Independents benefited from U.S. natural gas prices that were significantly higher year-to-year. Independent refiner-marketers got help from continued strong domestic refining margins. Integrated oil companies savored the rare simultaneous good performances from both upstream and downstream operations. The result was another round of record quarterly earnings for many oil and gas companies. Total net income before special items for the 20 majors and upstream and downstream independents on Petroleum Finance Week's quarterly financial performance scoreboard climbed 45.7% on revenues that rose 17.4% year-to-year in the first quarter. "Without question, the majors exceeded expectations and in some cases demonstrably so," says Michael Young, who follows majors for Gerard Klauer Mattison Inc. in Boston. He considers Occidental Petroleum, Amerada Hess and Exxon Mobil standouts. "Oxy benefited from the Altura acquisition, which closed in last year's second quarter, as well as being exposed to California's natural gas markets, which pushed its U.S. gas price realization through the roof," Young explains. Meanwhile, Amerada Hess and Exxon Mobil benefited from strong commodity prices and exceptionally robust refining margins. "Exxon Mobil's refining and marketing results were a real surprise," he says. "We estimate that R&M provided two thirds of its earnings surprise, and the other third came from lower-than-anticipated corporate and other expenses. It validated cost cuts that Exxon management forecast in the Mobil acquisition." Paul Ting, who follows majors for Salomon Smith Barney Inc. in New York, says first-quarter results confirmed what he regards as the two most critical industry trends: increased upstream capital commitments and simultaneous production performance improvements. "Worldwide production appears to be picking up from the anemic figures in 2000," he says. "Worldwide underlying production during the first quarter, excluding asset sales and acquisitions, increased 1.3% year-over-year." It was the first time since fourth-quarter 1999 that underlying production growth exceeded 1%, according to Ting. "Upstream capital spending growth during the first quarter of 33% exceeds the budgeted annual growth rate of 23.5%," he adds. "This may imply that actual 2001 upstream capital spending could surpass the already robust budgeted spending levels by roughly 10%." Ting points out that total capital spending growth of 15% during the quarter did not increase at the same pace as exploration and production (E&P) outlays or the 19% budgeted annual spending growth for overall capital spending. He concedes that the lag in total spending growth could be a function of timing. But he also suggested that it may signify a move in overall spending toward greater E&P outlays by the majors for 2001. "Balance sheets for the majors continue to improve, reflecting the healthy macro-environment," he says. The group's net ratio of debt to total capitalization declined to approximately 22%-its lowest point since 1983-at the end of first-quarter 2001 from 25% at year-end 2000. "Everybody expected good results. Their extent and strength was unexpected," observes Steve Smith of Dain Rauscher Wessels in Houston. Among producers, Unocal Corp.'s results were particularly good. "It was largely due to its Muni discovery in the Gulf of Mexico which, while not a company-maker, was pretty good," Smith says. The domestic downstream continues to look good, he adds. "In pure downstream plays, stock prices are climbing." Valero Energy Corp.'s stock moved from the mid-$30s to around $50 during a few weeks. "The question now is whether refining will be a multiyear play. I think there's a good case for it. Even with uncooperative weather or reduced demand, there isn't going to be excess capacity any time soon. So Phillips Petroleum's purchase of ToscoCorp. , where so many observers were holding their noses, starts to look much better." Al Silber of Monness, Krespi, Hardt & Co. in New York says, "The first quarter seemed to be another peak. This quarter doesn't look too bad. The natural gas price realization has come down, oil is about the same and refining and marketing results should be as good, if not better, than the first three months. I don't think the companies are in for any serious disturbance of the earnings level they have achieved." Exxon Mobil chairman Lee Raymond says, "Volumes increased in every business line, except for natural gas, which was affected by the controlled shutdown of facilities in the Aceh province of Indonesia. Capital expenditures increased in line with higher full-year spending plans." Chevron chairman Dave O'Reilly says, "As we have seen for more than a year, our upstream business has been the major contributor to our higher profits. Upstream operating earnings of $1.4 billion in the quarter were 38%." Worldwide production increased 3%. Fifteen companies with upstream operations increased total earnings 52.7% from first-quarter 2000 on total production that was only 6.9% higher year-to-year. Several individual improvements clearly reflected large acquisitions that took place later in 2000. Much of Anadarko Petroleum's dramatic 731.1% jump resulted from its inclusion of Union Pacific Resources Group production. While Devon Energy provided pooled figures for 2000 that were designed to reflect its midyear purchase of Santa Fe Snyder, it registered a healthy year-to-year increase. Increased production also contributed to Anadarko's earnings. "Anadarko was the most active driller in North America last year and this past quarter," says chairman Bob Allison. "...Because we didn't lay off people over the lean years and concentrated on technology, we have a big inventory of prospects to drill." Unocal gas production in the Lower 48 states increased for a fifth consecutive quarter, according to chief executive officer Charles R. Williamson. "This allowed us to take advantage of the strong U.S. natural gas market." The company's first-quarter gas prices averaged $6.93 per thousand cubic feet (Mcf), compared with $2.50 a year earlier. "The earnings were helped further by sales at 'bid-week' prices, which put our realizations higher than average daily spot prices for the quarter." The year-to-year increase in natural gas prices boosted Unocal's after-tax earnings by about $215 million. Ting points out that domestic gas production by the 29 largest independent producers during first-quarter 2001 climbed 8% from a year earlier. By comparison, underlying U.S. gas production growth for the majors (excluding the effect of asset sales and acquisitions) fell 1.4% during the same period. Excluding Exxon Mobil's year-to-year drop of 220 million cubic feet per day, which Ting considers an anomaly, underlying domestic gas production essentially was unchanged. -Nick Snow
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