Oil price slump slashes first half earnings

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

Significantly lower oil prices in the first half of this year have resulted in a sharp decline in profits for a sampling of U.S. and Canadian oil and gas companies.

Both revenues and profits were down significantly from first half 1997 (see table, pp. 40-41).

Slightly higher demand for petroleum did not offset effects of the drop in crude oil prices. Lower crude costs did boost earnings for refiner/marketers, but that was more than offset by the large declines in earnings in the exploration and production sector.

Profits and revenues were also off sharply in the third quarter, as low oil prices persisted (OGJ, Nov. 2, 1998, Newsletter).

Total profits for the 119 companies that the Oil & Gas Journal surveyed were down 44% in the first half from a year ago. The decline in earnings was in part due to a 15.9% drop in total revenues.

Of the companies sampled, only 14 companies had higher profits than in first half 1997. Lower first-half earnings vs. a year earlier were posted by 56 of the companies. Another 49 companies posted losses in first half 1998. Seventeen of these companies posted a loss in first half 1997.

Demand, price slumps

Increased oil demand worldwide helped, only marginally, to offset the effect on earnings from lower prices. Demand expectations worldwide are much lower than they were a year ago. That has led to excess crude oil production capacity, creating a glut of available oil and forcing oil prices lower.

According to the International Energy Agency, estimated worldwide petroleum demand averaged 73.65 million b/d in first half 1998, compared with 72.9 million b/d in first half 1997. U.S. petroleum products demand in the first half was up only fractionally, averaging 18.382 million b/d vs. 18.381 million b/d in first half 1997. U.S. natural gas demand slipped 2.8% to 11.411 tcf in first half 1998 from the prior year, led by a falloff in residential and commercial demand due to milder winter weather.

The worldwide price for export crude oil averaged $12.39/bbl for the first 6 months of 1998 and was down 35.1% from first half 1997. In the U.S., the first half average price for West Texas intermediate crude oil was $14.58/bbl, down 28.8% from the same period a year earlier. The average price for light sweet crude on the futures market was $15.34/bbl, down 28.1% from the first half a year earlier. The average spot price for natural gas was $2.11/Mcf compared with $2.38/Mcf in first half 1997. However, in the second quarter, the price of natural gas strengthened and climbed above year-ago levels.

Results breakdown

Both the large independent and small independent groups of companies posted aggregate losses for the first half of the year.

The group of 60 large independent companies posted a combined loss of $854.4 million in first half 1998 vs. an aggregate profit of $2.02 million in first half 1997. Revenues for this group fell 12.2% to $19.58 billion. Of the large independents, only 5 had higher profits, while 31 posted lower profits and 24 recorded losses.

The group of 30 small independent companies posted a loss of $68.5 million for the first half, compared with a profit of $47.2 million in 1997. This was despite a 5.6% increase in revenues for the group. Of the small independents, 3 companies had higher profits than a year earlier, while 8 posted declines in earnings and 19 recorded a loss.

The 23 integrated companies in the sample posted first half earnings down 31.1% from the same period in 1997. Revenues for this group fell 17.6%. Profits moved up for 4 of the companies, while 16 had lower earnings and 3 had losses.

For many of these companies, 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 six companies that are exclusively refiners and not involved in exploration and production. For these six companies, profits in the first half this year were up 9.7%, totaling $269.8 million, from $246 million in first half 1997. Revenues increased 2.7%.

Two companies had increased profits, one company lower profits and three posted a loss. Second quarter profits for the refining group were down significantly, falling 36% from the same period a year earlier. U.S. product demand was down slightly from second quarter 1997, and product prices were also significantly lower, particularly for motor gasoline.