RALLY IN FOURTH QUARTER 1994 FAILS TO BOLSTER OGJ GROUP PROFITS

Robert J. Beck
Economics Editor
Laura Bell
Statistics Editor

Profits were strongest during last year's fourth quarter. Oil prices were substantially higher late in the year, and chemical earnings were particularly strong due to a surge in economic activity in the U.S. and abroad.

Underscoring wide swings in performance, group profits were $16.2 billion in 1993, a 78.6% jump from 1992. In 1992, profits plunged 47% to $9.1 billion, due mainly to costs stemming from restructuring, staff reductions, and adoption of new accounting rules. Similar charges reduced earnings for some group companies in 1994.

Group net income shot up to $30.2 billion in 1980. Profits then plunged to only $11 billion in 1987 before rebounding to recent highs of $21.5 billion in 1988 and 1990.

Ten companies in the OGJ group listed higher earnings in 1994 compared with the previous year. The others had lower earnings. Four companies posted losses in 1994 compared with only two in 1993.

Even though profits fell last year, group revenues inched up 1.5% to $442.7 billion. Increased crude oil and natural gas production, along with increased refined product and chemical product sales, more than offset lower crude oil and natural gas prices.

Thirteen companies posted higher revenues in 1994 while nine had lower revenues.

ARCO had the sharpest decline in revenues, down 10.3% at $17.2 billion. The sharpest increase was at Amerada Hess, up 13.5% to $6.7 billion. Exxon accounted for 25.7% of group revenues with $113.9 billion in 1994, up 2.4% from 1993. Exxon's net income of $5.1 billion in 1994 made up 34.6% of the group total.

Industry sector earnings were mixed because changes in prices and demand affected companies differently. Chemical profits advanced for all companies in the group that reported segment earnings. Improved margins and increased sales volumes boosted chemical segment earnings. The improvement in the rate of economic growth in the U.S. and in western Europe, coupled with continued strong growth in the Asia Pacific area, boosted petrochemical sales volumes.

Refining and marketing earnings also were mixed in 1994.

Feedstock costs were lower than the year before, particularly early in 1994. But benefits from lower crude costs were offset by weaker product prices and refining margins. Refining margins were strong early in 1994 but turned negative by midyear as crude costs increased and competition reined product prices.

Increased product demand, mainly in the U.S. and Far East, helped boost revenues and earnings for some companies. European demand remained near 1993 levels.

Past restructuring and an accompanying improvement in operating efficiency also helped refining earnings for some companies. But special charges associated with restructuring continued to reduce net income for some.

Worldwide exploration and production earnings were mixed but generally lower, largely because of lower crude oil and natural gas prices. However, for a number of companies in the OGJ group lower prices were offset by increased production of crude oil, natural gas liquids, and natural gas.

Even though profits fell significantly, the group cut capital and exploratory spending only marginally from a year earlier. Low prices early in the year delayed spending authorizations. Companies were slow to commit funds to projects for fear of a period of extended weak prices.

Total capital and exploration outlays. were down only 1.8% at $38.1 billion. This was not a major change from the level in recent years. During the previous 6 years, group capital spending averaged $41.6 billion/year.

Of greater long run significance has been the group's ability to stem the slide in oil and gas reserves.

Group liquids reserves remained virtually constant at 32.406 billion bbl, compared with 32.404 billion in 1993. Natural gas reserves moved up 2.5% to 144.3 tcf in 1994. In 1993, group liquids reserves increased 1.7% and natural gas reserves moved up 0.5%. However, that may be only a temporary trend. Compared with 1981, group liquids reserves in 1994 were still down 5% and gas reserves were down 5.8%.

Net wells drilled by the group increased 3% to 5,200, down substantially from the 12,565 wells the group drilled in 1981.

PRICES

Annual average crude oil and natural gas prices for 1994 were down from the 1993 average the year before, lowering revenues and earnings from E&P. However, in some cases this was partly offset by increases in natural gas and liquids production.

The average annual U.S. wellhead price of crude oil fell to $13.19/bbl in 1994, down 7.4% from 1993. That was the fourth straight year of declining prices. The average price for West Texas intermediate crude was down 4.6% in 1994 at $16.42/bbl, while the average futures market price of light sweet crude oil was off 7.3% at $17.15/bbl.

There also was a drop in international crude oil prices in 1994. The average world price of export crude oil fell 3.4% to $15.28/bbl, down from $15.81/bbl in 1993.

