Effects of low oil prices partially offset by increased downstream profits

Robert J. Beck
Associate Managing Editor-Economics

Laura Bell
Statistics Editor

• U.S. Monthly Average Prices [31,512 bytes],
• A Look at 12 Months, Fourth Quarter Financial Results [125,048 bytes]
• A Look at 12 Months, Fourth Quarter Financial Results cont. [106,281 bytes]

The refining segment of the U.S. petroleum industry posted significantly higher profits in 1997, while falling oil prices dragged down the results for exploration and production operations.

The year started strong with first quarter oil and petroleum product prices significantly ahead of a year earlier. But oil and product prices weakened at midyear and fell sharply in the second half, dragging down profits for a number of companies.

Strong natural gas prices throughout the year boosted total annual revenues for a group of 93 companies (see table, pp. 20-21).

Total profits during 1997 for the 93 companies that the Oil & Gas Journal surveyed were up 5.3% compared with earnings in 1996. The increase in earnings was in part due to a 1% increase in total revenues.

Much of the profits increase is attributable to results in the first quarter of 1997, when crude oil, petroleum products, and natural gas prices were up significantly from a year earlier. Both revenues and profits fell significantly in the fourth quarter, however. Profits were down 5.6% from the level in the fourth quarter of 1996 and revenues were off 6.5%.

Of the 93 companies sampled, 43 posted higher earnings this year than last year. Another 30 companies showed lower profits than in 1996, and 20 companies posted losses for the year. Seven of the latter group also posted a loss the year before.

Fundamentals

Crude oil prices began to weaken in the second quarter of 1997 and fell sharply in the last quarter of the year. Petroleum product prices also slipped late in the year.

Natural gas prices remained relatively strong throughout the year and were a major reason that total annual revenues for the group were up slightly.

The worldwide price for export crude oil averaged $18.38/bbl for 1997 (see chart, this page)-down 10% from the $20.04/bbl average for 1996. The price of West Texas intermediate (WTI) crude oil averaged $19.73/bbl, down 7.1% from $21.23/bbl in 1996.

The average spot price for natural gas was $2.44/MMBTU compared with $2.30/MMBTU in 1996.

Higher crude oil and natural gas demand also helped support earnings. U.S. natural gas demand remained strong, even though the weather was warmer than normal during the winter heating season, and was up 0.2% for the year at an estimated 22.014 tcf. This was the highest U.S. natural gas consumption level since 1973.

U.S. petroleum product demand also increased, averaging 18.58 million b/d for the year, up 1.5% from 1996. World oil demand was up 2.5%, averaging 73.5 million b/d in 1997.

Integrated firms

The companies listed in the earnings table on pp. 20-21 are divided into categories: integrated companies, large independents, small independents, and refiners.

For the year, earnings gains were posted by the group of integrated companies and by the refiners. The group of 20 integrated companies posted increased profits of 8.8% in 1997, even though revenues slipped 3.2%.

Of the integrated group, 12 companies had higher profits, while 7 posted lower profits, and 1 recorded a loss for the year. For this group, profits were weaker in the fourth quarter as oil prices fell.

But profits for the integrated companies were still up 3.6% from the fourth quarter of 1996. Profits increased even though revenues fell 11.6% from the same quarter a year earlier.

Conoco Inc. Pres. and CEO Archie Dunham said, "Strong downstream product margins and increased refinery production, combined with improved gas prices plus higher international gas volumes, contributed to (Conoco's) record performance."

Conoco's refined products sales were up 5% to 1,048,000 b/d in 1997, because of increased yield from a new hydrocracker at the Lake Charles, La., refinery, and from a new vacuum distillation unit at its Humber refinery in the U.K.

While Conoco's worldwide upstream earnings were up 10% in 1997, downstream earnings were up 53%. Its U.S. downstream earnings grew 59%, while non-U.S. downstream earnings rose 47%, "primarily due to higher European margins and increased refinery production," said Conoco.

ARCO also reported increased earnings for 1997 despite lower oil prices.

