dain Rauscher Wessels, a division of Dain Rauscher Inc.

But even as their cash flows improved, producers have been hesitant to increase their spending levels, especially as oil and gas prices began to pull back from previous peaks near the end of the quarter. Some of the more aggressive producers did begin cranking up their field operations, however, and bigger budgets are expected in 2001 and beyond.

"The price they use for planning projects is starting to creep to $16/bbl from $14/bbl previously," said Smith. "But they would still like to see a return at $10-11/bbl."

Acquisitions and mergers played major roles in increasing both cash flow and spending plans among both the majors and independents during the quarter.

With its $6.9 billion acquisition of Arco's Alaskan operations and the closing of joint-venture transactions in its chemicals and midstream segments, Phillips Petroleum Co. revised its 2000 capital budget to $2.3 billion, exclusive of the Alaskan deal. That's up from $1.8 billion previously, with all of the extra spending targeted for Alaska.

Having merged with Union Pacific Resources Group in July to become one of the largest and financially strongest independents, Anadarko Petroleum Corp. boosted its current budget by $384 million to $1.5 billion. That includes its original budget of $766 million for this year and the $350 million remaining from UPR's budget.

"Anadarko and UPR each benefited from higher commodity prices during the second quarter and generated substantial cash flow which we'll use to accelerate operating activities and grow production," said Robert J. Allison Jr., chairman and CEO.

On the other hand, Nuevo Energy Co. recently decided to defer $20 million of its planned $140 million capital budget for 2000, because of an unexpected delay in obtaining entitlement on its Brea Highlands development project in Orange County, Calif.

Major oil
The major integrated companies' earnings pretty well matched or exceeded analysts' expectations during the latest quarter.

Exxon Mobil Corp. cashed in on both its megamerger and the run-up of oil and gas prices to double its earnings to a record $4.2 billion from $1.9 billion during the same period in 1999.

In an Aug. 1 briefing of investors and reporters, ExxonMobil Chairman Lee Raymond said, "Our early success is a tribute to our employees." But company officials say they may now eliminate 3,000 more jobs on top of the previously announced 15% work force reduction by the end of 2002.

Chevron Corp. reported another record quarterly performance, more than tripling its second quarter earnings to $1.1 billion from $350 million a year ago.

It marked the first time in Chevron's long history that the company earned more than $1 billion in two consecutive quarters, placing it well on the way to record earnings for the year. Yet the day the company released its earnings, its stock declined 6.2� to $77.31/share, illustrating that oil and gas companies are still undervalued by investors.

"This is the best environment that the industry has enjoyed in a long time, in terms of commodity prices. But their stock performance still doesn't reflect that yet," said Smith.

Other second quarter earnings among integrated oil companies for 2000 vs. 1999, in millions of dollars, included: Amerada Hess Corp., 202 vs. 77; BP, 3,610 vs. 1,367; Coastal Corp., 127.6 vs. 93.2; Conoco Inc., 456 vs. 114; Phillips, 442 vs. 68; Texaco Inc., 625 vs. 273; Unocal Corp., 264 vs. 9; USX-Marathon Group, 367 vs. 134.

Independent E&P firms
Substantially higher commodity prices and general production increases across the board boosted quarterly earnings often to record levels among independents.

Even without the UPR merger, Anadarko reported record earnings, cash flow, and production during the second quarter. Its earnings totaled $74.9 million, up from $8 million during the same period in 1999.

"With the production added by the UPR merger in the last 6 months of [this] year, Anadarko's 2000 annual production will easily double our 1999 production. We expect to produce more than 200 million energy-equivalent barrels in 2001," said Allison, referring to the firm's internal production measure.

Apache Corp. more than quadrupled its second quarter earnings to $140.4 million from $29.6 million a year ago. With strong commodity prices and increased production from its acquisition of Occidental Petroleum Corp.'s interests on the Outer Continental Shelf of the Gulf of Mexico, the Houston-based independent expects to continue its strong performance through the rest of this year.

Barrett Resources Corp. was one of the few producers to report a loss for the quarter, amounting to $4 million�the result of a non-cash, market-to-market expense associated with certain derivatives not treated as hedges. That compared with earnings of $4.1 million a year ago.

Cross Timbers Oil Co.'s quarterly earnings also were adversely impacted by a $15.7 million after-tax loss related to hedging activities, which reduced its net income to $800,000 from $28.3 million a year ago.

Other quarterly earnings comparisons among independents, in millions of dollars, included: Burlington Resources Inc., 94 vs. 24; Cabot Oil & Gas Corp., 1.5 vs. 0.11; Chesapeake Energy Corp., 30.2 vs. 0.0009; Devon Energy Corp., 88.3 vs. 16.2; EOG Resources Inc., 74.7 vs. 20.6; Louis Dreyfus Natural Gas Corp., 9.1 vs. (0.5); Ocean Energy Inc., 44.7 vs. 1.3; Pennaco Energy Inc., (0.55) vs. (1); Swift Energy Co., 14.2 vs. 3.2; Triton Energy Ltd., 21.5 vs. 3.9; Vastar Resources Inc., 135.8 vs. 48.3.

