Operating costs blamed for drop in 3Q07 earnings

Feb. 1, 2008
In what is starting to look like a bad trend, earnings for the OGJ200 group of companies fell for the fourth consecutive reporting period in the third quarter of 2007.

Don Stowers, Editor Oil & Gas Financial JournalLaura Bell, Statistics Editor Oil & Gas Journal

In what is starting to look like a bad trend, earnings for the OGJ200 group of companies fell for the fourth consecutive reporting period in the third quarter of 2007. Net income ($24.7 billion) was down 17.4% despite a 2% increase in revenues ($264.9 billion).

Year-to-date capital spending among these companies rose by $11 billion to $84.3 billion –up 15% over the third quarter of 2006, so higher operating expenses clearly took a toll on the producers’ earnings.

Several producers have complained that their net incomes have been adversely impacted by high drilling costs and other operating expenses despite overall gains in production volumes and higher revenues.

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The OGJ200 group of companies consists of publicly traded, US-based oil and gas producers. The group appears in Oil & Gas Journal’s annual special report, which ranks the firms by year-end total assets. To qualify for the list, a company must have operations in the United States.

Firms not reporting

The group contains 144 firms, the same number as in the previous edition of the OGJ200 Quarterly, published in the November 2007 issue of Oil & Gas Financial Journal. The financial results of eight of the firms were not available for this edition of the report, as these companies had not filed their third-quarter results with the US Securities & Exchange Commission by press time.

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Largest producers

The top 10 producers as measured by total assets had a few changes this quarter. Anadarko Petroleum Corp. ($48 billion) jumped from the No. 7 slot to No. 4, replacing Occidental Petroleum Corp. ($34 billion), which slipped from No. 4 to No. 7. Chesapeake Energy Corp. ($30 billion) moved up to the No. 8 position in the rankings, switching positions with Apache Corp. ($28 billion), which fell to ninth place.

The only new entrant in the top 10 list is Houston-based El Paso Corp. ($25 billion), which moved up to the No. 10 slot, replacing Hess Corp., which dropped to No. 11. El Paso had been in 13th place the previous quarter.

Exxon Mobil Corp. remains in the No. 1 position with more than $237 billion in total assets. ConocoPhillips is in second place with over $173 billion in assets, and Chevron Corp. holds down the No. 3 position with nearly $140 billion in assets.

Rounding out the top 10 based on assets are No. 5 Devon Energy Corp. ($40 million) and No. 6 Marathon Oil Corp. ($36 billion).


Thirty-seven of the firms in the compilation reported a net loss for 3Q07. For the comparable quarter in 2006, 40 firms had recorded a loss. Meanwhile, of the companies that reported positive income in the third quarter, 42 companies in the group reported improved results for the quarter compared to the same period a year ago, while 50 reported decreases in net income.

Of the top 10 companies, seven recorded income declines in the 3Q07 compared with 3Q06. Among the 10, only Devon Energy, Occidental Petroleum, and El Paso Corp. reported income gains over this period.

Total collective asset values rose $24.8 billion from 2Q07 to 3Q07. There was an overall increase in value of $81 billion for the third quarter of 2007 compared with the same quarter a year ago.

Devon Energy reported that its oil and gas production increased in the third quarter to 56.8 million barrels of oil equivalent (boe). This represented a 10% increase over 3Q06 production and was driven by organic production growth in each of the company’s producing segments –the United States, Canada, and International. The third quarter of 2007 marks the sixth consecutive quarter that Devon has increased oil and gas production.

Devon says it drilled 599 wells in 3Q07 with an overall success rate of 98%.

For the third quarter of 2007, Occidental Petroleum reported that daily oil and gas production averaged 570,000 boe, compared with 533,000 boe/day produced in the third quarter of 2006. The increased production included 15,000 boe/day from its giant Dolphin Project in offshore Qatar, 12,000 boe/day from domestic operations, and the remainder primarily from the Middle East.

In announcing the results, Dr. Ray R. Irani, chairman, president, and CEO, said, “Increase in our production volume, including initial production from the Dolphin Project and increases in worldwide crude oil prices, contributed to Oxy’s record-setting third quarter core income results of $1.210 billion. This reflects the continued successful implementation of our long-term strategy that is focused on current and new long-lived oil and gas assets in our core regions that produce strong financial returns.”

For El Paso Corp., production in 3Q07 totaled 848 million cubic feet equivalent per day (MMcfe/d) –a 5% increase over third quarter 2006 results.

