First quarter profits fall with oil prices

Robert J. Beck
Associate Managing Editor-Economics
Laura Bell
Statistics Editor

Plunging oil prices have spawned a sharp drop in first quarter earnings for a sampling of U.S. and Canadian oil and gas companies.

Both revenues and profits were down significantly from the first quarter a year earlier. Slightly higher world and U.S. demand for oil did not offset the effects of the decline in crude oil prices. The lower feedstock costs did boost earnings for the refining and marketing sector, but that was more than offset by the large declines in earnings in the exploration and production sector of the industry.

Total profits for the 129 companies that the Oil & Gas Journal surveyed were down 43.4% in the first quarter of this year from the same period in 1997 (see table, p. 37). The decline in earnings accompanied a 16.4% drop in total revenues.

Of the 129 companies sampled, 69 posted lower first quarter earnings this year than a year ago. Another 44 posted losses in this year's first quarter. Eight posted a loss in first quarter 1997. Only 15 companies had higher profits than they did in first quarter 1997, and one company showed earnings at the same level as a year earlier.

Low prices sting

Lower crude oil and natural gas prices were the primary reason for the drop in both revenues and company profits in the first quarter of this year.

Increased oil demand worldwide only partially offset the hit on earnings from lower prices. According to the International Energy Agency, estimated worldwide oil demand averaged 75 million b/d in first quarter 1998, compared with 73.7 million b/d in first quarter 1997.

U.S. refined products demand in the first quarter was up 0.4% from a year earlier, averaging 18.324 million b/d.

U.S. natural gas demand slipped 2% to 6.731 tcf in the first quarter from a year ago, because of warmer than normal winter weather.

The worldwide price for export crude oil averaged $12.83/bbl for the first 3 months of 1998, a drop of 38% from first quarter 1997. In the U.S., the first quarter average price for West Texas intermediate crude oil was $15.16/bbl, down 31% from the same period a year earlier.

The average price for light sweet crude on the New York Mercantile Exchange in the first quarter was $15.96/bbl, a decline of 30% from first quarter 1997.

The average spot price for natural gas was $2.09/Mcf vs. $2.80/Mcf in first quarter 1997, down 25%. However, by the end of the first quarter, the price of natural gas had strengthened and climbed above year-ago levels.

Company breakout

The sharpest year-to-year drop in earnings in the first quarter was recorded by independent exploration and production companies.

For the first quarter this year, the small independent group of 38 companies posted a decline of 92.4% in net earnings, with revenues down 14.9%. Of the small independents, only 6 companies had higher profits, while 17 posted lower profits and 15 recorded losses.

The larger independent companies showed earnings down 84% from a year earlier. Revenues for this group fell 9.4% in the first quarter. For this group of 67 companies, only 4 had increased profits, while 35 posted declines in earnings and 27 recorded a loss. One company reported earnings at the same level as a year earlier.

The 22 integrated companies in the sample posted first quarter earnings down 33% from the same period in 1997. Revenues for this group fell 18.9%. Profits moved up for 4 of the companies, while 16 had lower earnings and 2 had losses. Increased earnings from refining and marketing operations offset some of the sharp decline related to the drop in crude oil and natural gas prices.

The survey also included two companies that are exclusively refiners and not involved in exploration and production. For these two companies, profits in the first quarter this year were up significantly, totaling $57.9 million, compared with $31.2 million in first quarter 1997 for an increase of 85.9%. Revenues increased 17.8%. One company had increased profits, and the other lower profits.