In marked contrast to 1993, natural gas prices also declined last year.

The average U.S. wellhead price fell 9.9% to $1.83/Mcf from $2.03/Mcf in 1993. The price in 1993 was the highest since 1985 when it was $2.51/Mcf.

There also were reports of lower natural gas prices outside the U.S. last year.

Mobil's average international price was $2.44/Mcf, down 6.9% from $2.62/Mcf in 1993. Phillips listed its average 1994 non-U.S. sales price at $2.31/Mcf, down from $2.36 in 1993 and $2.62 in 1992. Unocal had an average sales price for non-U.S. gas of $1.99/Mcf, down 3.9% from $2.07 in 1993.

The Energy Information Administration (EIA) reported the average U.S. refiner acquisition composite cost of crude oil fell 5% in 1994 to $15.59/bbl. That was down from $16.41 in 1993 and $18.43 in 1992.

The average U.S. refiner price of finished motor gasoline fell 4.3% to 59.9c/gal in spite of strong demand in 1994. The average refiner price of No. 2 fuel oil slipped 7% to 50.6c/gal, even though distillate demand also moved up significantly in 1994.

Several companies listed declines in their average crude oil sales prices for last year.

Mobil reported an average price of $15.66/bbl, down from $16.99/bbl in 1993. In the U.S., Mobil's average crude oil sales price in 1994 was $12.90/bbl compared with $13.54/bbl in 1993. The U.S. NGL price fell to $10.37/bbl from $11-25/bbl in 1993.

Phillips posted an average 1993 world crude oil sales price of $14-73/bbl, down from $15.92/bbl in 1993. Price in the U.S. slipped to $13.36/bbl from $14.20/bbl the year before.

FINANCIAL INDICATORS

Most of the group's major financial indicators slipped in 1994, mainly because of the slide in net income.

However, total assets increased in 1994 after falling for 3 straight years. Restructuring, asset sales, and reevaluations caused the decline in assets the last several years. Strong investments and increased reserves helped reverse that trend in 1994.

Total assets for the OGJ group moved up 1.6% last year to $392.6 billion. Assets slipped to $389.3 billion in 1992 from $399.3 billion in 1991 and $405.7 billion in 1990.

Other financial indicators slipped in 1994 after significant gains in 1993.

Return on total assets for the group fell to 3.8% in 1994 from 3.9% in 1993. That was up from 2% in 1992, lowest in the past 15 years.

Return on stockholder's equity also slipped to 9.2% in 1994 from 10.1% the year before. The recent low was 5.3% in 1992. Return on stockholder's equity was 9.2% in 1991 and 12.2% in 1990. The return was as high as 21% in 1980 but fell to 5.6% in 1987 as industry profits plummeted.

Profits as a percent of total revenues also declined in 1994, falling to 3.2% from 3.5% in 1993. That was up from a recent low of 1.7% in 1992. The recent high was 6.1% in 1979. It fell to 2.4% in 1987.

Funds from operations fell 7.4% in 1994 to $37.9 billion, and working capital slipped to a minus $1.5 billion from a positive $26.4 million in 1993.

EXPLORATION AND PRODUCTION

Group net liquids production rose 2.7% in 1994 to 8.609 million b/d despite the continued decline in U.S. output.

Increased drilling helped increase total output. The group's net wells drilled moved up 3% in 1994 to 5,200. Wells drilled by the group increased 12.6% in 1993.

The increase in wells drilled in recent years has been due mainly to increased drilling for gas. Natural gas production for the OGJ group moved up 3.8% in 1994 to 33 bcfd, consistent with increased U.S. natural gas demand and production. U.S. gas consumption rose 1.5% in 1994 to 20.6 tcf, and production increased 3.4% to 19.8 tcf.

Earnings from non-U.S. E&P were lower in 1994 for most of the companies reporting. Some had higher non-U.S. liquids production that partially offset the effect of lower crude prices.

Exxon's earnings from U.S. E&P slipped 8.9% to $852 million. Non-U.S. E&P earned $1.932 billion, down 18.8% from the year before. Worldwide liquids production was up 2.5% at 1.709 million b/d, mainly due to record production from the North Sea and increased production from new developments in the U.S.

Exxon's worldwide gas production was 5.978 bcfd, up 153 MMcfd from 1993. The gain came mainly from new developments in the U.S. and Malaysia.

