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For Texaco, 1999 Could Be a Black Hole

Many U.S. companies are hoping for a strong second half of 1999 to make up for what they fear will be a difficult first half. For oil companies, the whole year already looks gloomy. Take Texaco Inc. As recently as Dec. 2, Chairman and CEO Peter I. Bijur told securities analysts that Texaco was forecasting oil prices of $15 a barrel in 1999 and, to preserve earnings, it planned modest cuts in overhead and capital spending. By late December, however, the hoped-for rebound in oil prices looked impossible. Chief Financial Officer Patrick J. Lynch told BUSINESS WEEK on Dec. 23 that Texaco now assumes prices of $10 to $12 a barrel in 1999 and is planning deeper cuts. Says Lynch: ''It became evident to us that this low-oil-price scenario was going to be with us for a while.''

''ANCIENT HISTORY.'' Texaco has already felt the effects of cheap oil. Last January, analysts were predicting that the company would earn about 80 cents a share, fully diluted, from continuing operations in the fourth quarter of 1998. By Dec. 23, the mean estimate compiled by I/B/E/S Inc. was 36 cents. But Lynch says even that number is ''ancient history'' and points instead toward some recent analyst estimates of 25 cents to 28 cents a share--down roughly 70% from a year earlier's 87 cents.

The new watchword at Texaco is ''manage for cash.'' Lynch says the company will still spend to develop proven fields in such areas as the Gulf of Mexico that it regards as important long-term plays. But it's backing off new exploration. The projected cuts in capital spending have been tripled for 1999, which could take the budget down to $3.7 billion, vs. the $4.6 billion budgeted for 1998. (As oil prices fell in 1998, Texaco's actual capital spending for the year came in at $4 billion.)

In addition, Texaco is accelerating a plan to cut $650 million from other expenses. The original intent was to achieve perhaps $450 million of those cuts in 1999 and the rest in 2000. But now, Lynch says, Texaco is looking for ways to do even more of the cutting in 1999. The company has said it plans to eliminate about 2,000 of its 29,000 jobs worldwide by the end of 1999, mostly through layoffs. In addition, about 10,000 employees will officially be transferred to Texaco's U.S. refining, marketing, and pipeline joint ventures, which began operating in 1998.

Texaco is not alone in cutting. Royal Dutch/Shell Group has announced massive cuts, and on Dec. 29, Conoco said it would slash its workforce by 6%. The day before, oil-services giant Halliburton said it would eliminate 2,750 jobs. As internal cuts become harder to find, oil companies are likely to look for savings through more joint ventures or outright mergers (page 118). By merging, Exxon Corp. and Mobil Corp. figure they can save $2.8 billion a year. At the Dec. 2 Texaco analyst meeting, Bijur said he didn't have ''the urge to merge.'' But Lynch says ''there is considerable analysis and work going on'' about merger and venture opportunities and that ''every possibility of improving shareholder value is on the table.''

A rebound in oil prices would be a godsend, of course. Lynch says Texaco is forecasting $15 to $17 a barrel in 2000, assuming a rebound in Asian demand and a slowing in new production. But skeptics figure that's an assumption that will have to be abandoned--like this year's $15-a-barrel dream. That bodes ill for for profits. Says Fahnestock & Co. analyst Fadel Gheit: ''Oil companies are not earning their cost of capital. It's an industry in liquidation, basically.'' Not a pretty picture.


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Updated Dec. 30, 1998 by bwwebmaster
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