High Commodity Prices Spur Record Profits

The five largest U.S. energy companies reported blockbuster fourth quarter and year-end profits last week, charmed by soaring commodity prices in the oil and gas marketplace. ExxonMobil Corp. was the leader of the pack, stunning Wall Street with the highest ever annual profit report for a listed company with net earnings that were twice those reported by Microsoft in the fourth quarter of 2000.

Other majors, including Chevron Corp., Conoco Corp., Texaco Inc. and USX Marathon Group also posted record earnings for the quarter.

Also taking a seat at the high earnings table were the independents, which are seeing their earnings fed by high commodity prices in both the crude oil and natural gas markets as well as higher production. Among others in the latest batch of announcements, Occidental Petroleum, Kerr-McGee Corp. and Phillips Petroleum, and to the north, Petro-Canada and Shell Canada announced record earnings.

Forecasters predict that the high earnings reports are not over, as the demand for energy continues to rise. Analyst Bruce Lanni of A.G. Edwards predicted that "most likely," energy prices and earnings for the industry will "continue to surprise Wall Street" through this year. The pre-earnings forecasts, which have been below actual earnings almost across the board in average estimates by First Call/Thomson Financial analysts, are off because of unexpected fourth quarter jumps in prices for natural gas and oil, according to analysts.

ExxonMobil, the world's largest publicly traded oil and gas company, reported the highest full-year profits ever by a U.S. company, earning $1.46 a share in the fourth quarter, and erasing First Call analysts' forecast average of $1.31 a share. ExxonMobil officials said fourth-quarter income, excluding merger expenses and special items, was $5.12 billion, up from $2.7 billion, or 77 cents a diluted share for the same period of 1999. Revenue was up $64.13 billion from $54.58 billion for the quarter.

ABN Amro analyst Gene Nowak called ExxonMobil's results "awesome." Fahnestock & Co. analyst Fadel Gehit, who was not surprised by the earnings, said ExxonMobil was at the "forefront of efficiency" in its bid to keep costs down and profits up.

After doing well in its previous three quarters, commodity prices in the fourth quarter capped the record profits by the Irving, TX-based giant, sending ExxonMobil's earnings from its exploration and production unit to $1.4 billion, an increase of $624 million from 1999. Upstream earnings were $2.4 billion, up from $831 million for the same period of 1999.

ExxonMobil's profit of $16.9 billion topped a previous record held by U.S. banking giant Citigroup, which recorded $10.8 billion in profits in 1999.

In the understatement of the day, ExxonMobil Chairman Lee Raymond said that "the combined assets of the new company continue to perform well and financial results for the upstream and downstream businesses significantly exceeded the same period last year." The company, formed in 1999 when Exxon bought Mobil for about $81 billion (see NGI, Dec. 6, 1999), is raising its budget for 2001, with an increase of 15% to 20%.

Chevron, the second-largest U.S. oil and gas company, saw fourth quarter earnings rise 88%, with its profit from operations reaching $1.54 billion, or $2.39 a share, handily beating First Call average estimates of $2.21. In the fourth quarter of 1999, earnings were $819 million, or $1.24 in 1999. Revenue was up 23%, standing at $13.5 billion compared with $11 billion a year ago.

San Francisco-based Chevron, which expects to complete its merger sometime this spring with No. 3 major Texaco (see NGI, Oct. 23, 2000), took charges totaling $49 million, or 7 cents a share, which resulted in net income of $1.49 billion, or $2.32. In the fourth quarter of 1999, the company had $281 million in gains and $291 million in charges, which resulted in net income of $809 million, or $1.23 a share.

"Another strong operating performance in the fourth quarter capped the most profitable year in our company's history," said Chevron CEO Dave O'Reilly. Touting the company's exploration and production results, which are up 53% from a year ago, O'Reilly said that higher crude oil and natural gas prices spurred the high earnings, but added that earnings were "further bolstered by higher production."

No. 3 Texaco also recorded record profits in the fourth quarter with earnings of $840 million, or $1.55 a share compared with $370 million or 67 cents in 1999. First Call had predicted earnings of $1.51. Revenue for the fourth quarter was up 37%, standing at $14.4 billion, compared with $10.6 billion a year earlier.

