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Hurricanes Aside, Producers Reap Profits on High Commodity Prices

Record oil and natural gas prices trumped the serious damage inflicted to offshore Gulf of Mexico operations by hurricanes in the third quarter, with ExxonMobil Corp. reporting the highest-ever earnings in corporate history, up 75% from a year ago. Majors BP plc, Royal Dutch Shell plc, Chevron Corp. and ConocoPhillips, as well as super independents Burlington Resources Inc., Kerr-McGee Corp., Marathon Oil Co. and Anadarko Petroleum Corp. also were able to overcome extensive offshore hurricane damage to reap massive profits -- but there were few production gains.

ExxonMobil's $9.9 billion net profit ($1.58/share) easily surpassed 3Q2004 earnings of $5.7 billion (88 cents). The numbers also topped Exxon's prior earnings record of $8.4 billion reported in 4Q2004. Despite making history, the top oil major neglected to note in its earnings release that the third quarter's numbers were a record, perhaps attempting to assuage growing political pressure to enact windfall profits taxes.

IFR Energy Services analyst Tim Evans said Exxon's quarterly earnings "set a new record benchmark for corporate earnings in general and, given the risk of political blowback we'd guess they probably buried some earnings to avoid passing the $10 billion barrier. As it is, there are already grumblings about taxing windfall profits and some arm twisting to encourage greater investment in expanding refining capacity." Sen. Jack Reed (D-RI) called on the executives of nine leading energy companies to contribute a portion of their quarterly profits to assist low-income customers and senior citizens in dealing with higher heating bills this winter (see related story).

Excluding special items, ExxonMobil's earnings were up 33%, to $8.3 billion from $6.2 billion, and its revenue jumped 32%, to $100.72 billion from $76.38 billion. Cash flow, including asset sales, soared to $16.5 billion from $10 billion a year earlier. U.S. net upstream income was $1.67 billion, compared with $1.17 billion in 3Q2004. Total worldwide net income for the upstream was $7.349 billion, compared with $3.929 billion for the same period a year ago.

Capital and exploration spending in the third quarter rose 22% from a year ago, to $4.4 billion from $3.6 billion, and earnings within the exploration and production unit jumped to $5.73 billion from $1.8 billion in 3Q2004. However, the production numbers didn't prove the better for it. Worldwide, ExxonMobil's oil and gas output fell 4.7%, which the company attributed to Hurricanes Katrina and Rita, maintenance activities and maturing fields.

Globally, gas production was down 9%, to 7.7 Bcf/d from 8.48 Bcf/d in 3Q2004. In the United States, gas output fell nearly 15%, to 1.6 Bcf/d from 1.9 Bcf/d in 3Q2004. Canadian gas production also was slightly down, falling to 926 MMcf/d from 954 MMcf/d for the same period a year ago.

BP reported a 34% hike in 3Q2005 net profit, but it blamed a 2% production loss on the devastating hurricanes that struck the Gulf of Mexico. In the storms' aftermath, the London-based major warned that its deepwater Thunder Horse platform may not ramp up until the second half of 2006 -- a year later than scheduled -- and the producer cut its production forecast for 2005 by 100,000-200,000 boe/d. BP's worldwide hydrocarbon production was 3.824 million boe/d in the quarter, down from 3.906 million boe/d in 3Q2004. Net crude output was up slightly, but worldwide net natural gas production fell to 7.84 Bcf/d, down from 8.275 Bcf/d. The hurricanes also are expected to lead to the loss of an additional 160,000 boe/d in 4Q2005, according to CEO John Browne.

Net profit in the third quarter reached $6.46 billion (31 cents/share), up from $4.82 billion (22 cents) in 3Q2004. Revenue was $97.73 billion, up from $66.73 billion in 3Q2004. The profit included net special charges of $921 million, compared with a year-earlier charge of $394 million. Special charges included a re-measurement of fair value for assets associated with the company's Innovene chemical subsidiary, which it has previously agreed to sell.

