Oil Industry Net Not Expected to Reflect Price Fall : Impact Won’t Be Apparent Until 2nd-Quarter Reports, Industry Analysts Believe
The financial news due from the oil patch in the next few weeks, when the industry reports its first-quarter results, probably will be better than the recent collapse of prices would suggest, analysts say. Earnings at some companies could exceed year-ago results.
Because most oil prices fell more gradually than the price categories reported in news accounts during the January-March period, the brunt of the decline isn’t expected to be felt until the current quarter--which some analysts now believe will be the bottom for the oil industry.
But the first-quarter financial results for individual firms will vary wildly, and there are prospects for large inventory write-downs and other unusual charges against earnings that have made many investment analysts loathe to predict company-by-company profits.
“Nobody wants to pin themselves down,” said oil analyst Thomas Lewis of Duff & Phelps in Chicago. Added Thomas Petrie, Denver-based oil analyst for First Boston: “The first quarter’s going to be very hard to sort out.”
The earnings will be the first reported since prices of crude oil, which had eased down to $31 from $35 per barrel between 1981 and late 1985, began a free fall in mid-January that appears to have stabilized for the moment at about $13 for a 42-gallon barrel.
Forced Heavy Cutbacks
The dramatic decline has forced large oil producers to slash exploration and trim other spending. It has also threatened the survival of many independent producers and oil-service companies and led to the shutdown of tens of thousands of suddenly unprofitable oil wells in the United States.
But while the price for contracts to deliver oil in the future dropped below $10 a barrel at one point in March, analyst Lewis estimated that the average price collected for a barrel of crude during the quarter was about $21.50.
“You’ll see price weakness, but you will not see the true impact” in the first-quarter results, Lewis said.
In fact, Editor John C. Gehman of Energy Performance Review, a Washington survey of financial performances in the energy industry, calculates that industry operating margins--the difference between raw materials costs and refined product prices--were higher in the just-finished quarter than they were a year earlier.
“At an operating level, there will be an improvement from a year ago,” Gehman said. “Last year was a bad quarter. The wild card is the possibility for inventory write-downs. I have a feeling that could make it wild and crazy.”
He was referring to the value that firms choose to place on their own oil, which has theoretically plunged by about 60% since late November. Amerada Hess, the No. 8 oil company, is widely expected to announce an inventory write-down that some analysts expect could lead to a $200-million quarterly loss.
Refinery Operations May Improve
As a general rule, the less an oil company relies on getting oil out of the ground as opposed to refining and selling it, the better off it is when prices are dropping. That is because refinery and sales operations pay lower prices themselves.
Chairman George Keller of Chevron, the No. 4 oil company, said last week that Chevron’s refinery and marketing units will show a first-quarter improvement over a year ago. And while oil production was “disastrous,” Keller suggested that overall results won’t be sharply different than Chevron’s year-earlier earnings of $354 million.
Analyst Petrie said another firm likely to post a creditable showing is No. 3 Texaco. While declining to make specific forecasts, Petrie also said the three big Los Angeles-based producers are positioned to remain profitable unless there are write-downs or other unusual charges against earnings.
He said Atlantic Richfield has taken “timely action” to slash spending, Occidental Petroleum will benefit from its recent acquisition of Chicago-based Midcon and the completion of a pipeline serving its big Colombian reserves, and Unocal is “working its way out” of its heavy debt load “with some adroit financing.”
While the average price paid for crude oil during the first quarter was in the $20-per-barrel range, the current quarter began with prices around $13 a barrel. Said analyst John Curti of Birr, Wilson in San Francisco: “It’s the second quarter that’s going to be bad.”