NEWS Higher prices, increased demand bolster OGJ group 1995 profits

Robert J. Beck
Associate Managing Editor-Economics
Laura Bell
Statistics Editor

Earnings for Oil & Gas Journal's group of 22 large U.S. petroleum companies totaled $18.1 billion in 1995, up 23.1% from 1994.

This compares with a drop of 9.3% in group net income in 1994 from 1993.

The 1994 decline resulted mainly from lower crude oil and natural gas prices coupled with sharply higher costs related to restructuring, staff cuts, and adoption of new accounting rules.

The adoption of new accounting standards also lowered earnings in 1995, when several companies posted losses tied to the new standards. The losses were most severe in the fourth quarter, when group profits fell 46.5% from 1994 to $2.683 billion.

Group profits peaked at $30.2 billion in 1980. Profits then plunged to $11 billion in 1987 before rebounding to recent highs of $21.5 billion in 1988 and 1990. Restructuring resulted in another drop in group income in 1992, to $9.1 billion.

Of the 22 companies in the OGJ group, 12 had improved earnings in 1995 compared with the previous year. The other 10 had lower earnings or losses. Five companies posted losses in 1995 compared with four companies in 1994.

Total revenues for the OGJ group also rose significantly in 1995, by 8.5% to $478.5 billion. Increased natural gas production, higher crude oil prices, and increased refined product and chemical product sales more than offset lower natural gas prices. All but one of the companies in the group posted higher revenues in 1995.

Sector earnings

Industry sector earnings were generally mixed for the OGJ group in 1995.

Continued steady economic growth in the U.S. and industrialized Europe along with strong economic growth among developing nations, especially in the Asia-Pacific area, boosted petrochemical sales and demand for refined products and natural gas.

Improved margins and increased sales volumes boosted chemical segment earnings for all the group companies reporting for that segment.

Company refining/marketing earnings were mixed in 1995 but generally lower than the previous year. Product prices did not move up as sharply as crude oil prices, so margins were squeezed when higher refining feedstock costs were only partly offset by higher product prices.

Increased worldwide petroleum product demand helped boost revenues for some of the companies. Much of the increase in product demand was concentrated in the Far East and Europe. U.S. demand remained close to 1994 levels.

The benefits from earlier restructuring moves and an improvement in operating efficiency also helped refining earnings for some companies.

Exploration and production earnings were mixed but generally higher for U.S. and non-U.S. operating segments. Higher crude oil prices and increased natural gas production were the major reason for increased overall E&P earnings. This was partly offset by lower gas prices and reduced crude oil and natural gas liquids production for some companies in the group.

Spending, operations

The OGJ group in 1995 boosted capital and exploratory spending on the strength of higher earnings and an optimistic outlook for oil and gas demand.

Total group capital and exploratory expenditures in 1995 rose 9.2% on the year to $41.3 billion. During the last 8 years, group capital outlays have averaged $41.1 billion.

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

Group liquids reserves moved up marginally on the year to 32.595 billion bbl in 1995, while natural gas reserves climbed 0.5% to about 146 tcf. In 1994 group liquids reserves increased 1.4%, and gas reserves rose 3.5%.

This may be only a temporary trend for oil reserves. Group liquids reserves in 1995 were down 7% from 1985, compared with a 10 year increase in group gas reserves.

The improvement in reserves is due to advances in exploration technology reducing the risk of dry holes and an overall increase in drilling activity.

Prices

The prices of crude oil, refined products, and natural gas had varying effects on OGJ group earnings last year.

Crude prices jumped sharply, and product prices rose moderately in 1995, boosting E&P revenues and earnings. This was partly offset by lower natural gas prices, particularly in the U.S.

The U.S. wellhead price of crude oil averaged $14.62/bbl in 1995, up 10.8% from 1994. This followed 4 years of declining U.S. wellhead prices. Even at that, the average U.S. wellhead crude price in 1995 was down 27% from 1990.

The average price for West Texas intermediate crude and New York Mercantile (Nymex) crude futures each rose 7.1% in 1995, to $17.59/bbl and $18.37/bbl, respectively. The average price of world export crude oil increased 9.8% to $16.78/bbl last year, while the price for the reference basket of seven crudes tracked by the Organization of Petroleum Exporting Countries climbed 8.3% to an average $17.05/bbl.

In contrast, natural gas prices declined sharply in 1995 for the second year in a row. The annual average U.S. wellhead price for natural gas fell to $1.59/Mcf in 1995 from $1.88/Mcf in 1994 and $2.03/Mcf in 1993. The U.S. average spot market gas price fell 15.3% to $1.50/Mcf in 1995, and Nymex gas futures fell 13.3% to an average $1.69/Mcf.