BP posted an impairment charge of $100 million on an unspecified Gulf field, which the company said was damaged by the hurricanes. Thunder Horse platform, in the same producing region, is expected to cost $250 million to repair, including $107 million charged in the third quarter. Thunder Horse, which is designed to process up to about 250,000 boe/d, began listing when Hurricane Dennis crossed the Gulf in July. Browne said the platform's ballast system had a defect that caused the platform to list, not hurricane damage. Overall, annual group production for 2005 is now expected at about 4 million boe/d, compared with a previous guidance of 4.1-4.2 million boe/d. However, Browne noted capital expenditure expectations for 2005 have been cut back by $500 million to $14 billion because the hurricanes forced the company to defer spending.

London-based Shell, the third-largest publicly traded producer, credited higher prices, refining profits and gains from divestments for lifting 3Q earnings 68%, more than making up for the company's lost production and extensive repair costs related to Katrina and Rita. Shell, whose numbers conform to international financial reporting standards, said net income rose to $9.03 billion ($1.35/share), from $5.37 billion (79 cents) in 3Q2004. Revenue rose 8% to $76.44 billion from $70.69 billion. Shell's results were pumped up by a special net gains of $1.57 billion related to divestments, compared with net special charges of $28 million in 3Q2004.

Capital expenditures for its exploration and production (E&P) businesses jumped 21% to $2.5 billion, with some of the extra expenses attributed to storm recovery. Globally, Shell's E&P unit earnings were up 55%, however, Shell's total oil and gas production fell 11% to 3.2 million boe/d, compared with 3.6 million boe/d in 3Q2004. The two storms accounted for the shut in of about 160,000 boe/d on average.

Natural gas production was down 15% worldwide, to 6.55 Bcf/d from 7.7 Bcf/d in 3Q2004. In the United States, Shell's gas output fell almost a quarter, to 948 MMcf/d, compared with 1.29 Bcf/d in 3Q2004.

In the upstream, Shell said it has restored Gulf production to more than 200,000 boe/d of the 450,000 boe/d prior to Katrina, and "good progress continues to be made on key assets" offshore, including Ursa, Mensa, and the Auger pipeline. An additional 150,000 boe/d is expected to return to production during 4Q2005, about 80,000 boe/d higher than earlier guidance. About 15 million boe was deferred in 3Q2005 and 18 million boe is expected to be deferred in the fourth quarter because of the storms.

Together, Katrina and Rita will cost Shell $350 million after tax in repair costs and lost production, but some of the expenses are expected to be returned from insurance claims. Including the hurricane impact, the production outlook for 2005 is now 3.5 million boe/day, and for 2006, output is expected to be in the lower range of 3.5-3.8 million boe/d. The outlook for 2009 of 3.8-4.0 million boe/day is unchanged.

Shell management also responded to rumors concerning an attempted takeover of Calgary-based EnCana Corp. CFO Peter Voser told analysts in a conference call the company could spend up to $10 billion on an acquisition, but "Anything current price assumptions would not be attractive for us." EnCana is estimated to be worth about $50 billion. Voser said Shell's "organic growth pipeline is here, and that is our focus."

Katrina, Rita and Dennis cut right into the heart of Chevron's Gulf Coast operations in the third quarter, resulting in a $600 million cut in profits, and the carryover effects on fourth quarter results are expected to be even more significant, CEO Dave O'Reilly said Friday. The storms reduced 3Q2005 oil and natural gas production by about 90,000 boe/d and are expected to curtail more output in the final quarter. Chevron reported net income of $3.6 billion ($1.64/share), compared with $3.2 billion ($1.51) for the same period a year ago. Earnings in 2005 included results for two months from the former Unocal operations. There were no special items in the third quarter, while 3Q2004 net income included a special-item gain of $0.5 billion ($0.23/share) related to asset sales. Sales and other operating revenues in the third quarter were $53 billion, up from $40 billion.

"Katrina and Rita hit us right in the core of our operations," said O'Reilly, who spoke to analysts during a conference call on Friday. "The effect of the storms will be felt for some time." As the largest producer on the Gulf of Mexico shelf, and with extensive deepwater operations, O'Reilly said the company also suffered from Hurricane Dennis, which struck in July.

