NGI The Weekly Gas Market Report
Union Pacific Resources Group and ARCO warned last week theywill be taking massive asset write-downs and restructuring chargesduring the fourth quarter, reflecting their continuing struggle todeal with low crude oil and gas prices.
Union Pacific said it will take a whopping $760 millionafter-tax, non-cash charge for asset impairment under FinancialAccounting Standard 121. UPR also said its 1999 plans includecontinuing its cost-reduction program and a preliminary capitalbudget of about $500 million. Excess cash flow of more than $250million will be used to further cut debt to keep the company’s $2billion de-leveraging program on target.
ARCO said after-tax special charges in the fourth quarter areexpected to total $890 million. The net charge includes assetwrite-downs, restructuring costs and a tax refund. Assetwrite-downs are a result of investment impairments totaling $790million after tax and mainly related to expectations of lower crudeprices.
“The low price environment in which the oil and gas industryfinds itself is forcing us and many of our competitors, large andsmall, to take asset impairments and actions to reduce costs andconserve cash, said UPR CEO Jack Messman. “Our write-down has beentriggered by low commodity prices and largely relates to NorcenEnergy Resources’ assets acquired just before the collapse inprices in early 1998. While we are required by Financial AccountingStandard 121 to mark these assets to market with a charge to 1998earnings, the write-down will lead to improved earnings goingforward.
“UPR is on target to meet its de-leveraging objectives. Our cashflow remains strong and will allow us to meet our debt covenants,fund our capital program and pay down additional debt. UPR willlive within its means and adjust its capital spending as commodityprices and cash flows change.”
Messman said the actions should put UPR on the road toprofitability in 1999. “After all the changes to our company in1998 caused by the Norcen acquisition and the subsequent assetsales, UPR has about 50% more reserves and about 50% moreproduction today than it did at this time in 1998.”
UPR’s assumptions for natural gas prices are $2.05/Mcf in 1999,$2.25 in 2000, and $2.35 beyond 2000. The company’s preliminary1999 capital budget of about $500 million is down by abouttwo-thirds from 1998’s $1.2 billion expenditure on exploration andproduction projects, excluding the $3.5 billion purchase of Norcenin March 1998. UPR said the reduction is a direct consequence ofthe current price environment and its commitment to continuedde-leveraging.
Properties involved in the ARCO write-downs include some assetsacquired as part of the Union Texas Petroleum (UTP) purchase andother assets in the UK North Sea, Middle East and North Africa.Essentially all of the oil and gas properties impacted areoverseas.
The charges include restructuring costs of $180 million aftertax for the global cost reduction program ARCO announced inOctober. The program is designed to reduce before-tax costs by morethan $500 million by 2000. ARCO said 1,200 employees, up from theoriginal estimate of 900, will be terminated as part of theprogram. In addition to the cost reduction program, ARCO announcedin December that its capital spending plans for 1999 call forreduced spending worldwide. The company said it expects to spend$2.7 billion worldwide in 1999, down 25% from the 1998 spendinglevel.
Also included in the 1998 fourth quarter special items will be anet benefit of $80 million, which includes a federal income taxrefund in excess of $100 million.
More bad news came last week from Tulsa, OK-based ParkerDrilling Co., which reported an unaudited net loss of $7.7 million,or a $0.10 loss per diluted share for the three months ended Nov.30. The prior year’s results for the same quarter reflect netincome of $10.7 million, or $0.14 per diluted share. “The industrycontinues to experience the effects of the most dramatic drop inenergy prices since the 1980s,” said Robert L. Parker Jr., CEO.”Parker’s strategy is to curtail costs and concentrate ourmarketing efforts in areas showing greatest potential.”
Parker is changing its fiscal year-end from Aug. 31 to Dec. 31,effective Dec. 31, 1998. Parker specializes in barge and offshoredrilling and workover services, land drilling, and specialized oiltool rentals.
Joe Fisher, Houston
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