Integrated energy firms
"Enron Corp. has completed another excellent quarter," said Chairman and CEO Kenneth L. Lay. The Houston-based integrated company reported an almost 40% increase in wholesale energy volumes and continued escalation of profitability from Enron Energy Services, with new contracts totaling $3.8 billion.

Enron's web-based transaction system registered a 92% increase in both volume and transactions from the first quarter, and its Enron Broadband Services recently cut a exclusive, first-of-its-kind contract with Blockbuster to stream on-demand movies.

For the second quarter of 2000, Enron's earnings totaled $289 million, up from $222 million a year ago.

Similar comparisons of second quarter earnings, in millions, among integrated energy companies include: CMS Energy Corp., 81 vs. 75; Nisource Inc., 23.4 vs. 22.9; Oneok Inc., 17.9 vs. 0.2; Reliant Energy, 223.8 vs. 74.7; Williams, 351.8 vs. 18.1.

Upstream service-supply
While drilling activity hasn't increased at the same rapid pace as oil and gas prices, many upstream service companies reported significant improvements during the second quarter over the record low levels of 1999.

"The increase in activity in the second quarter represents the fourth consecutive quarter of improving utilization, and we believe the third quarter will continue this trend," said Tom Richards, president and CEO of Grey Wolf Inc.

Like several other drilling contractors, however, Grey Wolf reported a loss for the quarter, totaling $5.5 million compared to a loss of $12.2 million during the same period of 1999.

"With continued high demand for natural gas and relatively high depletion rates constraining production, we expect future business opportunities to increase," said Dick Cheney, chairman and CEO of Haliburton Co., the largest petroleum service company.

Several oil and gas producers already are increasing budgets for exploration, development, and production to capitalize on improved markets. Although downstream spending will lag behind those upstream improvements, that market also should improve in 2001, benefiting Halliburton's engineering and construction business, said Cheney, who is resigning Aug. 16 to campaign as George W. Bush's vice-presidential running mate.

During the second quarter, Halliburton Energy Services reported a 24% improvement from the same period in 1999 and a 12% sequential quarterly improvement, compared with declines of 29% and 14%, respectively, for the company's engineering and construction group. With announced plans earlier this year to sell its Dresser Equipment business, Halliburton has been carrying those units as discontinued operations. As a result, the company's second quarter earnings declined to $75 million from $83 million a year ago.

Quarter-to-quarter comparisons for other service companies were, in millions: Baker Hughes Inc., 60.9 vs. 68.5; Noble Drilling Corp., 68.9 vs. 42.8; Parker Drilling Co., (9.5) vs. (13.1); Pride International Inc., (2) vs. (2.97); R&B Falcon Corp., (42.6) vs. (23.3); Transocean Sedco Forex Inc., 35.9 vs. 27.4.

Refining
Refining margins improved sharply with growing demand in a tight market.

"Gasoline and distillate inventories remain low despite good margins because demand is good and because US refiners as a group are running at less-than-full capacity today to avoid building inventories that may be worth less tomorrow," said Jean Gaulin, chairman and CEO of Ultramar Diamond Shamrock Corp.

Moreover, with the retreat of oil prices from recent highs, Gaulin said, "the squeeze on our wholesale, retail, and black-oil margins should also dissipate."

Ultramar Diamond Shamrock reported the strongest quarterly results ever in its history, with earnings of $128.5 million, up from $48.4 million a year ago.

Tosco Corp. also enjoyed a strong quarter, with earnings of $145 million, up from $84.6 million in the second quarter of 1999.

"In general, refining margins were good throughout the quarter, particularly in the [US] East," said Thomas D. O'Malley, chairman and CEO of that firm. "We expect refining margins to remain good through the foreseeable future," he said.

Petrochemicals
Dow Chemical Co. benefited from its global presence and solid economic growth of the petrochemical market around the world, achieving volume and price increases in all geographies during the quarter. That hiked the company's earnings to $527 million from $410 million a year ago.

"Based on our expectations of favorable economic growth around the world and stabilizing feedstock and energy costs, we are optimistic that we will achieve positive year-over-year results in the second half, despite some short-term weakening in certain industry fundamentals," said J. Pedro Reinhard, executive vice-president and chief financial officer for Dow.

However, William H. Joyce, chairman and CEO of Union Carbide Corp., said, "Looking into the third quarter, we are not counting on any help from lower raw material prices."

Union Carbide posted second quarter earnings of $130 million, up from $97 million last year.

A table listing second quarter 2000 vs. 2Q 1999 earnings for selected US and Canadian energy companies in all industry categories will be published in the Aug. 14 issue of Oil & Gas Journal.

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