With refining margins down, production problems up and its Dynegy Inc. investment blown, ChevronTexaco Corp. reported a net loss of $904 million (85 cents/share) for the third quarter, compared to earnings of $1.27 billion ($1.19/share) for the same period a year ago. Total net charges were $2.07 billion, including the $1.55 billion Dynegy write-off.

However, even without the charges, ChevronTexaco performed more poorly than its near peers, ExxonMobil and Royal Dutch/Shell, which reported earnings also on Thursday (see related story). Before the charges, profit was $1.24 billion, or $1.17 a share, down from $1.714, or $1.62 — a 28% drop in quarterly performance and 9% less than Wall Street estimates.

ChevronTexaco, which unlike the more conservative majors had taken a gamble on Dynegy six years ago, also warned Thursday that more write-offs may be coming in the fourth quarter regarding Dynegy. The two companies are now negotiating an early termination of a natural gas sales marketing agreement that would have run through August 2006, and ChevronTexaco said it would begin marketing natural gas in three to four months.

Besides the Dynegy charges, ChevronTexaco also reported a $485 million loss for asset impairments and merger-related expenses totaling $73 million for the quarter.

CEO Dave O’Reilly, who was a no-show during the morning conference call, said in a written statement that the huge losses could be attributed to “oil and gas production disruptions in several areas” and the “continued weak markets for refined products and chemicals.” He said that when the production problems and market weakness was “combined with a number of charges against earnings for special items — most notably an additional write down on our investment in Dynegy Inc. — the result was a net loss for the period.”

Net charges before special items and merger effects were $160 million, slightly more than the year-ago quarter. “The favorable effects of improved earnings of the company’s coal and power and gasification businesses, lower net interest expense and lower corporate charges were essentially offset by a decline associated with the company’s share of Dynegy’s operating results,” said ChevronTexaco. It also reported foreign currency losses of $3 million, versus $15 million last year.

Special items of $1.452 billion in the quarter were composed of the Dynegy charges, which were partially offset by benefits of $97 million for prior-years’ tax adjustments. The Dynegy charges were composed of $1.095 billion for the write-down of the company’s investment in Dynegy common and preferred stock to its estimated fair value at Sept. 30, 2002; $305 million for the company’s share of Dynegy’s own write-downs and revaluations; and $149 million for the share of Dynegy’s loss on its sale of Northern Natural Gas Co.

ChevronTexaco’s current book value for Dynegy $412 million, made up of $112 million for the common equity interest and $300 million for the preferred stock. “An additional charge to fourth quarter 2002 earnings would be required if the fair value of the Dynegy securities at Dec. 31, 2002, is below the carrying value at that time and the decline is deemed to be other than temporary.”

Upstream earnings for the quarter were about the same from a year ago, despite factors that impacted production. O’Reilly noted that OPEC quotas, production disruptions in Angola, Nigeria and the North Sea, and Gulf of Mexico storms “all served to lower oil and gas output from a year ago.” Worldwide oil-equivalent production was down 49,000 bbl/d, or 1.9% compared with last year. Absent the quotas and disruptions, output would have increased by about 45,000 bbl/d. The average U.S. crude oil and natural gas liquids realization was up $1.52/bbl from last year, and the average U.S. natural gas realization rose 6% to $2.77/Mcf.

Earnings increased in chemicals, coal and power and gasification, said O’Reilly, but “these improvements were more than offset by a decline” in Dynegy’s operating results.

U.S. exploration and production operating earnings of $553 million were essentially unchanged from last year, said ChevronTexaco, which noted that higher crude and natural gas realizations were partially offset by a decline in oil-equivalent production. In the 2002 quarter, the combined negative impact on profits from damages and reduced production from Tropical Storm Isidore in the Gulf of Mexico was about $25 million. There also were “unfavorable mark-to-market adjustments of about $25 million for contracts treated as derivatives.” Last year, the effects from similar items were not significant, said the company.

The average liquids realization increased 7% between periods to $23.33/bbl; the average natural gas realization was $2.77 per thousand cubic feet, compared with $2.62 in the year-ago quarter. Net oil-equivalent production declined 4% from the third quarter a year ago. Net liquids production was down 1.5% to 602,000 bbl/d. Net natural gas production averaged 2.406 Bcf/d, down 9%. And the effect of the tropical storm lowered average daily production in the quarter by 9,000 bbl and 49 MMcf.

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