Unocal Expects Big Profit Jump; Gas Prices Cited
Unocal Corp.'s operating profit in the first six months of this year should equal its earnings for all of 1995, due in part to the recent sharp rise in gasoline prices, Chairman Roger C. Beach told shareholders at the oil company’s annual meeting Monday.
“I expect that our adjusted six months’ earnings will be approximately equal to our full-year adjusted 1995 results,” not including special items, said Beach, who is also Unocal’s chief executive, at the meeting in Brea.
The company’s adjusted earnings were $1.06 per common share in 1995, or $297 million. In the first quarter of 1996, the company earned 45 cents per common share, excluding special items. The company has about 248 million common shares outstanding.
The company’s strong results are the first solid sign that the state’s refining industry will see strong operating profits in the second quarter ending June 30 as a result of gasoline prices that soared nearly 40 cents a gallon in California from February to their peak in May.
“It shows precisely what we’ve been saying: that the major refiners are the primary beneficiaries of the run-up of gasoline prices, particularly on the West Coast,” said Edwin Rothschild, director of energy policy at Citizen Action, a Washington-based consumer group. “It was the wholesale price that refiners charged that went up the most and which was then passed on to consumers at the pump.”
On Monday, Beach cited the “sharp improvement in the performance of the 76 Products Company over the first quarter. Refining and marketing margins have risen dramatically during this quarter, and gasoline sales volumes are strong.”
Answering questions after the meeting Monday, Beach declined to detail Unocal’s expected refining margins. But he said all California refiners will report second-quarter increases in profit margins well above those in the rest of the country. “We’ve gone from negative earnings to very positive earnings,” he said.
In May, Salomon Bros. analyst Paul Ting estimated that California refining margins tripled in April as gasoline prices rose.
Previously, refiners have blamed the sharp run-up in California gasoline prices on tight supplies, the high cost of crude oil and the added costs of producing cleaner-burning gasolines.
At the end of April, Unocal said it only began to show a refining profit this year in the week ended April 19. Before that, the company, like other California refiners, had invested heavily in new equipment to meet state requirements to produce cleaner-burning gasolines by a March 1 deadline and oil prices had risen sharply, squeezing margins.
The Energy Information Administration said the average price of regular unleaded gasoline in California peaked at $1.545 on May 6. As of May 31, it had fallen to $1.51 a gallon.
Asked how soon motorists can expect prices to fall, Beach said, “There’s a lot of dynamics in the marketplace right now, and it’s very difficult to assess where this thing’s going to wind up.”
Beach also attributed the company’s improved financial showing to higher crude oil and natural gas prices during the period, as well as a 40% increase in the volume of gasoline sold through the company’s revamped service stations.
Beach added that Unocal’s agricultural products business units are having a strong year with high fertilizer prices and production.
“While our overall results have obviously been helped by strong commodity prices and improved downstream [i.e., refining and marketing] margins, our ongoing initiatives to improve performance and maintain high production rates and sales volumes are an important factor in the improved earnings,” Beach said.
Analysts doubt Unocal’s favorable performance will last. “I don’t expect them to continue in this kind of a trend,” said Gary Hovis, an analyst at Argus Research. “With all the exploration activity they’ve been incurring over the last six months, especially in Vietnam, I think earnings will remain on a plateau for the next two years.”
Meanwhile, about 50 demonstrators picketed the annual meeting, assailing Unocal’s investments in Myanmar, formerly Burma, in a project to develop a natural gas field off Myanmar’s coast and to build a pipeline across the country to Thailand.
The protesters argue that Unocal is cooperating with a brutal military regime that has crushed dissent, displaced villagers along the pipeline route and used forced labor to build roads and clear the area.
During the meeting, dissident shareholders, led by the Catholic Maryknoll Fathers and Brothers, mounted a proposal, which was ultimately defeated, to revise Unocal’s statement of corporate principles to withdraw investment from nations with a pattern of human rights violations.
“We are profoundly troubled by the horrendous human rights violations in Burma as reported to us by our own missioners in the field, our State Department, the United Nations and by trusted human rights resources around the world,” said the Rev. Joseph P. La Mar, assistant treasurer of the Maryknoll Fathers.
In the face of sometimes hostile questioning, Beach flatly denied the allegations. “I visited Myanmar just six weeks ago,” he said. “Let me assure you that there is no conscripted labor work on this project. No villages have been relocated because of our project. And no pristine rain forest will be negatively impacted by our project.”
Bloomberg Business News contributed to this report.