Chevron posted lower earnings from world E&P. U.S. earnings slipped 16.8% to $584 million, while non-U.S. earnings were down 19% at $519 million in 1994.

Lower crude oil and natural gas prices and lower oil production reduced Chevron's U.S. earnings in 1994. Average crude oil realization slipped 72c/bbl to $13.86. Natural gas prices averaged $1.77/Mcf for the year, down 22c from 1993.

Refining and marketing

Group earnings from refining and marketing last year generally reflected the movements in crude oil and product prices.

Worldwide crude runs to stills moved up 0.7% to an average 15.7 million b/d in 1994, while refined product sales increased 1.7% to 21.4 million b/d.

The increase in crude oil runs was very small because many refineries were running near capacity, and maintenance downtime and restructuring limited increases in throughput.

The American Petroleum Institute reported total U.S. crude oil runs increased 1.9% in 1994 to 13.871 million b/d, and the average U.S. refinery utilization rate rose to 92.7%.

EIA reported total U.S. petroleum product demand increased 2.6% in 1994 to an average 17.679 million b/d, an increase of 442,000 b/d. Demand for motor gasoline, one of the most profitable refined products, rose 1.5% to a record high 7.587 million b/d.

World consumption of petroleum products increased only 1.1 million b/d in 1994 to an average 68.2 million b/d, the International Energy Agency (IEA) reported. Excluding the C.I.S., where consumption has been falling significantly, product consumption advanced 1.9 million b/d, an increase of 3.1%.

In spite of the increase in demand, lower product revenues and increased operating costs led to lower margins in 1994. Rising crude costs starting in mid-year 1994 squeezed margins significantly Refining margins started the year quite strong but turned negative in June and July Margins were mixed during the latter part of the year.

Wright Killen estimated U.S. Gulf Coast refinery cash operating margins averaged 88c/bbl in 1994, down from $1.39/bbl in 1993.

Earnings from refining and marketing for the OGJ group were mixed. For some companies, increased sales boosted profits. For other companies, leaner margins and restructuring and environmental costs reduced earnings.

Shell's earnings from its oil products division rose to $373 million in 1994 from $280 million the year before. Product sales were up 6% at 1.272 million b/d. Crude runs fell 0.5% to an average 850,000 b/d. Increased refined product sales and lower operating costs were the key elements in the improved income, more than offsetting weaker margins.

Amoco's earnings from worldwide refining and marketing fell sharply to $418 million from $826 million in 1993. Worldwide refined product sales moved up 3.7% to 1.361 million b/d. Crude runs to stills increased 0.1% to 959,000 b/d. The decrease in 1994 earnings was mainly due to lower margins, particularly for distillates.

CHEMICALS

Earnings from chemical operations were very strong in 1994, with all companies reporting gains. Stronger economic growth in the U.S., combined with improved economic activity in Europe and robust growth in developing countries of Asia, helped boost sales of petrochemicals.

Chevron reported 1994 chemical earnings of $206 million, up from $143 million in 1993. Most of the 1993 earnings were special gains, mainly from asset sales of $112 million. The 1994 improvement came from improved industry conditions, along with restructuring and cost reduction programs in recent years.

Phillips posted chemical earnings of $259 million in 1994, up from $91 million in 1993. The increase was mainly due to improved margins for olefins and aromatics, as well as increased sales volumes for ethylenes and plastics. Ethylene and U.S. polyethylene production sales reached record levels in 1994.

CAPITAL SPENDING

Capital and exploration outlays for the group were down a little in 1994. However, spending did not fall as sharply as profits, so the ratio of spending to net income advanced from the level a year earlier.

The recent high for the capital spending:profits ratio occurred in 1992.

Total capital spending last year was $38.1 billion, down only 1.8% from 1993. This was the third straight year the group posted lower outlays. Spending was $41.2 billion in 1992 and $46.3 billion in 1991.

Spending by the OGJ group hit a high of $66.9 billion in 1981. Outlays then dived to $30.8 billion in 1987. During the 5 year span 1988-92, group capital spending was more than $40 billion/year, averaging $42.2 billion.

Last year 12 of the companies reduced capital and exploration spending, while 10 posted increases. Six out of the 10 largest companies, ranked by assets, reduced spending.

Exxon remained the big spender with outlays of $7.8 billion, down 4.1% from 1993. The spending shift away from the U.S. was evident.

