Arthur Andersen Energy Conference: Oil Execs Positive on Next Year's Prospects
By Mavis Scanlon
Staff Reporter
12/9/98 11:22 AM ET
HOUSTON -- Despite the trouncing oil is taking, industry executives are still optimistic that crude prices will recover to the midteens next year, according to Arthur Andersen's annual oil and gas industry outlook.
Executives surveyed figure the U.S. benchmark grade will average $16 a barrel in 1999, increasing to $17 in 2000 and $19 by 2001. Crude futures for January delivery settled Tuesday at $11.30 a barrel, off 17 cents.
The results were released Tuesday here at Arthur Andersen's annual energy conference.
In addition, the survey showed moderately bullish expectations for the natural-gas market, which has turned south in recent days thanks to unseasonably warm weather in much of the nation. Fifty-five percent of the executives from the 83 companies that participated in the survey indicated they expect natural-gas demand to grow by 2% to 4% a year during the next five years. Much of that demand is expected to come from electric-power generation, which respondents rated as natural gas' highest potential growth area. Electric-power generation was followed by the industrial, commercial and residential sectors.
The expectations of a recovery for oil to $16 a barrel "is relatively optimistic in light of present prices," says Victor Burk, managing director of Arthur Andersen's worldwide energy industry services group.
And the depth of recent spending cuts reflects price expectations lower than those indicated in Arthur Andersen's survey. The latest oil company to slash its exploration spending is Amerada Hess (AHC:NYSE). Amerada Hess closed Tuesday at 53, down 1 7/16, after announcing late Monday it would slash its exploration spending to $250 million in 1999 from $400 million in 1998. Total capital expenditures are budgeted at $900 million in 1999, down from $1.45 billion in 1998.
What Next?
Market cap (billions) Revenue (billions) 1999 EPS view Debt/capital ratio*
Schlumberger $23.5 $12.1 $2.18 28%
Halliburton 14 13 1.88 22%
Baker Hughes 3.2 5 0.96 25%
Weatherford 1.9 1.9 1.61 27%
Cooper Cameron 1.3 1.9 2.20 35%
Petroleum Geo 1.7 0.5 1.60 45%
Smith 1.3 2 1.84 29%
B.J. Services 1.1 1.5 1.06 18%
National Oilwell 0.5 1.2 1.20 39%
Revenue for latest 12 months. *Long-term debt-to-capital ratio.
In the survey, only 29% of respondents said they would increase their spending on domestic exploration, while nearly half will up their outlays to develop existing wells. Internationally, 16% plan to increase exploration spending, and only 19% plan to increase development spending.
But all that may be moot if prices stay near $11 a barrel for long. Then more cuts would become a certainty, Burk says.
Indeed, the uncertainty over prices was one of the most significant issues facing the industry, respondents said. A second was the lack of attractive drilling prospects.
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Five or six major refiners ultimately will control the U.S. market, along with a few regional players, as the shakeout in the energy industry continues, predicted Jean Gaulin, vice chairman, president and chief operating officer of refining and marketing giant Ultramar Diamond Shamrock (UDS:NYSE).
"We want to be one [of the majors]," Gaulin said in a presentation here. But there will be challenges along the way, he said, including increased competition on the retail side and the continued demands of his customers and shareholders. Gaulin will add the title of chief executive of Ultramar in January and shed his COO moniker.
His goals for Ultramar include a 12% profit margin by 2000, up from the 8% margin the company garnered in 1997. A major restructuring announced Monday is expected to add $300 million in earnings before taxes over the next three years, he said, including $50 million in the current quarter. The First Call consensus estimate for Ultramar for this quarter is 29 cents. Other initiatives will be geared toward reducing costs in Ultramar's gasoline-retailing operations. Competition in the U.S. retail market is expected to heat up with the introduction of gasoline sales by chains such as Costco (COST:Nasdaq).
Participating in a panel on the transformation of the North American energy industry, Gaulin said consolidation is essential in his corner of the oil patch to reduce costs and meet the competition head-on. He sees the company as a consolidator. Ultramar's focus now is on forming a joint venture with Phillips Petroleum (P:NYSE). In October, the two agreed to combine all of the operating assets of Ultramar and the North American refining, marketing and transportation operations of Phillips into a joint venture called Diamond 66.
When queried whether Ultramar has its sights set on any assets that may be divested as Exxon's (XON:NYSE) acquisition of Mobil (MOB:NYSE) moves ahead, Gaulin said that while Ultramar is not talking to Mobil, "we are interested in everything we can find."
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