Large Earnings Declines in Second Quarter for All Segments of the Oil and Natural Gas Industry

Earnings of oil and natural gas producers, refiner/marketers and oil field companies fell sharply in the second quarter 2009 (Q209) from the second quarter of 2008 (Q208), continuing the trend towards lower profitability evident during the first quarter. These results are drawn from quarterly EIA reporting on the financial performance of energy companies that together represent about half of U.S. oil and gas production and the majority of U.S. refining.

Based on data available at the time of the publication of the quarterly reports, crude oil prices paid by U.S. refiners averaged $57.50 per barrel in Q209, down by more than half from the peak average of $118.16 per barrel recorded in Q208. (All prices and price changes are in constant Q209 dollars.) Natural gas wellhead prices averaged $3.44 per thousand cubic feet (Mcf) in Q209, compared to a peak average of $10.05/Mcf in Q208.

Figure

The large integrated and large independent producers in EIA's Financial Reporting System survey reported earnings of $11.4 billion in Q209 for the oil and gas production segment, down from $33.6 billion in Q208 (Figure 1). In the refining and marketing segment, which includes the operations of large integrated and large independent refiners, earnings dropped to $0.5 billion in Q209 from $3.3 billion in Q208; domestic refining/marketing operations lost $0.1 billion in Q209 while foreign operations earned $0.5 billion, as refining margins generally declined. Smaller independent producers reported losses totaling over $0.3 billion in Q209, down from earnings of nearly $0.5 billion in Q208 (Figure 2). Reported net income of the majors and independent producers reflected write-downs of the value of their oil and gas reserve assets.

Figure

The majors' upstream capital expenditures declined relative to Q208 but by much less than the fall in net income, and remained above the second quarter average for 2004-2008 (Figure 3). In particular, worldwide oil and gas production capital expenditures fell 25 percent relative to Q208, but increased 3 percent relative to the second quarter average for 2004-2008. Despite the decline in net income, worldwide refining/marketing investment by the majors rose slightly, by 2 percent, in Q209 relative to Q208, but dramatically (39 percent) relative to the second quarter average for 2004-2008.

Figure

Notwithstanding the reduction in capital expenditures, oil and natural gas production in Q209 continued to show growth. In both Q209 and Q109, the reporting companies' aggregate domestic oil production, foreign oil production, domestic natural gas production, and foreign natural gas production all increased over the comparable quarter in the prior year, the only two quarters that has happened since Q401. As in Q109, only domestic oil production in Q209 remained below the average of the prior five first quarters. The increase in production, despite the sharp drop in capital expenditures, resulted from the lagged effects of higher capital expenditures in previous quarters based on relatively high prices.

Oil field company net income dropped 51 percent in Q209 from Q208 (Figure 2), as U.S. oil and gas rig counts each fell by about 50 percent (Figure 4), reflecting the decline in prices and producer earnings.

Figure