The White Plains, NY-based company posted a quarterly loss on asset sales of $17 million and had charges of $272 million for write-downs, $116 million for environmental and legal issues and $10 million for merger costs. For the same period of 1999, Texaco had $3 million in asset sale losses, and had charges of $81 million for write-downs, $42 million for environmental and legal charges, and $7 million for restructuring.

Fourth quarter profits for Conoco were up 77%, benefiting from its strongest oil and gas prices in almost a decade. The Houston-based energy company said that before special items, net income was $574 million, or 91 cents per diluted share, which topped First Call/Thomson Financial's consensus of 85 cents a share. In 1999, quarterly earnings were $324 million, or 51 cents per share.

Revenues reached $10.4 billion, up from $8.2 billion in the fourth quarter of 1999. Natural gas prices averaged $6.46/MM Btu, which is more than double the $2.48 last year. Crude oil for the quarter averaged $31.96 a barrel, up from $24.56 a year ago.

"It was another spectacular quarter, appropriately capping the best year in the company's 125-year history," said CEO Archie W. Dunham. "The quarter's strong earnings were driven by higher natural gas and crude oil prices, robust refining and natural gas liquids margins and higher production volumes."

Dunham said the company expects to exceed the high end for reserve replacement for 2000, which he estimated to be between 125% and 135% of oil and gas produced.

Houston-based Marathon, the separately traded unit of Pittsburgh-based USX Corp. and the fifth largest U.S. energy giant, recorded profits from operations at $386 million, or $1.25 a share - a jump from First Call's estimate of $1.14 a share. For the same period of 1999, Marathon had a profit of $148 million, or 47 cents. Revenue was up 10%, standing at $8.05 billion from $7.3 billion a year earlier.

Marathon had a final loss of $310 million, or $1 a share, after taking $696 million in charges related to a joint venture with Kinder Morgan Energy Partners LP.

Among the independents reporting earnings this week, Kerr-McGee more than doubled its earnings in the fourth quarter. The Oklahoma City-based company saw its net income excluding special items rise to $276 million, or $2.67 a share, up from $130 million, or $1.51 a year ago. First Call had expected the company to earn $2.82 in the quarter.

Revenues increased to $1.1 billion, up from $816 million. Exploration and production profits also more than doubled, rising to $446 million, from $216 million in 1999, mostly because of higher sales and lower exploration costs.

Like Kerr-McGee, Los Angeles-based Occidental Petroleum Corp. missed Wall Street's expectations for the fourth quarter but recorded hefty profits nonetheless. The high energy prices scored for the oil and gas division, but took a toll on the company's chemical businesses, hurt by the higher raw material costs.

Occidental earnings excluding special items were $349 million, or 94 cents a share, compared with $192 million, or 52 cents a share in fourth quarter 1999. First Call had predicted the company would earn $1.05 for the quarter. Revenues were up to $3.9 billion from $2.6 billion a year earlier.

Bartlesville, OK-based Phillips Petroleum Co. beat analysts' forecasts and saw its fourth quarter earnings more than triple in the fourth quarter of 2000 for the same reason its peers had record results: strong natural gas and oil prices.

Phillips, which has been moving toward more exploration and production, saw its income rise to $701 million or $2.72 a share, up from $215 million, or 84 cents a share in fourth quarter 1999. First Call/Thomas Financial analysts had estimated earnings would be $2.28 a share. Revenue rose to $5.8 billion from $4.3 billion a year earlier. Phillips said it benefited not only from higher commodity prices, but also from higher production in its Alaskan fields that it acquired in 2000 from Arco.

Calgary-based Petro-Canada saw its annual net earnings rise to C$893 million, or C$3.28 a share, compared with C$233 million or C$.086 in 1999 "far outstripping its previous best year" of C$306 million in 1997's net earnings.

"Petro-Canada's performance reflects both an exceptional business environment and our success in capitalizing on that environment," said CEO Ron Brenneman. He attributed the higher earnings to the company's strong upstream business and its "excellent" finding and development cost performance "even in the face of rising industry costs."

Another Calgary operation, Shell Canada Ltd., said its year-end earnings of C$858 million or C$3.04 a share were a record, compared with earnings in 1999 of C$641 million or C$2.22. Its fourth quarter earnings were C$296 million, or C$1.08 per share, compared with C$358 million or C$1.24 in 1999. Fourth quarter 1999 earnings were C$106 million, excluding the sale of its Plains business, a C$32 million impairment provision for the Peace River in-situ oil sands operation and partners fees.

Carolyn Davis, Houston

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