Producers’ profits higher in fourth quarter, flat in 2007

March 24, 2008
The combined fourth-quarter 2007 (4Q07) earnings of a sample of US-based oil and gas producers and refiners increased from a year earlier.

The combined fourth-quarter 2007 (4Q07) earnings of a sample of US-based oil and gas producers and refiners increased from a year earlier. Many operators reported that production volumes climbed from a year earlier, but on the downstream side, refining margins were weak.

For all of 2007, the group posted a small decline in earnings, as high operating costs weighed on a majority of the companies’ profits.

A group of service and supply firms reported a 98% increase in 4Q07 earnings compared with the fourth quarter of 2006, while revenues were up 19%. This sample, which includes drillers, suppliers, and engineering firms, reported a combined 69% surge in 2007 earnings compared with 2006 net income.

Meanwhile, a group of companies based in Canada reported a 61% earnings increase for the recent quarter compared with the final quarter of 2006. Some of these companies benefited from high oil prices and increased production volumes. Full-year earnings were little changed year-on-year for most of these firms.


The collective 4Q07 earnings of a sample of 72 US-based oil and gas operators and refiners climbed 16.5% from the same 2006 period. Meanwhile, their revenues moved up a combined 32%.

Full-year results for this group of operators were not as good. These companies posted a combined 1.6% net loss for 2007, on revenues that were up 8% from 2006. While 10 of the companies posted a loss for the year, 15 recorded a net loss for 4Q07.

Higher oil price realizations and lower refining margins drove the quarterly results in opposite directions, and high operating costs continued to weigh on earnings.

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Many of the independent oil and gas producers sampled recorded leaner profits in the recent quarter compared with the final 2006 quarter.

Although they both reported profits for 4Q07 and for 2007, large independent producers Anadarko Petroleum Corp. and Chesapeake Energy Corp. posted declines in earnings from a year earlier. Losses on derivatives weighed on Anadarko’s net income, while exploration expenses moved lower for the quarter but climbed for the full-year.

Meanwhile, Chesapeake reported year-on-year production gains of 34% for the quarter and 23% for the entire year. But the company’s earnings were affected by an unrealized after-tax mark-to-market loss of $180 million in 4Q07 and $257 million for the full year resulting from its oil, gas, and interest rate hedging programs.

Integrated firms

Most integrated companies reported improved results from a year earlier. ExxonMobil Corp. posted record 4Q07 and annual results.

For the recent quarter, net income increased 14% to $11.66 billion. ExxonMobil reported its production increased nearly 1% from the fourth quarter of 2006. Excluding the expropriation of assets in Venezuela, divestments, effects of the Organization of Petroleum Exporting Countries’ quota, and price and spend impacts on volumes, production was up nearly 3%.

For the year, ExxonMobil’s upstream earnings were a record $26.5 billion, up $267 million from 2006 due to higher crude oil realizations and favorable sales mix effects, mostly offset by higher operating expenses, net unfavorable tax items, and lower natural gas realizations.

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Marathon Oil Corp. reported reduced earnings for the quarter and for 2007. Net income slid 38% to $668 million for 4Q07. Annual earnings declined 24% to $4 billion while revenues for 2007 were up only slightly to $65.2 billion.

Marathon’s downstream income was $4 million in 4Q07 and $2 billion for the year, compared to $533 million and $2.8 billion in the same periods of 2006, down in both periods mostly as a result of lower refining and wholesale marketing gross margins.

The refining and wholesale marketing gross margin per gallon was 4.8¢ in 4Q07, compared with 17.07¢ a year earlier, and 18.48¢ for 2007, compared with 22.88¢ for 2006.

“The fourth quarter of 2007 was a difficult quarter that included lower downstream margins driven primarily by rapidly rising crude prices; relatively flat upstream production due to delays in the Alvheim (Norway) project and unscheduled downtime for warranty repairs at our Equatorial Guinea LNG production facility, unscheduled downtime at our Athabasca oil sands project in Canada, and higher exploration costs,” said Clarence P. Cazalot Jr., Marathon president and chief executive officer.