Two-thirds of the $600 million loss to storms in the quarter was on "lost opportunities," said O'Reilly, which included the loss of oil and gas production offshore as well as the 40-day shut down of the Pascagoula, MS refinery. Not included in the financial statements was another factor, he noted: almost 700 of Chevron's employees either "lost their homes or had their homes severely damaged" in the storms.

Worldwide oil-equivalent production, including volumes produced from oilsands in Canada and production under an operating service agreement in Venezuela, increased 105,000 boe/d from a year earlier to 2.548 billion boe/d. Included was production from the former Unocal operations of 425,000 boe/d for two months, or an average of 282,000 boe/d for the period. Excluding the additional volumes from Unocal operations, production otherwise declined from 3Q2004 because of the hurricanes, asset sales since mid-2004 and the effect of higher prices on the cost-recovery and variable-royalty provisions of certain production sharing agreements.

U.S. exploration and production income was up 4% to $1.2 billion. Domestic net oil-equivalent production was 735,000/boe/d , a drop of 8%, or 66,000 boe/d from 3Q2004. Domestic output from the Unocal unit 76,000 boe/d. Absent the Unocal volumes for two months, curtailed production due to storms and the effect of property sales since mid-2004, the underlying net oil-equivalent production in quarter declined about 6% from 3Q2004.

At ConocoPhillips, earnings soared 89%, with net income reaching $3.8 billion ($2.68/share), from $2.01 billion ($1.43) in 3Q2004. Revenue increased 43% to $49.7 billion from $34.7 billion. In its E&P unit, income from continuing operations jumped 61% to $2.29 billion from $1.42 billion.

Oil and gas volumes dropped sequentially from 2Q2005 after the loss of 60,000 boe/d from planned and unplanned downtime in the United Kingdom, hurricane-related disruptions in the Gulf and the normal seasonal decline in Alaska. However, output improved from a year ago, averaging 1.52 million boe/d, compared with 1.48 million boe/d.

Production volumes are expected to improve in 4Q2005 on contributions from the United Kingdom, Norway, Vietnam and Alaska. However, the producer again scaled back its full-year outlook to flat from 2004, citing hurricane disruptions. Earlier this year, ConocoPhillips reduced its growth forecast to 3% from 5%.

Gas output was up slightly in the United States, including Alaska, to 1.39 Bcf/d from 1.384 Bcf/d in 3Q2004. In Canada, gas production also was higher, at 429 MMcf/d from 425 MMcf/d. Total worldwide gas production for the quarter barely fell, to 3.109 Bcf/d from 3.183 Bcf/d for the same period a year ago.

Burlington Resources nearly doubled its 3Q2005 income, earning $748 million, compared with $394 million in 3Q2004. Earnings per diluted share were $1.96, up 96% from $1/share a year ago, attributed to higher commodity prices, increased equivalent production, share repurchases and an after-tax gain on the sale of Permian Basin Royalty Trust units for 19 cents/share.

Total volumes increased 1% to 2,843 MMcfe/d from 2,815 MMcfe/d in 3Q2004. Natural gas production increased from Canada and the Bossier trend in East Texas, and oil production increased from the Cedar Creek Anticline and Bakken programs in North Dakota and Montana. Storm-related production curtailments and repairs caused volume decreases in South Louisiana and several adjacent areas, and in offshore China, while maintenance shutdowns of outside-operated pipelines and processing plants reduced production in the San Juan Basin. Gas output in the United States was up slightly compared to a year, to 952 MMcf/d from 935 MMcf/d. Canadian gas output also rose slightly, to 799 MMcf/d from 796 MMcf/d. Worldwide, gas production fell to 1.88 Bcf/d from 1.906 Bcf/d.

Production curtailments resulting from Katrina and Rita, which peaked at 180 MMcfe/d, have declined to 30 MMcfe/d. Full restoration of the shut-in volumes is said to depend on the pace of repairs to producing facilities, resumption of industry pipeline and natural gas processing services and availability of local electrical power and other infrastructure.

Burlington expects full-year 2005 production to average within the range of 2,840-2,890 MMcfe/d, which includes the impact of weather-related production curtailments in several operating areas, and price-related international volume adjustments.