However, a sharp increase in gas demand owing to cold weather boosted prices at yearend 1995 and early 1996. Outside the U.S., natural gas prices were relatively stable and in many areas higher in 1995.

In the refining sector, the increase in crude oil prices raised feedstock costs, while intense competition reined increases in product prices, preventing much of the increased feedstock cost from being passed through to consumers. As a result refining margins on average were lower in 1995. But worldwide economic growth last year boosted demand for refined products outside the U.S., and increased sales volumes helped refiners.

According to the U.S. Energy Information Administration, the average U.S. refiner acquisition composite cost of crude oil in 1995 increased 10.6% from 1994 to $17.24/bbl. Higher feedstock cost and strong gasoline demand contributed to an increase in the average U.S. refiner price of finished gasoline of 4.5% to 62.6¢/gal last year.

Distillate demand moved up 1.2% in 1995, contributing in varying degrees to higher distillate prices. The average refiner price of No. 2 fuel oil increased only 1% to 51.1¢/gal. The refiner price of commercial aviation kerosine jet fuel also rose marginally in 1995, by 0.9% to 53.9¢/gal.

In contrast, the refiner price for residual fuel oil jumped 14.1% to an average 36.2¢/gal.

Financial indicators

The OGJ group's major financial performance indicators also advanced in 1995.

Total assets of the group increased for the second consecutive year in 1995, following declines in 1991-93. Restructuring, along with asset sales and reevaluations had caused the decline in assets in those 3 years. Strong investment along with increased reserves helped reverse that trend in 1994 and 1995.

Total assets for the OGJ group moved up 0.4% in 1995 to $394.3 billion, compared with $392.7 billion in 1994, $386.2 billion in 1993, $389.3 billion in 1992, $399.3 billion in 1991, and $405.7 billion in 1990.

The return on total assets for the group increased to 4.4% in 1995 from 3.6% in 1994, 3.9% in 1993, and 2% in 1992-then the lowest level in 15 years. That compares with a return on assets of 9.3% in 1980.

Return on stockholders equity for the group also increased in 1995, to 11% from 9.2% in 1994 and 10.1% in 1993. The recent low was 5.3% in 1992, and the modern peak was 21% in 1980.

Profits as a percentage of total revenues also moved up in 1995, to 3.6% from 3.2% in 1994 and 3.5% in 1993. That was up from a recent low of 1.7% in 1992 and compares with a recent high of 6.1% in 1979.

Exploration and production

The OGJ group's net liquids production declined 1.9% in 1995 to an average 8.597 million b/d.

This lower output for the group was due mainly to the continuing decline in U.S. production. Total U.S. production of crude, condensate, and NGL fell 1.2% in 1995 to an average 8.291 million b/d. U.S. crude and condensate output slipped 2% to 6.53 million b/d in 1995.

Increasing investment in E&P operations outside the U.S. has helped slow the decline in the group's output in recent years. Output for the OGJ group last year was down only 2.2% from an average 8.786 million b/d in 1990.

Underpinning that production trend to some degree was an acceleration in drilling activity growth. The OGJ group's net wells drilled increased 11.7% in 1995 to 5,918 wells. This followed a 3% increase in 1994 and a 12.6% increase in 1993.

However, drilling for natural gas accounts for the biggest part of the increasing well count in recent years. Natural gas production for the OGJ group moved up 0.4% in 1995 to 32.2 bcfd. U.S. natural gas consumption moved up 4.3% in 1995 to 21.6 tcf, while overall U.S. production increased only 0.2% to 19.7 tcf. Imports rose 4.9% to fill part of the gap.

But also of great significance was the drawdown of gas in storage, which at yearend 1995 was down 486 bcf from yearend 1994. Companies supplied a significant volume of gas from storage to meet the late year surge in U.S. demand.

Generally, the group's E&P earnings fared better outside the U.S.

Chevron Corp.'s U.S. earnings slip- ped 5.5% to $552 million, while its non-U.S. E&P earnings increased 56.3% to $811 million.

In the U.S., its reduced natural gas volumes and prices more than offset the benefits from higher crude oil prices.

However, Chevron's non-U.S. earnings were bolstered by higher crude oil sales volumes and higher prices. Its U.S. production fell 19,000 b/d to 350,000 b/d, and non-U.S. output climbed 27,000 b/d to 651,000 b/d.

Chevron's gas production fell 10.4% to 1.868 bcfd in the U.S. but increased 3.5% to 565 MMcfd outside the U.S.

In 1995, the company's average crude oil realization increased $1.48/ bbl to $15.34/bbl, while its average natural gas price fell 26¢ to $1.51/Mcf.

Reserves

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

Proved liquids reserves for the group moved up in 1995 to a total 32.595 billion bbl from 32.406 billion bbl in 1994. Proved natural gas reserves also increased, by 0.5% to 146 tcf.

