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UPR, ARCO Take Large Write-Downs

UPR, ARCO Take Large Write-Downs

Union Pacific Resources Group and ARCO warned last week they will be taking massive asset write-downs and restructuring charges during the fourth quarter, reflecting their continuing struggle to deal with low crude oil and gas prices.

Union Pacific said it will take a whopping $760 million after-tax, non-cash charge for asset impairment under Financial Accounting Standard 121. UPR also said its 1999 plans include continuing its cost-reduction program and a preliminary capital budget of about $500 million. Excess cash flow of more than $250 million will be used to further cut debt to keep the company's $2 billion de-leveraging program on target.

ARCO said after-tax special charges in the fourth quarter are expected to total $890 million. The net charge includes asset write-downs, restructuring costs and a tax refund. Asset write-downs are a result of investment impairments totaling $790 million after tax and mainly related to expectations of lower crude prices.

"The low price environment in which the oil and gas industry finds itself is forcing us and many of our competitors, large and small, to take asset impairments and actions to reduce costs and conserve cash, said UPR CEO Jack Messman. "Our write-down has been triggered by low commodity prices and largely relates to Norcen Energy Resources' assets acquired just before the collapse in prices in early 1998. While we are required by Financial Accounting Standard 121 to mark these assets to market with a charge to 1998 earnings, the write-down will lead to improved earnings going forward.

"UPR is on target to meet its de-leveraging objectives. Our cash flow remains strong and will allow us to meet our debt covenants, fund our capital program and pay down additional debt. UPR will live within its means and adjust its capital spending as commodity prices and cash flows change."

Messman said the actions should put UPR on the road to profitability in 1999. "After all the changes to our company in 1998 caused by the Norcen acquisition and the subsequent asset sales, UPR has about 50% more reserves and about 50% more production today than it did at this time in 1998."

UPR's assumptions for natural gas prices are $2.05/Mcf in 1999, $2.25 in 2000, and $2.35 beyond 2000. The company's preliminary 1999 capital budget of about $500 million is down by about two-thirds from 1998's $1.2 billion expenditure on exploration and production projects, excluding the $3.5 billion purchase of Norcen in March 1998. UPR said the reduction is a direct consequence of the current price environment and its commitment to continued de-leveraging.

Properties involved in the ARCO write-downs include some assets acquired as part of the Union Texas Petroleum (UTP) purchase and other assets in the UK North Sea, Middle East and North Africa. Essentially all of the oil and gas properties impacted are overseas.

The charges include restructuring costs of $180 million after tax for the global cost reduction program ARCO announced in October. The program is designed to reduce before-tax costs by more than $500 million by 2000. ARCO said 1,200 employees, up from the original estimate of 900, will be terminated as part of the program. In addition to the cost reduction program, ARCO announced in December that its capital spending plans for 1999 call for reduced spending worldwide. The company said it expects to spend $2.7 billion worldwide in 1999, down 25% from the 1998 spending level.

Also included in the 1998 fourth quarter special items will be a net benefit of $80 million, which includes a federal income tax refund in excess of $100 million.

More bad news came last week from Tulsa, OK-based Parker Drilling Co., which reported an unaudited net loss of $7.7 million, or a $0.10 loss per diluted share for the three months ended Nov. 30. The prior year's results for the same quarter reflect net income of $10.7 million, or $0.14 per diluted share. "The industry continues to experience the effects of the most dramatic drop in energy prices since the 1980s," said Robert L. Parker Jr., CEO. "Parker's strategy is to curtail costs and concentrate our marketing efforts in areas showing greatest potential."

Parker is changing its fiscal year-end from Aug. 31 to Dec. 31, effective Dec. 31, 1998. Parker specializes in barge and offshore drilling and workover services, land drilling, and specialized oil tool rentals.

Joe Fisher, Houston

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