Low Prices Pound Producer Earnings
Last year was one of misery for most energy companies,
particularly producers. It was so bad that one industry analyst is
calling for sweeping change in how producers do business.
"Earnings? What earnings? There aren't any," quipped John Olson,
senior vice president with Houston-based Sanders Morris Mundy. "The
industry had a very tough year with wellhead revenues falling from
$95 billion to $70 billion, and that came right off the top."
Olson chastised producers during a speech last week in
Washington, D.C. (see related story) and later told NGI things have
got to change. "The earnings profile of producers has never been
strong and it has been a reflection upon the consistent failure of
the current industry model or current industry structure. Producers
have not made any serious money since 1981.The model hasn't worked
for nearly 20 years. You have to change the business. And the
problem is the producing sector has run out of ideas."
Olson's prescription includes risk management across the board -
hedging, swapping, and indexed long-term contracts; and joint
ventures/alliances with cogenerators and independent power
producers. And, according to Olson, gas is the way to go; forget
about oil with its price resting on the whims of the world market.
A round-up of earnings released last week reveals one clear
winner and many losers. The Coastal Corp., which has embraced
natural gas more than ever, set a new earnings record. The company
weathered the tough commodity price environment so well in large
part thanks to its position as a big gas transporter and large
refiner, noted analyst Stuart Wagner of Petrie Parkman. Unlike
Coastal, others reporting earnings last week suffered from not
having a major pipeline business to lean on for revenue.
With oil prices in the tank and expected by most to remain there
for some time, Coastal is leaning more heavily than ever on gas for
future growth. "Coastal has developed a clearly defined growth
strategy which is being implemented to maximize earnings from our
unique integrated asset base. In the near-term, commodity prices
and refining margins are at levels that indicate 1999 will be a
challenging year for all of us in the energy industry. However,
specific projects and plans are in place to provide significant
earnings growth over the longer-term," said David A. Arledge, CEO.
"Coastal has the financial flexibility, balance sheet strength and
operational expertise to compete profitably in each of our
Coastal's reserve replacement last year was a whopping 519%,
marking the fourth consecutive year reserve replacement has
exceeded 300%. Last year the company added more than 1.1 Tcfe,
increasing total proved reserves to more than 2.6 Tcfe at year-end,
88% of which is natural gas.
Stirling Pack Jr. of Coastal's investor relations department
said the company is focusing on gas now more than ever. The company
sees prices coming up in the second half of the year when demand
picks up and deliverability declines. Pack pointed to record low
rig counts and cuts to E&P budgets as evidence supply will be
tightening up. Demand growth is expected to come both at the
residential level and in power generation.
Coastal traditionally has sought growth through the drillbit.
The company now sees opportunities for growth through acquisitions,
Pack said. Any acquisitions likely would be in one or more of the
three areas where Coastal has focused E&P operations: the
shallow Gulf of Mexico, South Texas, and the Rocky Mountains, Pack
said. He said the company expects to increase production by as much
as 20 to 25% this year and as much as 15 to 20% in 2000. Last
year's E&P budget started at $500 million, grew by $50 million,
and then by another $100 million at a time when other companies
were cutting back. For this year, the initial E&P budget is
about $700 million, $200 million of which is targeted for
acquisition of developable reserves.
Coastal is budgeting for continued low prices, too. The company
is expecting oil to be at $14 for WTI and gas to be at $2.00/Mcf at
the Henry Hub, Pack said. Realized prices for gas in 1998 were
$1.95/Mcf versus $2.40/Mcf for 1997. Gas production in 1998
averaged 508.9 MMcf/d, compared with 436.0 MMcf/d in 1997.
Throughput for Coastal's pipeline subsidiaries in 1998 was 2,132
Bcf, compared with 2,190 Bcf in 1997.
While Coastal clearly dodged the low-price bullet last year,
many others did not. While profits were meager or non-existent,
asset write-downs were plentiful as companies were forced to
reconcile their books with the value of reserves in the ground.
Union Pacific Resources Group (UPR) blamed the oil price
collapse for a 1998 loss of $899 million despite a 53% increase in
production and a 49% increase in proved reserves. The 1998
financial results were strongly affected by a number of one-time
items, most notably a $760 million after-tax, non-cash, asset
impairment charge. Reserves increased by 49%, to a year-end total
of 6.124 Tcfe, up from the 1997 year-end total of 4 Tcfe. Including
its Norcen acquisition, the company achieved a reserve replacement
rate of 403%.