Liquids reserves for the group had been shrinking down since 1980 when they totaled 38.2 billion bbl, a trend largely attributable to lower crude oil prices.

That contrasts with a near doubling of total world oil reserves in this period, primarily because of major additions in OPEC reserves. Total world crude oil reserves were 642.2 billion bbl at yearend 1980. At the end of 1995 total world reserves were 1 trillion bbl.

Meantime, U.S. reserves have been slowly declining. In 1980, U.S. crude oil reserves were 27.1 billion bbl. At yearend 1995, estimated U.S. proved reserves were 22.5 billion bbl.

The volume of proved natural gas reserves estimated for the group has fluctuated substantially the last few years. In 1980 the group's reserves totaled 176.7 tcf. Total gas reserves slipped as low as 128.1 tcf in 1987 but then rebounded to 144.6 tcf in 1991.

Part of the decline gas reserves in the 1980s resulted from reevaluation of Alaskan North Slope (ANS) gas reserves. The U.S. Department of Energy cut its estimate of ANS gas reserves by 24.6 tcf in 1988. A lack of market and high costs of building a pipeline to transport North Slope gas rendered much of it uneconomic to produce.

Worldwide natural gas reserves were 2.574 quadrillion cu ft in 1980. This had increased to 4.934 quadrillion cu ft at yearend 1995. U.S. natural gas reserves fell to 163.8 tcf at yearend 1995 from 194.9 tcf in 1980. A large portion of that decline was the ANS revision.

The OGJ group's reserves to production ratios did not change significantly in 1995. Reserves increased marginally, and production fell, boosting the ratio for liquids to 10.4 years in 1995 from 10.1 years in 1994. For natural gas, the ratio remained at 12.4 years for 1995, the same as 1994, while both natural gas production and reserves increased in 1995.

Refining/marketing overview

OGJ group earnings from refining and marketing operations last year reflected the changes in crude oil and product prices during the year, as well as increased demand for refined products.

For the OGJ group, world crude runs to stills fell 2.5% to an average 15.1 million b/d in 1995. Global refined product sales by the group increased 1.3% to 21.6 million b/d.

The decline in crude runs for the OGJ group was due to flat demand in the U.S. coupled with a sharp drop in stocks. In addition, refineries have been running very close to capacity, increasing the need for maintenance downtime.

According to the American Petroleum Institute, total U.S. refining runs increased 0.7% in 1995 to 13.968 million b/d. However, some refining capacity was added in the U.S., spurring a drop in the average U.S. refinery utilization rate to 91.7%.

EIA estimated 1995 total U.S. petroleum product demand at 17.704 million b/d, down from 17.718 million b/d in 1994. But demand for gasoline, one of the most profitable refined products, increased 2.4% to a record high 7.785 million b/d.

Global consumption of refined products, according to the International Energy Agency, increased 1.9% in 1995 to an average 70 million b/d.

In spite of increased products demand, refining margins slipped in 1995 when product price hikes failed to keep pace with rising crude costs. Crude costs jumped from year earlier levels in first half 1995, slipped slightly in the third quarter, and then rebounded by yearend.

That tracked the direction of refining margins, which were negative early in the year, strengthened in the second quarter, and then remained only modestly positive in the second half. Wright Killen & Co., Houston, estimated U.S. Gulf Coast refinery cash operating margins at an average 33¢/bbl in 1995 compared with an average 88¢/bbl in 1994 and $1.39/bbl in 1993.

Downstream performance

Earnings results from refining and marketing operations for the OGJ group were mixed but generally lower.

For some companies, leaner margins along with restructuring and increased environmental costs resulted in lower earnings. For other companies, increased product sales bolstered downstream earnings.

Exxon Corp.'s earnings from world refining and marketing fell in 1995, dropping 8.4% to $1.272 billion.

Its U.S. earnings declined 5.8% to $229 million, while non-U.S. R&M earnings fell 9% to $1.043 billion. The decline in earnings occurred even though Exxon's crude oil runs moved up 0.3% to 3.422 million b/d and global product sales increased 0.9% to 5.074 million b/d.

Refining and marketing earnings at Mobil Corp. moved up 18.5% in 1995 to $1.142 billion. Mobil's refinery runs worldwide increased 1.8% to 2.12 million b/d, and its product sales were up 4.5% to 3.212 million b/d.

Its U.S. operations posted profits of $333 million, up 22%, and non-U.S. operations showed a profit of $809 million, up 17.1% from 1994.

Its increase in U.S. profits was attributed to lower expenses, higher sales volumes, improved lubricants income, and excellent refinery performance.

