NGI The Weekly Gas Market Report
Last year was one of misery for most energy companies,particularly producers. It was so bad that one industry analyst iscalling 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. “Theindustry 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 inWashington, D.C. (see related story) and later told NGI things havegot to change. “The earnings profile of producers has never beenstrong and it has been a reflection upon the consistent failure ofthe current industry model or current industry structure. Producershave not made any serious money since 1981.The model hasn’t workedfor nearly 20 years. You have to change the business. And theproblem 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 jointventures/alliances with cogenerators and independent powerproducers. And, according to Olson, gas is the way to go; forgetabout oil with its price resting on the whims of the world market.
A round-up of earnings released last week reveals one clearwinner and many losers. The Coastal Corp., which has embracednatural gas more than ever, set a new earnings record. The companyweathered the tough commodity price environment so well in largepart thanks to its position as a big gas transporter and largerefiner, noted analyst Stuart Wagner of Petrie Parkman. UnlikeCoastal, others reporting earnings last week suffered from nothaving a major pipeline business to lean on for revenue.
With oil prices in the tank and expected by most to remain therefor some time, Coastal is leaning more heavily than ever on gas forfuture growth. “Coastal has developed a clearly defined growthstrategy which is being implemented to maximize earnings from ourunique integrated asset base. In the near-term, commodity pricesand refining margins are at levels that indicate 1999 will be achallenging year for all of us in the energy industry. However,specific projects and plans are in place to provide significantearnings growth over the longer-term,” said David A. Arledge, CEO.”Coastal has the financial flexibility, balance sheet strength andoperational expertise to compete profitably in each of ourbusinesses.”
Coastal’s reserve replacement last year was a whopping 519%,marking the fourth consecutive year reserve replacement hasexceeded 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 departmentsaid the company is focusing on gas now more than ever. The companysees prices coming up in the second half of the year when demandpicks up and deliverability declines. Pack pointed to record lowrig counts and cuts to E&P budgets as evidence supply will betightening up. Demand growth is expected to come both at theresidential 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 thethree areas where Coastal has focused E&P operations: theshallow Gulf of Mexico, South Texas, and the Rocky Mountains, Packsaid. He said the company expects to increase production by as muchas 20 to 25% this year and as much as 15 to 20% in 2000. Lastyear’s E&P budget started at $500 million, grew by $50 million,and then by another $100 million at a time when other companieswere cutting back. For this year, the initial E&P budget isabout $700 million, $200 million of which is targeted foracquisition of developable reserves.
Coastal is budgeting for continued low prices, too. The companyis expecting oil to be at $14 for WTI and gas to be at $2.00/Mcf atthe Henry Hub, Pack said. Realized prices for gas in 1998 were$1.95/Mcf versus $2.40/Mcf for 1997. Gas production in 1998averaged 508.9 MMcf/d, compared with 436.0 MMcf/d in 1997.Throughput for Coastal’s pipeline subsidiaries in 1998 was 2,132Bcf, 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 toreconcile their books with the value of reserves in the ground.
Union Pacific Resources Group (UPR) blamed the oil pricecollapse for a 1998 loss of $899 million despite a 53% increase inproduction and a 49% increase in proved reserves. The 1998financial results were strongly affected by a number of one-timeitems, most notably a $760 million after-tax, non-cash, assetimpairment charge. Reserves increased by 49%, to a year-end totalof 6.124 Tcfe, up from the 1997 year-end total of 4 Tcfe. Includingits Norcen acquisition, the company achieved a reserve replacementrate of 403%.
“Occidental’s 1998 results reflect significantly lower oil andgas and chemical prices than we realized in 1997,” said CEO Ray R.Irani. “The 1999 capital spending budget will be reduced to $350million compared with $1.06 billion for 1998. Of the $350 millionin 1999 capital spending, oil and gas will be allocatedapproximately $275 million, with Elk Hills and Qatar receiving thehighest priority, and the remainder will go to chemicals. We expectthat 1999 worldwide oil and gas production will remain atapproximately the same level as 1998 even with the reduced spendinglevel.” Occidental domestic gas production grew to 614 MMcf/d from596 MMcf/d in 1997.
Phillips Petroleum Co. 1998 net income was less than a third ofwhat it was in 1997. Major special items included charges of $267million for oil and gas property impairments. Excluding the effectof 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’searnings were significantly impacted by lower worldwide liquidhydrocarbon and natural gas prices. Nevertheless, 1998 saw us gainmomentum in growing and improving the business. Domestic gasproduction 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/Mcfin 1997.
Kerr-McGee net income for 1998 was off by almost 75% to $50million from $194 million 1997. CEO Luke R. Corbett said lower oiland gas prices negatively impacted 1998 earnings by about $100million. In the fourth quarter the company took a $250 millionwrite-down for the impairment of oil and gas assets and non-corechemical 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 millionand caused a fourth quarter net loss of $213 million. In the fourthquarter, Texaco took a $93 million write-down of assets and $142million in negative inventory valuation adjustments. “We are notstanding still, waiting for prices to improve,” said CEO Peter I.Bijur. “We are implementing significant cost and expense reductionsacross all of our businesses. These reductions, along with theannounced $600 million reduction in our 1999 capital-spendingprogram, will enable us to maintain financial flexibility.” For thefourth quarter and year 1998, average gas prices were $1.91 and$2.00 per Mcf, 27% lower than the fourth quarter and 16% lower thanthe year 1997.
Unocal reported 1998 net earnings of $130 million. Excludingspecial items earnings were $166 million. Domestic gas productiondeclined to 927 MMcf/d from 993 MMcf/d in 1997. Domestic gas soldfor $1.97/Mcf, down from $2.36/Mcf in 1997.
Chevron had 1998 net income of $1.976 billion, down 39% from1997 net income of $3.256 billion. Last year the company took $159million in asset write-offs and re-valuations. Domestic gas pricesdeclined 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 discontinuedoperations, 1998 earnings were $400 million. On the same basis,1997 earnings were $1.33 billion. In the fourth quarter the companytook a $864 million net charge for asset write-downs, restructuringcosts 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. Thecompany took a $198 million charge in 1998 for impairment of assetsand operating leases.
Lower prices and lower volumes led Oryx Energy to report a netloss for 1998 of $95 million. Fourth quarter 1998 results includeda $49 million after-tax non-cash asset write-down in accordancewith FAS 121.
For 1998 Anadarko Petroleum posted a net loss of $49.3 million.Excluding a fourth-quarter impairment of $45 million after-tax forforeign exploration, Anadarko’s net loss for 1998 was $4.7 million.”Simply stated, our financial results for 1998 were lousy due tothe collapse in commodity prices, the worst in more than twodecades. We can’t change that. What we can do is continue doingwhat we do best-growing our core assets-our proved reserves at lowfinding costs just as we did in 1998,” said Anadarko CEO Robert J.Allison Jr. Anadarko gas production for 1998 was essentially levelwith 1997. Average gas prices fell 17% in 1998 from 1997 to$1.92/Mcf from $2.30/Mcf.
Joe Fisher, Houston
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