"Occidental's 1998 results reflect significantly lower oil and
gas and chemical prices than we realized in 1997," said CEO Ray R.
Irani. "The 1999 capital spending budget will be reduced to $350
million compared with $1.06 billion for 1998. Of the $350 million
in 1999 capital spending, oil and gas will be allocated
approximately $275 million, with Elk Hills and Qatar receiving the
highest priority, and the remainder will go to chemicals. We expect
that 1999 worldwide oil and gas production will remain at
approximately the same level as 1998 even with the reduced spending
level." Occidental domestic gas production grew to 614 MMcf/d from
596 MMcf/d in 1997.
Phillips Petroleum Co. 1998 net income was less than a third of
what it was in 1997. Major special items included charges of $267
million for oil and gas property impairments. Excluding the effect
of all special items, 1998 net operating income was still off 57%.
Phillips has cut its capital spending for 1999 to $1.5 billion,
about $600 million less than 1998 spending.
USX Corp. Chairman Thomas J. Usher said, "The Marathon Group's
earnings were significantly impacted by lower worldwide liquid
hydrocarbon and natural gas prices. Nevertheless, 1998 saw us gain
momentum in growing and improving the business. Domestic gas
production was 743.8 MMcf/d in 1998, up from 721.9 MMcf/d in 1997.
Domestic gas prices were down to $1.79/Mcf in 1998 from $2.20/Mcf
Kerr-McGee net income for 1998 was off by almost 75% to $50
million from $194 million 1997. CEO Luke R. Corbett said lower oil
and gas prices negatively impacted 1998 earnings by about $100
million. In the fourth quarter the company took a $250 million
write-down for the impairment of oil and gas assets and non-core
chemical operations. In 1998 the company's domestic gas sold for
$2.12/Mcf, down from $2.57 in 1997.
Texaco's income before special items declined 50% in 1998 to
$894 million. Special items reduced 1998 net income to $578 million
and caused a fourth quarter net loss of $213 million. In the fourth
quarter, Texaco took a $93 million write-down of assets and $142
million in negative inventory valuation adjustments. "We are not
standing still, waiting for prices to improve," said CEO Peter I.
Bijur. "We are implementing significant cost and expense reductions
across all of our businesses. These reductions, along with the
announced $600 million reduction in our 1999 capital-spending
program, will enable us to maintain financial flexibility." For the
fourth quarter and year 1998, average gas prices were $1.91 and
$2.00 per Mcf, 27% lower than the fourth quarter and 16% lower than
the year 1997.
Unocal reported 1998 net earnings of $130 million. Excluding
special items earnings were $166 million. Domestic gas production
declined to 927 MMcf/d from 993 MMcf/d in 1997. Domestic gas sold
for $1.97/Mcf, down from $2.36/Mcf in 1997.
Chevron had 1998 net income of $1.976 billion, down 39% from
1997 net income of $3.256 billion. Last year the company took $159
million in asset write-offs and re-valuations. Domestic gas prices
declined 17% to $2.02/Mcf.
For 1998, ARCO reported net income of $452 million, down from
$1.77 billion in 1997. Excluding special items and discontinued
operations, 1998 earnings were $400 million. On the same basis,
1997 earnings were $1.33 billion. In the fourth quarter the company
took a $864 million net charge for asset write-downs, restructuring
costs offset by a tax refund. The company sold its gas for
$1.82/Mcf in 1998 (including Vastar production), down from
$2.04/Mcf in 1997.
Amerada Hess Corp. reported a 1998 net loss of $459 million. The
company took a $198 million charge in 1998 for impairment of assets
and operating leases.
Lower prices and lower volumes led Oryx Energy to report a net
loss for 1998 of $95 million. Fourth quarter 1998 results included
a $49 million after-tax non-cash asset write-down in accordance
with FAS 121.
For 1998 Anadarko Petroleum posted a net loss of $49.3 million.
Excluding a fourth-quarter impairment of $45 million after-tax for
foreign exploration, Anadarko's net loss for 1998 was $4.7 million.
"Simply stated, our financial results for 1998 were lousy due to
the collapse in commodity prices, the worst in more than two
decades. We can't change that. What we can do is continue doing
what we do best-growing our core assets-our proved reserves at low
finding costs just as we did in 1998," said Anadarko CEO Robert J.
Allison Jr. Anadarko gas production for 1998 was essentially level
with 1997. Average gas prices fell 17% in 1998 from 1997 to
$1.92/Mcf from $2.30/Mcf.
Joe Fisher, Houston