Mobil's improvement in non-U.S. R&M earnings was due to lower expenses in Europe and Australia, higher sales volumes particularly in the Pacific Rim countries, higher lubricants income, and benefits from an upgrade of its Singapore refinery.

Chemicals

Chevron reported record 1995 chemical earnings of $484 million, up from $206 million in 1994. Excluding special items, chemical earnings were $524 million in 1995 and $215 million the prior year.

However, there was some weakness in the chemical sector in the fourth quarter, when earnings generally fell below year earlier levels.

Chevron expects chemical earnings to be lower in 1996 but still strong. It plans to proceed with major expansions of capacity for ethylene and paraxylene, products expected to show continued growth this year.

Shell Oil Co.'s income from chemical operations was a record $704 million in 1995, up from $223 million in 1994. Income was higher due to improved margins and increased sales volumes in most product lines.

Phillips posted chemical segment earnings of $356 million in 1995, up from $259 million in 1994. The increase was primarily due to improved margins for ethylene, polyethylene, and paraxylene. Expansion and technology improvements at its Puerto Rico complex and revenues from licensing plastics and chemicals processes also contributed to chemical profits.

Capital spending

Capital and exploration expenditures for the OGJ group moved up in 1995 as profits increased.

However, spending outlays did not move up as sharply as profits did, and as a result the ratio of spending to net income fell from the prior year level.

Apprehension about how long higher oil and gas prices might last has continued to rein capital spending. That tracks the trend of recent years in which companies have been cautious with budgets, tying outlays to long range price forecasts rather than to short term changes.

Total capital spending by the OGJ group last year was $41.3 billion, up 9.2% from 1994 and following 3 consecutive years of year to year declines in outlays: $38.8 billion in 1993, $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 plummeted to $30.8 billion in 1987. Since then, group capital spending has been relatively steady averaging $41.1 billion/year.

Last year 15 of the group companies boosted capital and exploration spending while seven posted decreases. Eight of the 10 largest companies in the group, ranked by assets, increased capital and exploration spending in 1995.

Shift outside U.S.

The continuing shift of spending away from the U.S. was evident.

Exxon's spending in the U.S. totaled $2.1 billion in 1995, up 6.2% from 1994. U.S. outlays were only 23.9% of its total outlays last year compared with 25.8% of the total in 1994. Exxon's non-U.S. spending in 1995 moved up 17.6% on the year to $6.8 billion.

Of the 10 largest companies in the group, Amoco Corp. posted the biggest increase in capital spending, boosting outlays 29% in 1995 to $4.1 billion. Amoco E&P spending rose 19.9% to $2.7 billion in 1995, paced by a 37.6% increase in U.S. outlays to $1.1 billion. The company's outlays for refining and marketing increased 10.6% to $461 million, and chemical capital spending jumped 84.8% to $863 million.

Shell hiked overall spending 20.6% in 1995 to $3 billion. E&P outlays increased 46.5% to $1.4 billion, while refining and marketing spending slipped 2% to $1.065 billion. Chemical products capital outlays moved up 23% to $422 million.

Texaco Inc. also increased spending in 1995, up 14.1% to $3.1 billion. Its E&P outlays increased 26.8% to $1.8 billion. E&P outlays were up 14.1% at $900 million in the U.S. and 51.6% to $918 million outside the U.S. Texaco capital spending on refining, marketing, and transportation increased 10.5% in 1995 to $622 million.

Mobil's 1995 capital and exploration spending moved up 11.6% to $4.3 billion. The largest increase was in E&P outlays, which moved up 24.1% to $2.7 billion. Refining and marketing spending fell 1% to $1.3 billion, and spending on chemicals increased 5.7% to $224 million.

Chevron's 1995 capital spending slipped 0.4% on the year to $4.8 billion. E&P outlays were $2.7 billion, with 68% outside the U.S.

For the OGJ group overall, capital and exploration spending as a percentage of net income fell to 227.6% in 1995, down from 256.6% in 1994.

This ratio was at a record high of 453.9% in 1992. The highest previous ratio had been 307.3% in 1986.

In recent years the OGJ group has held the level of investment fairly constant as profit margins fluctuated widely with oil and gas price volatility and charges related to restructuring and accounting changes.

The outlook

At this point it is difficult to predict the group's profit performance for 1996. In the first quarter, a number of companies reported significant increases in net income from 1995.

Higher crude oil, natural gas, and product prices boosted revenues and earnings. Colder than normal winter weather at the start of the year pushed up demand for heating oil and natural gas and was a major factor in higher prices. In addition, first quarter demand for gasoline was ahead of year ago levels.

Increased global petroleum product and natural gas demand will help boost revenues for the OGJ group of companies this year.

The extent to which added demand in 1996 will result in improved profits will depend mainly on the level of crude oil and natural gas prices and on individual company operating efficiencies.