Sunday, May 15, 2005

This Year's Appendix B: One Year Forward, Two Years Back

1. Better Late than Never

If the 2002 financial performance of US energy majors foretold the 2003 invasion of Iraq, then the 2003 performance of the US energy majors forecast, foretold, and secured the re-election of George Bush as President of the United States and Lobbyist-in-Chief.

That the publication of the US Energy Information Agency's 2002 Performance Profiles of Major Energy Producers first made its appearance in 2004; that its 2003 Performance Profiles made it into the public domain in 2005 proves, among other things, that profit determines policy and not vice versa; that foresight beats hindsight ; that the production of oil is all about the expropriation of value and not the geological limits of supplies.

The energy companies participating in the EIA's Financial Reporting System (FRS) reported 2003 earning of $57.4 billion, triple the 2002 level, and the highest net income since 1980. Return on stockholders' equity (ROE) increased from 14.6% in 2002 to 18.1% in 03. This ROE exceeded that of the S&P Industrials by 4 percentage points for the 2000-2003 period, after averaging 3 percentage points less that the S&P Industrials ROE for the 1985-1999 period.

The increased return was a direct product of increased prices, with crude prices increasing 17% and natural gas prices at the wellhead up almost 70 percent. The higher prices made oil and gas production the most profitable business segment for the reporting energy majors. This surge brought the yearly average contribution to net income from production for the 2000-2003 period to $37.1 billion vs. the yearly average of $14.7 billion for the 1990-1999 period. Most importantly, the rate of return on investment (ROI)in 2003 increased to 15.3 percent.

2. Sea of Love, Sea of Cash

2003 was also a profitable year for the refining and marketing segments of the business. ROI in these sectors reached 8.9% vs. the 5.8% average for the 1990-1999 period.

Cash flow from operating activities reached $105.1 billion in 2003, the highest level ever recorded by EIA. Since the OPEC price increases of 1999, cash flow from operations has averaged $28.1 billion more (in constant 2003 dollars) per year than averages for the 1986-1999 time frame.

But increased cash flow has not translated increased capital expenditures. Such expenditures declined by almost $21 billions from 2002 levels. Merger and acquisition activities, a significant segment of capital expenditures, declined by two-thirds in 2003.

The FRS companies used their increased cash flows into paying down debt, stock repurchases, and dividend payments. More than half of the increase in cash flow went to these three activities, outweighing the stream of cash assigned to capital expenditures . The energy majors reduced their debt to equity ratio by more than 5 percentage points, bringing their ratio 20% delow the debt-to-equity ratio of the S&P Industrials. Cash and cash equivalents on hand grew nearly $9 billion in '03, the largest year-on-year increase ever reported.

The single greatest increase in cash flow assignment was the doubling of stockholders' dividends to nearly $43 billion.

3. But None for You....

Cash assigned for oil and gas exploration, excluding the cost of unproved acreage, by the FRS participating companies declined for the second year in a row, down 21% from 2001 levels. While expenditures for finding reserves declined, the FRS companies increased funds for developing already proven reserves. The development expenditures rose 5% , achieving their highest number since 1982.

In the classic manifestation of overproduction rather than reserve depletion or scarcity, high prices lead the energy majors to bring their areas of known reserves into production; to favor development over exploration.

The energy majors continued to focus on the US offshore area, continuing the pattern first established in 1992. US onshore, despite the age of its fields, still receives more exploration expenditures than any single foreign area. Worldwide, the US energy majors continue to spend the most for exploration in Canada and Africa.

4. And More Than Enough for You..

The reserve replacement ratio, (reserves added in relation to volume extracted) measured 1.04 (104 %), a 9% increase over 2002. Even this, however, was below the 1.25 ratio of the 1990-2001 period.

Despite the reduced capital spending, despite the focus on developing only proven acreage, replacement rates exceeded production.

5. Old News is New News... Supply Meets Demand, Prices Soar.

The 2003 financial performance of the energy majors, as reported in 2005, continued throughout 2004. In the fourth quarter of 04, net income for the FRS companies exceed 4Q03 levels by 101 percent. For all of 04, net income was 54% higher on 26% more revenue.

The petroleum sectors, (oil and gas production and marketing) registered a year-on-year increase in net income of 93%, based largely on a 30% increase in prices. Worldwide supplies increased 4%, as the actual reserves of oil continue to defy the peak oil theories. Again.

S. Artesian

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