Sunoco Inc., Tesoro Petroleum Corp., and Valero Energy Corp. posted mixed results for the quarter and the year. While each of these refiners reported stronger revenues from the year-earlier periods, they each saw their net income drop. High crude prices and weak refining margins held earnings in check.

Valero reported 4Q07 income from continuing operations of $567 million, compared with $1.1 billion in the fourth quarter of 2006. Despite the decline, recent results were better than analyst expectations.

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Analyst Eitan Bernstein with Friedman, Billings & Ramsey said that behind Valero’s operating earnings were better-than-expected refining margins, which benefited from the company’s use of lower-cost, lower-quality crude oils and other discounted feedstocks.

Valero said its complex refineries were able to take advantage of wide sour crude discounts during 4Q07, and it benefited from having a large, geographically diverse refining system, which provides relatively more earnings stability through exposure to multiple refining regions.

Canadian firms

Boosted by higher oil prices, a sample of oil and gas producers, refiners, and transporters each recorded earnings increases for the recent quarter. Meanwhile, results for the year were lower for a few of the 11 companies in the group.

EnCana Corp. reported a 63% gain in net income for 4Q07 and a 30% decline in full-year 2007 earnings.

“With strong production growth and successful price hedges that delivered a $1 billion benefit to 2007 cash flow, our company’s cash flow, operating earnings, and free cash flow all increased substantially in a year when our industry faced many challenges,” said Randy Eresman, EnCana president and chief executive officer. “In 2007, production from our key natural gas resource plays grew 14%, while production from our integrated oil projects increased 25%. Our newly established refining business also delivered great results, achieving twice the cash flow we expected during its inaugural year,” he said.

For the quarter and for 2007, Nexen Inc. posted large increases in net income due to strong oil and gas production from Buzzard field in the North Sea, robust commodity prices, and high cash operating margins. Net income in 4Q07 grew 152%, and for the year, the company’s earnings climbed 81%.

Nexen reported that although average benchmark West Texas Intermediate prices for the year increased 9%, it grew its cash netbacks per barrel by 32%.

Suncor Energy Inc. said that the 169% jump in its 4Q07 earnings primarily reflects higher oil sands operating revenues, as stronger price realizations more than offset lower production in the quarter.

Suncor’s earnings also benefited from a lower oil sands royalty expense. But earnings were tempered by lower refining and marketing earnings due to a planned outage at the company’s Sarnia refinery that resulted in increased product purchases to meet customer commitments.

For the year, Suncor’s net income declined almost 5% due to maintenance that reduced oil production and increased operating expenses, but higher oil prices partly offset these factors.

Service, supply firms

A sample of 25 oil service and supply companies recorded robust combined earnings increases for 4Q07, but a dozen companies in the group reported declines in net income from a year earlier. For the year, seven of the firms posted lower earnings from 2006. None of the companies in the sample posted a loss for either the quarter or the year.

For 4Q07, Rowan Cos. Inc. had record net income of $138.5 million compared with $62.4 million a year earlier. And 4Q07 revenues were a record $623.6 million, up from $410.9 million in the 2006 fourth quarter. Full-year results climbed as well on strong rig utilization and day rates.

Nabors Industries Ltd. announced net income of $222.2 million for 4Q07, compared with $237.8 million in the fourth quarter of 2006.

The quarter’s results include the previously disclosed gain on the sale of a portion of the company’s oil and gas holdings, a smaller loss in certain investments which losses the company believes are over, and during the quarter the Canadian statutory federal tax rate was reduced, resulting in a reduction in Canadian deferred taxes. Nabors’ results also partially reflect the company’s repurchase of 3.93 million shares during the fourth quarter at an average cost of $27.12/share.