“This quarter continues our financial and operational success as our pipelines and E&P businesses performed well,” said Doug Foshee, El Paso’s president and CEO. “During the quarter, we completed the Peoples [Energy Production Co.] acquisition, which added excellent staff and properties into our E&P operations. The quarter also included significant exploration success in Brazil. And three major pipeline projects, representing $1.2 billion of capital, received FERC approval as we have continued to expand our pipeline business. We also marked an important step in forming our pipeline MLP with the registration filing for El Paso Pipeline Partners.”

Top 20 firms

The 20 largest oil and gas producers in terms of net income and stockholders’ equity remain largely unchanged in the 3Q07 compared to the previous quarter.

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Classified according to net income, the top 17 firms remain largely the same with ExxonMobil leading the way with $9.4 billion in earnings. Four other firms reported more than $1 billion in net income: Chevron ($3.7 billion); ConocoPhillips ($3.7 billion); Occidental Petroleum ($1.3 billion); and Marathon Oil ($1.0 billion).

Three new companies have entered the top 20 group in net income, and three have dropped out. No. 18-ranked Energen Resources Corp. reported $113 million in earnings; No. 19 Pioneer Natural Resources Co. earned $102 million; and Helix Energy Solutions Group Inc. reported net income of $84 million.

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The three companies that have fallen from the top 20 in net income this quarter are Newfield Exploration Co., Dominion Exploration & Production, and Kinder Morgan CO2 Co. LP.

In all, the top 20 performers in net income reported combined earnings of just over $23.5 billion.

Ranked according to stockholders’ equity, the 20 largest companies remained unchanged with the sole exception of the 19th and 20th ranked firms. Questar Corp. moved up to the No. 19 spot from No. 20 the prior quarter. Pogo Producing Co. dropped from No. 19 to No. 20.

The five largest companies ranked by stockholders’ equity are: ExxonMobil ($119 billion); ConocoPhillips ($87 billion); Chevron ($75 billion); Occidental Petroleum ($22 billion); and Devon Energy ($21 billion).

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The capital and exploration budgets of the top 20 companies increased by a whopping $26.4 billion from the second quarter of 2007 to the third quarter. This represents a steep 59% climb. The collective spending total for the 20 companies was just over $70.7 billion.

Revenues rose by $3.9 billion to a total of $256.8 billion for the 20 largest companies –approximately a 1.6% increase over 3Q06.

Market capitalization for the top 20 in assets appreciated by $87.9 billion –roughly a 7.8% increase from 2Q07 to the third quarter. These 20 firms have a total market cap of about $1.2 trillion.

Fast growers

Houston-based Lucas Energy Inc. was the fastest-growing company in the OGJ200 group for 3Q07. Ranked No. 114 based on growth in stockholders’ equity from the previous quarter. The firm reported a 153% surge in equity to $19 million from $7.5 million in the second quarter of 2007.

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Lucas Energy acquired significant new property in the heart of the firm’s main operating area in Gonzales County, Texas, in the third quarter, and then acquired a major stake in Bonanza Oil & Gas Inc., a Texas company, in the fourth quarter. The company focuses on identifying, acquiring, and revitalizing underperforming oil and gas assets through the application of modern well technology and stringent management controls.

Founded in 2004, Lucas Energy went public in 2006. James J. Cerna Jr. is the president and CEO, and William Sawyer serves as COO. The company is listed on the OTC BB.

The fastest-growing companies are determined primarily by growth in stockholder equity. For a company to qualify for this list, it must have reported positive net income for the 2Q07 as well as the third quarter of 2007, and it must have posted an increase in earnings in the most recent quarter from the second quarter of 2007. Excluded from the list are limited partnerships, subsidiaries, and newly public companies.

The second fastest-growing firm is United Heritage Corp., headquartered in Midland, Tex. Ranked 132nd by assets, United Heritage grew by 121.4% from 2Q07 to 3Q07. Stockholders’ equity increased from slightly more than $1 million to $2.3 million over this period.

Founded in 1981, United Heritage is a public company involved in the development of onshore oil and gas assets. The firm is listed on the NASDAQ stock exchange. It has four leases covering 10,500 acres in the Wardlaw Field in Edwards County, Tex.

Among the other fastest-growing companies, six have shown double-digit growth in stockholder equity the past quarter. They are: Sabine Royalty Trust (22.6% growth); Whiting Petroleum Corp. (20.8% growth); Gulfport Energy Corp. (20.3% growth); Reserve Petroleum Co. (12.6% growth); Pyramid Oil Co. (11.8% growth); and Crimson Exploration Inc. (10.4% growth).

Five firms also appeared on the OGJ200 list of fastest-growing companies in the second quarter of 2007. They are: Gulfport Energy, Pyramid Oil, Denbury Resources Inc., Arena Resources Inc., and Plains Exploration & Production Co.

Click here to download a .pdf of the OGJ200 Quarterly