Chairman Mike R. Bowlin said, "The year ended with a strong fourth quarter year-over-year production increase of nearly 5% as a result of our stable U.S. oil production, increases in Algeria and Qatar, and new oil production from the Ashtart and Tengiz fields, along with added gas production in the U.S., North Sea, and China.

"In the downstream business, our refining and marketing operations concluded a strong year with a 13% increase in earnings, driven by margin improvements and volume growth."

ARCO's 82.3% interest in ARCO Chemical Co. earned $128 million in 1997 vs. $320 million in 1996. "Chemical earnings were negatively impacted by lower product margins, higher plant turnaround costs, and higher foreign exchange charges," said Bowlin.

Independent refiners

The earnings survey also included six companies that are involved only in refining and marketing and do not have exploration and production operations. For these six refining companies, profits in 1997 were up 78.3% from the year before, and revenues increased 20.6%. Four of the companies boosted profits while two had lower earnings last year.

In the fourth quarter, this group posted profits up 459% from 1996 and revenues up 20.3% from the same quarter a year earlier.

Tosco Corp., a rapidly growing U.S. independent refiner, increased its profits to $212.7 million in 1997 vs. $146.3 million in 1996. Tosco processed 793,400 b/d in 1997, up 258,400 b/d from the previous year. Average refined products output was 787,800 b/d for the firm vs. 538,500 b/d in 1996.

Ultramar Diamond Shamrock Corp. said its refining, marketing, and petrochemicals units all contributed to its increased 1997 earnings. The firm said its performance "show(s) the benefits of recent mergers and acquisitions."

UDS reported an earnings increase of 81% in 1997, including a special noncash charge for a reduction in the carrying value of its inventories ($11.1 million pretax). "This special noncash charge resulted from the significant market drop in crude oil prices late in 1997," said the firm.

UDS Chairman Roger Hemminghaus said, "We've said all along that our recent strategic moves would make UDS a stronger company, and the figures for 1997 show we're on the right track."

Upstream independents

The larger independent oil and gas companies had earnings down 35.1% from 1996, even though revenues increased 30.7% from the year before. For this group of 50 companies, 22 had higher profits, while 17 posted declines in earnings, and 11 had a loss for the year.

In the fourth quarter, the profits for the large independents were down 62% from a year earlier, but revenues were up 25.6%.

The largest firm in this group, Burlington Resources, reported net income of $319 million for 1997 vs. $335 million for 1996.

Net cash from operations for 1997 was $1.122 billion compared to $995 million in 1996. "The increase in 1997 compared to 1996 was primarily due to higher operating income, excluding noncash items, and working capital changes," said the company. The firm's 1997 results include a $0.40/share charge related to the merger with Louisiana Land & Exploration Co.

Burlington Resources' revenues were $2 billion in 1997, compared with $2.2 billion the previous year. Revenues were down $264 million as a result of the sale of Louisiana Land & Exploration's Saraland, Ala., refinery. Oil sales volumes decreased 4% to 87,200 b/d, and average oil prices fell 6% to $19.24/bbl; these two factors cut revenues by, respectively, $31 million and $37 million.

"These decreases were partially offset by increases in gas sales volumes of 4% to 1,669 MMcfd and an average gas price increase of 6% to $2.18/Mcf," said the firm, "which increased revenues $46 million and $82 million, respectively."

The group of 17 small independents had profits down 24% from 1996, even though revenues increased 32.1%. Five of the companies posted higher profits, four had lower profits, and eight posted losses for 1997. In fourth quarter 1997, the small independents as a group posted a loss of $18.8 million, even though revenues were up 18.2%.

McMoRan Oil & Gas Corp., for example, reported a net loss of $109,000 in the fourth quarter of last year vs. a $3.9 million loss in fourth quarter 1996.

Fourth quarter 1997 revenues for the firm were $5.844 billion ($5.426 billion from oil and gas E&P, the rest from administrative fees). E&P expenditures were $59.268 million in 1997 vs. $20.678 million in 1996.