Fourth quarter earnings dismal; diversity helped some firms

Low oil prices and poor industry fundamentals led to dreary fourth quarter financial results for most energy companies.

An asset portfolio that included a strong emphasis on natural gas and power helped cushion the blow, with firms that operate in everything from exploration through electricity generation faring better, in general, than vertically positioned companies.

Losses for the quarter were common in many industry divisions, especially among independent firms in both the upstream and downstream sectors.

"Softened energy demand due to weakened economies in Asia, Russia, and South America have yielded difficult market conditions this quarter," explained Bruce A. Smith, chairman, president, and CEO of Tesoro Petroleum Corp.

But even in sectors where company earnings were generally positive-such as for integrated energy companies and petrochemical manufacturers-they were often down considerably from fourth quarter 1997 results.

A sampling of company results, broken out by company type, will illustrate some general trends among the various industry sectors.

Integrated energy

Major, integrated energy firms tended to perform well in fourth quarter 1998, with many holding earnings steady compared with fourth quarter 1997. Enron Corp., for example, reported net income of $176 million vs. $169 million a year earlier.

Enron said its wholesale energy operations and services business expanded in every major region during the quarter. The result was a 27% increase in natural gas volumes for the period and a 65% increase in electricity volumes vs. a year earlier.

Commenting on the year as a whole, Richard C. Green Jr., chairman and CEO of UtiliCorp United, said, "Weellipsedelivered a second consecutive year of 8% growth in normalized earnings per share, earning $2.43 per diluted share compared with $2.25 a year ago." He added that he expects UtiliCorp to be among the earnings per share leaders when the full industry's 1998 results are reported.

A comparison of fourth-quarter 1998 and 1997 earnings for a few companies in this sector follows, with 1998 results listed first, in millions of dollars, and losses shown in parentheses: CalEnergy Co. Inc. 790 vs. 628, UtiliCorp 37 vs. 26.2, Energen Corp. 3.8 vs. 6.1, and Williams (20.2) vs. 57.5.

As can be seen, not all firms in this category reported year-on-year earnings increases.

"Companies like ours, which are engaged in oil and gas activities, are struggling with oil prices at or near 12-year lows," said Mike Warren, chairman and CEO of Energen. "This battle has persisted for several months now and has been compounded in recent weeks by natural gas prices falling below the $2 (per Mcf) level.

"The challenges of prolonged periods of low commodity prices are real, and Energen is not immune from these external forces," Warren added.

Williams Chairman, Pres., and CEO Keith E. Bailey blamed his firm's quarterly losses on "energy market conditions, a significant number of impairments and loss accruals, disappointing financial results in the equipment area of our communications business, and the decision to accelerate the completion of our national fiber-optic network."

Major oil

Integrated oil firms, large and small, fared worse, by comparison.

Texaco Inc. Chairman and CEO Peter Bijur said, "The industry has not experienced crude oil prices this low since the mid-1970s.

"Upstream results declined sharply in this low price environment. In the downstream, we continued to have solid performances in our European and Latin American businesses, as margins and volumes remained strong. In the Asian operations of Caltex (Texaco's downstream joint venture with Chevron Corp.), we incurred foreign currency losses due to the strengthening of the Korean won and Japanese yen. Also, our U.S. alliances (with Shell Oil Co. and Saudi Aramco) experienced weak results due to poor margins and significant refinery downtime."

Some fourth-quarter earnings in this category for 1998 vs. 1997, in millions of dollars, were: Petro-Canada 19 vs. 78 (Canadian $), Tesoro Petroleum Corp. (39.5) vs. 6.9, Murphy Oil Corp. (61.1) vs. 31.9, Mobil (152) vs. 704, and Texaco Inc. (213) vs. 623.

Murphy Pres. and CEO Claiborne P. Deming said, "Continuing weak demand and surplus supplies during the fourth quarter of 1998 exerted significant downward pressures on prices and resulted in the write-down of the carrying value of certain of the company's oil and gas properties and downstream inventories.

"Current industry conditions are also impacting operating costs. This is particularly true for drilling rigs, and in the current quarter, the company and its partners canceled the contract for the drilling rigs originally scheduled to drill the development wells of the Terra Nova oil field, offshore Canada (OGJ, Feb. 1, 1999, p. 30)."

