3rd quarter earnings are flat at Arco and Occidental despite spiraling crude prices.

3rd quarter earnings are flat at Arco and Occidental despite spiraling crude prices

Southland oil companies found out during the last quarter that higher oil prices do not necessarily mean larger profits. Both Atlantic Richfield Co. and Occidental Petroleum Corp. posted relatively flat earnings compared to the third quarter of 1989, while Unocal reported a 53 percent increase resulting from factors unrelated to higher crude oil prices.

Westwood-based Occidental's earnings increased by less than 1 percent and, after being adjusted for special gains and charges, downtown Los Angeles-based Arco's earnings rose just as little.

Unocal's earnings showed a dramatic improvement because the company had a poor third quarter during 1989, according to Al Silber, an analyst with Brean Murray Foster Securities in New York.

"A year ago you were talking about very low earnings," he said, adding that Arco is a larger company and tends to be more stable than downtown Los Angeles-based Unocal. Arco's 1989 revenues were $16.8 billion, while Unocal's were $11.35 billion.

The circumstances affecting Unocal's 1989 third quarter earnings were in many ways different from those surrounding its current showing. For instance, Unocal has since closed a refinery in Beaumont, Texas, which had been performing poorly, said company spokesman Barry Lane.

Unocal also sold its interest in a Norwegian oil field, further reducing its debt, according to Silber. In addition, the company sold a half interest in a refinery it owned in Illinois to the Venezuelan National Oil Co., and performance at the refinery has since improved.

Overall, Unocal has reduced enough of its debt so that the company's interest expense is lower than in 1989, which helped to increase earnings, he said.

Joseph Battipaglia, an analyst with New York-based Gruntal & Co., agreed. "The real story is a rationalization of expenses," he said. Unocal is "cutting costs across the board."

Unocal announced last week that it will use its profits to accelerate its drilling programs in 93 North American wells, which are expected to add 5,700 barrels to the company's production by early 1991.

All three companies benefited from high crude prices on the production end, yet suffered when it came to marketing and refining. Arco's worldwide oil and gas exploration and production earnings rose 111 percent, while Unocal's rose 47 percent. Occidental's oil and gas production earnings, on the other hand, increased from $17 million during third quarter 1989 to $78 million third quarter 1990, a 359 percent increase.

Percentages can be deceiving when the numbers are small, an Occidental spokesman said. In a news release, Occidental reported that the increase was a reflection of higher worldwide crude prices, higher domestic natural gas liquids prices and increased international crude oil volumes.

Arco is in a better position than Unocal to benefit from higher crude prices because it produces more than it sells, while Unocal does not, according to Ken Beer, vice president of Howard, Weil, a securities firm based in New Orleans. Therefore, Arco can make money from selling its excess crude.

In contrast, both Unocal and Arco struggled at the pumps during the quarter. Occidental does not sell gasoline.

Unocal's refining, marketing and transportation sectors earned $34 million this quarter compared to $39 million during the third quarter 1989. However, Arco managed to squeeze a profit in its refining, marketing and transportation sectors, which earned $209 million during third quarter 1990 compared to $180 million during third quarter 1989. Strong performance early in the quarter and ancillary business improvements increased earnings, according to an Arco press release.

Arco was hurt by the fact that it refrained from raising prices at the pump for two weeks after Iraq invaded Kuwait on Aug. 2, according to Beer. "That hurt their earnings," Beer said.

Since Arco showed restraint early on in the crisis, the company's earnings might be higher later on down the road, said Craig Schwerdt, director of institutional equity research for Drake Capital Securities Inc. in Santa Monica. "Arco might come through in the fourth quarter," he said.

In addition, both Arco and Occidental are heavily involved in the production of petrochemicals and these sectors of their operations suffered during the third quarter.

The price for feedstock materials, which is the raw petroleum material used to make petrochemicals, went up with the price of crude, according to Beer. Neither Arco nor Occidental could pass the increased costs along to their customers, who already had several-month contracts from which to buy the petrochemicals at specific prices.

An Occidental report stated that the company's chemical operations are suffering from industry-wide soft pricing.

"Occidental's mix of business was negatively impacted by what happened. Sixty-five percent of its earnings are from chemicals," Battipaglia said.

Seventeen percent of Arco's 1989 revenues were from petrochemical sales, while only a small percentage of Unocal's revenues come from petrochemical sales. "It's not a real big segment of our business," Lane said.