Exxon's spending in the U.S. totaled $2 billion in 1994, down 15.6% from 1993 and 25.8% of the group's total. Exxon's non-U.S. spending in 1994 was up 0.7% at $5.8 billion.

Of the 10 largest companies, ARCO posted the sharpest decline in capital spending, reducing outlays 19.9% in 1994 to $1.7 billion. ARCO's spending also slipped 9.1% in 1993.

Amoco cut spending in 1994, dropping outlays 4.2% to $3.2 billion. Refining and marketing fell 30.9% to $473 million. Worldwide exploration and production spending moved up 3.3% to $2.2 billion. Outlays for chemicals advanced 25.6% to $485 million. Corporate and other outlays fell 57.6% to only $73 million.

Texaco also reduced spending in 1994, down 5.2% to $2.7 billion. Outlays in the U.S. were down 6.4% at $1.2 billion. International spending fell 4% to $1.5 billion. Texaco capital spending on refining, marketing and transportation was down 11.8% at $563 million.

Shell posted the largest increase among the 10 biggest companies with outlays up 22.6% at $2.8 billion. E&P moved up 8.6% to $952 million, while the oil products division jumped 54.4% to $1.1 billion. Outlays in the chemical products segment increased 7.5% to $343 million.

Chevron listed the second highest level of spending in 1994 at $4.8 billion, up 8.5% from 1993. E&P outlays were $2.7 billion, with 71% outside the U.S.

Mobil's spending gained 4.6% to $3.8 billion. The largest increase was in E&P, which moved up 10.5% to $2.2 billion. Refining and marketing spending inched up 1.3% to $1.2 billion. Spending on chemicals fell 30.1% to $218 million.

Group spending as a percentage of net income rose to 259% in 1994 from 239.4% in 1993. This ratio was at a record high 453.9% in 1992. The highest previous ratio had been 307.3% in 1986.

In recent years the OGJ group has held its level of investment fairly constant even though profit margins swung widely due to price fluctuations and expenses related to restructuring and accounting changes.

RESERVES

One of the more significant indicators of future activity for the OGJ group is the trend in liquids and natural gas reserves.

Liquids reserves remained constant in 1994, totaling 32.406 billion bbl compared with 32.404 billion bbl in 1993. Gas reserves rose 2.5% to 144.3 tcf.

Liquids reserves had been sliding since 1980 when they totaled 38.2 billion bbl. Part of that decline was due to the decline in crude oil prices.

The volume of natural gas reserves booked by the group has fluctuated during the last few years.

In 1980 the group's gas reserves were 176.7 tcf.

The volume fell as low as 128.1 tcf in 1987 but rebounded to 144.6 tcf in 1991.

Part of the decline that occurred in the 1980s stemmed from a reevaluation of Alaskan reserves.

The Department of Energy reduced Alaskan North Slope reserves by 24.6 tcf in 1988 because of lack of a pipeline outlet.

The OGJ group's reserves to production ratio did not change much in 1994.

Due to the increased rate of production and constant level of reserves, the ratio for liquids fell to 10.3 years in 1994 from 10.6 years in 1993. For natural gas, the ratio fell to 12.3 years in 1994 from 12.5 years in 1993.

OUTLOOK

The OGJ group began 1995 amid increased prices for crude oil and lower prices for gas.

The price of world export crude oil averaged $16.87/bbl for the first quarter this year, up 26.7% from the same period last year. West Texas intermediate averaged $17.60/bbl in first quarter 1995 compared with $14.02 in the same quarter last year.

For the first quarter of this year, natural gas prices on the U.S. futures market averaged $1.47/MMBTU, down from $2.25 last year.

However, prices firmed and by the first week of June had increased to $1.77/MMBTU from $1.86 for the same week in 1994.

Forecasters see increased world demand for products and natural gas this year.

IEA predicts world products demand will increase 1 million b/d to an average 69.2 million b/d for 1995. Excluding the C.I.S., where demand is expected to fall another 400,000 b/d, demand will be up 1.4 million b/d this year.

Demand is expected to increase 500,000 b/d to a total 40.4 million b/d for industrialized countries in the Organization for Economic Co-operation and Development.

EIA forecasts 1995 U.S. petroleum demand of 17.86 million b/d, up 1% from last year. It also predicts a 3.4% increase to 21.3 tcf in natural gas consumption.