Independent E&P firms

Upstream independents are struggling perhaps more than anyone in the current price environment (OGJ, Feb. 8, 1999, p. 30).

Nuevo Energy Co. Chairman and CEO Doug Foshee said, "There's not much to say about 1998, other than we're glad to have it behind us." Looking ahead, he said, "We've cut our capital for 1999 to the bone, and we're working to minimize every component of our cost structure."

Robert J. Allison Jr., chairman and CEO of Anadarko Petroleum Corp., put it equally bluntly: "Simply stated, our financial results for 1998 were lousy due to the collapse in commodity prices-the worst in more than 2 decades. We can't change that. What we can do is continue doing what we do best: growing our core assets, our proved reserves at low finding costs, just as we did in 1998.

"This year we're going to hold the line on expenses where we can. Our goal for 1999 is to get through this low-price period with higher reserves and production."

Some fourth quarter earnings in this category for 1998 vs. 1997, in millions of dollars, were: Imperial Oil Ltd. 136 vs. 272 (Canadian $), Pogo Producing Co. (32.3) vs. 7.7, Anadarko (56.7) vs. 42, and Nuevo (68.8) vs. (31.6).

Paul G. Van Wagenen, Pogo chairman and CEO, provided no excuses for his company's fourth quarter performance: "No company should blame disappointing results solely on protracted low commodity prices or disappointing drilling results.

"Such things are, respectively, cyclical and part of the inherent risk in our exploration business. You must plan for those unpleasant possibilities."

Refiner-marketers

Downstream independents also performed poorly in the fourth quarter. Some earnings in this category for 1997 vs. 1998, in millions of dollars, were: Ultramar Diamond Shamrock Corp. (67.7) vs. 24.3, and Tosco Corp. (116) vs. 41.

The fourth quarter was particularly tough on refiners, says Tosco Chairman and CEO Thomas D. O'Malley: "By the end of 1998, the price of oil had declined dramatically from the beginning of the year. Refining margins have also contracted, particularly in the last quarter of 1998. We now believe that the lower price environment will continue for some time, and that the refining business will be very competitive in 1999."

In response to the current market weakness, Ultramar Diamond Shamrock Vice-Chairman and CEO Jean Gaulin noted that his company plans to cut throughput rates throughout its Midcontinent network of refineries by nearly 10%, starting in February.

Petrochemicals

Fourth quarter earnings were down significantly among petrochemical producers. The sector usually is not affected by low oil prices, but the current downturn, because it is the result of depressed demand, primarily in Asia, has touched all industry divisions.

Some fourth quarter earnings among petrochemical producers for 1998 vs. 1997, in millions of dollars, were: Dow Chemical Co. 144 vs. 357, Union Carbide Corp. 67 vs. 147, and Nova Chemicals Inc. 2 vs. (19).

William Joyce, chairman and CEO of Union Carbide, said he expects the continuing market weakness, particularly in Asia, to affect earnings through most of 1999, and perhaps longer.

Upstream service-supply

Results were also mixed in the oil field service-supply sector in the fourth quarter.

For these companies, 1999 is expected to be a more difficult year, as they will more fully feel the effects of the price climate on operators.

Marine Drilling Cos. Inc. Pres. & CEO Jan Rask said, "As long as crude oil and natural gas prices remain weak, we anticipate that our day rate revenue and utilization will continue to decline. This will substantially reduce our revenues and adversely affect our results of operations for at least the near term, likely resulting in losses in 1999 until the Marine 500 and Marine 700 (drilling rigs) begin operations."

Some fourth-quarter earnings in this sector, 1998 vs. 1997, in millions of dollars, were: Schlumberger 278 vs. 397, Transocean Offshore Inc. 103.3 vs. 47.2, Global Marine Inc. 34.5 vs. 83.8, Marine Drilling Cos. 7 vs. 18.6, and Parker Drilling Co. (7.7) vs. 10.7.

Bob Rose, president and CEO of Global Marine, said, "I wish we could look forward to another record year in 1999, but, realistically, tougher times are ahead.

"The strong growth in demand for oil and gas that characterized the past decade has slowed with the financial crisis in Southeast Asia. Iraq is adding new supplies of oil to a glutted market, and OPEC and other major oil producers appear powerless to throttle back their production enough to increase prices. We have therefore instituted hiring and wage freezes and are cutting other costs selectively, including cold-stacking rigs that cannot find gainful employment."