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Oil firms take charges
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December 7, 1998: 6:44 p.m. ET
Ultramar, Amerada Hess reveal 4Q charges; analysts see more ahead
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NEW YORK (CNNfn) - The collapse of crude oil prices this year already has led major oil companies to lay off workers, slash capital budgets and take multi-million dollar quarterly charges to offset the effects of shrinking profit margins.
But those following the industry say the worst may still be to come.
Ultramar Diamond Shamrock Corp. (UDS) of San Antonio warned investors Monday any inventories held at year-end carry the risk of devaluation -- since much of its supply was purchased at prices higher than current levels. If crude oil prices remain where they are, the company said, it expects to take a $90 million pre-tax write-down in the fourth quarter.
UDS, an independent petroleum refinery with revenues of about $12 billion, already wrote down its inventories by $42.4 million pre-tax in the third quarter.
In October, the company formed a joint venture with Phillips Petroleum Co. to create the largest independent refining and marketing company in North America, part of its efforts to remain competitive in today's tough oil environment.
Also Monday, Amerada Hess Corp. (AHC) said it plans to cut back sharply on capital expenditures, curtail oil exploration and production spending and reduce its workforce by 20 percent in this division, resulting in a $150 million after-tax charge in the fourth quarter.
The company said in a statement that the cuts, driven by the sharp decline in oil prices over the past year, would mean a 40 percent drop in planned 1999 exploration and production spending, to $250 million from an original $400 million. Hess also said the $150 million after-tax charge is in addition to a $150 million charge announced at the end October, bringing to $300 million the total charges for the year.
Gauging the effects of a global glut
The major oil companies -- including Exxon (XON), Texaco (TX), Mobil (MOB)and Phillips Petroleum (P) -- refused to say whether they expect to take similar write-downs in the current quarter.
Mobil, which is merging with Exxon Corp. in an $80 billion deal, refused to comment on any upcoming write-downs since it in a quiet period while the Securities and Exchange Commission reviews the merger. A company spokesman said the company will disclose fourth quarter financial results in late January.
With crude prices hovering around 12-year lows, however, analysts say some of the industry's leading players may face hefty charges.
"Economic trends favor the occurrence of write-downs at other companies," said Warburg Dillon Read analyst Scott Smith. "Crude oil prices have been cut in half and product inventories (remain at record levels). The thing that I think is more telling is that (these companies) are taking write-downs now in anticipation that crude prices will be low for the next few years."
Plummeting prices
Crude oil futures prices in London fell below the $10 mark Monday, the lowest since the Brent cash market dipped below $9 in 1986.
Brent crude for January delivery on London's International Petroleum Exchange dipped to $9.94 a barrel.
Oil on average this year, at $13.56 for Brent, is lower than at any time since 1976.
The industry is suffering from an oversupply of low-price oil, created by dwindling demand in Asia and other emerging markets. At the same time, unusually warm winter weather this year and last has stifled demand. Rising Iraqi exports and a badly timed lifting of OPEC's output ceiling a year ago also have been contributing factors.
The 11-member oil group is struggling to get low oil prices back in line by tackling a persistent oversupply of oil in the market.
Last week, OPEC ministers in Vienna failed to agree on a plan to reduce the global glut of oil in the market, opting instead to postpone its decision on production policy and output cuts until next March. That sent oil prices slumping further.
What's ahead?
Those tracking the industry admit they are unsure how fourth quarter charges will shake out for the major oil companies.
Morgan Stanley Dean Witter analyst Douglas Terreson said the companies use a variety of accounting and hedging practices, crippling Wall Street's ability to compile estimates.
"It's tough say what charges might look like," he said. "Until they come out and tell us, it's difficult to get your hands around it. I think it's probably safe to say, though, that we are going to see some more charges in refining and marketing."
He noted that write-downs are likely to effect the refineries more than the integrated companies like Exxon and Texaco.
"It will have less of an impact on the major (oil companies) since they are more integrated and have so many different revenue and earnings streams," Terreson said. "It may be that Diamond Shamrock gets hit the hardest."
Investors, he said, will just have to wait to find out.
--from staff and wire reports
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