Thursday, it was deja vu all over again for both majors and independents reporting fourth quarter earnings. For the majors, Phillips Petroleum Co. and its merger partner Conoco both reported earnings declines for the final quarter of the year, while independent Houston Exploration Co. also saw earnings fall despite record production figures.
Bartlesville, OK-based Phillips, set to close its merger with Conoco in the second half of 2002, achieved its targeted annual production rate growth of 17% in the fourth quarter, but earnings dropped 68% for the fourth quarter from a year earlier, hitting all segments of its operations, but especially natural gas and crude oil production prices. Fourth quarter net operating income (which excludes special items) was $227 million, or $0.59 per share, down from $701 million, or $2.72 per share, in the fourth quarter of 2000.
Net income for Phillips dropped dramatically, standing at $162 million, or $0.42 per share, compared with $744 million, or $2.88 per share, in the fourth quarter of 2000. Total revenues were $10 billion, versus $6.3 billion a year ago. Net income in the final quarter also was reduced by special items totaling a net $65 million. These special items included impairments related to chemicals assets, and petroleum and chemicals product inventory writedowns, partly offset by a settlement gain.
For the fourth quarter, Phillips’ exploration and production net operating income was $244 million, down from $695 million in the same quarter of 2000; the decline was pushed by lower worldwide crude oil sales prices and reduced natural gas prices in the Lower 48. Fourth quarter 2001 average worldwide crude oil sales price was $18.98/bbl, down from $29.73 in the same period a year ago. The company’s Lower 48 and foreign natural gas prices averaged $2.06/Mcf and $2.58/Mcf, respectively, compared with $4.98 and $2.90 in fourth quarter 2000.
Of its upstream performance, Phillips CEO Jim Mulva said, “Daily production of 836,000 boe was up 7% from the third quarter of 2001, and was basically flat with that of the fourth quarter of 2000. Compared with the third quarter, worldwide oil production was up 9% percent and worldwide gas production rose slightly.
“Our gas gathering, processing and marketing segment net operating income was down from the fourth quarter of 2000, as well as from the third quarter of 2001, due mainly to lower natural gas liquids prices,” said Mulva. “Production of natural gas liquids was up 4% from the same period of 2000, but down 3% from third quarter 2001.”
For the year, Phillips’ net operating income (which excludes special items) was $1.7 billion, or $5.79 per share, versus $1.9 billion, or $7.47 per share, for 2000. For the year, the company’s return on capital employed, adjusted for acquisitions, was 16%. Net income was also $1.7 billion, or $5.63 per share, versus $1.9 billion, or $7.26 per share, for the year 2000. Total revenues were $26.9 billion, versus $23.1 billion a year ago.
Even though Houston-based Conoco reported higher production and refining volumes in the fourth quarter, results were “more than offset by significantly lower prices and margins,” which led to lower earnings. Net income before special items totaled $197 million, or 31 cents per diluted share, 66% below last year’s record fourth quarter of $574 million, or 91 cents per diluted share. Revenue for the quarter was $8.5 billion, down 18% from $10.4 billion last year on sharply lower prices for refined products, crude oil and natural gas.
For the year, Conoco reported net income before special items totaling $1.8 billion, or $2.87 per diluted share, down 6% versus $1.9 billion, or $3.08 per diluted share, in 2000. Revenue was a record $39.5 billion, up slightly from last year.
Conoco’s upstream in the final quarter earned $302 million, down 47% from last year, and some of the increased costs were associated with its Gulf Canada transaction. Gains on natural gas and crude oil hedges added $101 million to earnings during the quarter. Exploration expense totaled $176 million, up 71%, reflecting the addition of Gulf Canada and higher dry hole costs, including wells in Barbados and Malaysia. U.S. upstream earned $141 million, down 39%, while international upstream earnings decreased 52% to $161 million.
For the year, Conoco upstream earned $1.7 billion, down 5% on lower crude oil prices, as well as higher acquisition-related costs and exploration expenses. Year-over-year earnings benefited from higher natural gas prices and increased volumes. U.S. upstream earned $866 million, up 25% because of strong natural gas prices earlier in the year. International upstream earned $879 million, down 23%, on declining crude oil prices.
“Despite falling prices and margins in the last half of the year due to general economic weakness and unseasonably warm weather in North America, we again delivered very strong earnings — the second-best year in our history,” said Conoco CEO Archie Dunham. Conoco’s discoveries in 2001 “could result in a potential 440 MMboe for future development. We estimate that Conoco will replace some 425% of its total production with proved reserve additions during 2001.”
Conoco also reported a 2002 capital budget of $2.8 billion, about the same as last year. Dunham said $2.3 billion of the budget is earmarked for upstream operations, with most to be spent on development of crude oil and natural gas reserves in North America, the United Kingdom and Southeast Asia. The company has budgeted about $550 million for U.S. oil and natural gas field development, including the new Magnolia field in deepwater Gulf of Mexico and the Lobo and San Juan onshore natural gas fields. More than $430 million has been budgeted for Canadian projects, including oil, natural gas and oil sands developments in Western Canada.
For the second consecutive year, Houston Exploration Co., which has 97% of its production in natural gas, reported record net income of $114.8 million and record cash flow of $313.1 million for 2001, which represents increases of 35% and 53%, respectively, over 2000. However, fourth quarter net income was $9.0 million or $0.29 per share on a fully diluted basis, compared with fourth quarter 2000 net income of $40.8 million, or $1.37 per share.
Results for the fourth quarter, said the Houston-based company, include a net non-cash charge of $11.9 million due to a writedown in the carrying value of oil and gas properties, partially offset by hedging gains. Excluding the non-cash charge, net income would have been $20.9 million or $0.68 per fully diluted share.
Net income for the year was $114.8 million, or $3.74 per share on a fully diluted basis. Excluding the non-cash charge, net income for 2001 would have been $126.6 million or $4.13 per fully diluted share as compared to net income for 2000 of $85.3 million or $3.02 per share on a fully diluted basis. The average realized gas price in the fourth quarter of 2001 was $3.40/Mcf compared with $4.66/Mcf in the fourth quarter a year ago. For the year, the average realized gas price was $4.24/Mcf compared with $3.37/Mcf for 2000.
Houston Exploration reported record production for the fourth quarter, totaling 23.2 Bcfe, a 6% increase from the 21.8 Bcfe a year earlier. Its full-year production totaled 89.8 Bcfe, an increase of 13% over last year’s record of 79.7 Bcfe. Additionally, the company reported a record production exit rate of 263 MMcfe/d compared with 256 MMcfe/d from 2000.
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