Kerr-McGee, which has been downsizing its operations in the past few months, reported net income of $359.3 million ($3.09/share), up from $7.4 million (5 cents) in 3Q2004. Excluding results from discontinued operations in the North Sea and elsewhere, earnings were $2.53/share, up from 95 cents. Revenue for the quarter rose to $1.21 billion from $1.20 billion, shy of the $1.25 billion analysts had expected. Domestic gas sales from continuing operations averaged 937 MMcf/d in the quarter, down from 999 MMcf/d in 3Q2004.

Because of curtailments offshore, Kerr-McGee warned its physical deliveries to certain sales indices are expected to be insufficient to cover the associated derivative contracts in place for 4Q2004. Accordingly, it recognized a 3Q2005 after-tax charge of $66.8 million associated 4Q2005 derivative contracts assigned to the Gulf where deliveries to specific sales indices are expected to be less than the associated hedged volumes.

"The company believes that it is probable that deliveries in the Gulf of Mexico will resume in sufficient volumes to match its remaining 2006 and 2007 derivative contracts by January 2006," Kerr-McGee said in a statement. The company also recognized an after-tax loss of $137.7 million in quarter for "hedge ineffectiveness," representing the excess of the mark-to-market loss associated with all outstanding derivative contracts accounted for as hedges over the expected higher revenues the company will receive on its future sales of oil and gas.

Marathon Oil Corp.'s quarterly profit more than tripled, with net income for the Houston-based company increasing to $770 million ($2.09/share), compared with $222 million (64 cents) in the year-earlier quarter. Excluding special items, the company reported a profit of $2.16 a share. Revenue jumped to $17.25 billion from $12.32 billion a year earlier.

The E&P unit's quarterly income was $627 million, up from $351 million a year ago. Production sales volumes averaged 291,500 boe/d, while output available for sale was 321,000 boe/d. Gas sales in the United States fell in the quarter, to 561.8 MMcf/d from 598 MMcf/d for the same period of 2004.

Despite the loss of 20,000 boe/d shut in because of the storms, Marathon's business continued to generate production increases, particularly in Equatorial Guinea and Russia. Marathon forecast 2005 average daily production available for sale of 340,000-350,000 boe/d, excluding acquisitions or dispositions. The cost of storm-related repairs in the Gulf is not expected to be significant, and production is now at 90% of pre-storm levels, Marathon said.

Anadarko Petroleum Corp. reported a 50% surge in quarterly profit on Friday, lifted by record commodity prices. Net income rose to $598 million ($2.51/share), from $300 million ($1.58) in 3Q2004. CEO Jim Hackett said the company "hit the middle of our target range" for production, with organic volumes up 8% so far this year.

Results included $141 million in losses on derivatives, partially offset by a $29 million gain on a transportation keep-whole agreement and a $13 million after-tax charge related to selling a field in Oman. Excluding those items, Anadarko earned $2.86/share, beating a Wall Street forecast of $2.82. Revenues rose to $1.76 billion from $1.56 billion a year earlier. Cash flow from operating activities was $1.14 billion in the third quarter, and discretionary cash flow totaled $1.01 billion.(1)

Third quarter sales volumes totaled 39 million boe, or 426,000 boe/d. Natural gas sales volumes averaged 1.382 Bcf/d, at an average realized price of $7.15/Mcf. Natural gas liquids volumes averaged 34,000 bbl/d. Overall volumes were essentially flat sequentially and were down year-over-year because of asset sales. Adjusted for these property sales, volumes increased 8%.

Offshore Gulf of Mexico, Anadarko's gross volumes of 20,000 boe/d were shut in for a combined 20 days quarter because of Hurricanes Katrina and Rita. In total, the company estimates that combined onshore and offshore weather-related shut-ins and delays, including those affecting rigs being used to develop the K2, K2 North and Genghis Khan fields, reduced quarterly net volumes by 400,000 boe. Full-year 2005 net volumes are expected to be reduced by approximately 2.2 million boe because of the shut-ins and ongoing effects of the delayed development activity, including delays due to offshore loop currents.

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