Unocal Posts Record Net Earnings in Second Quarter

Unocal Corporation (NYSE: UCL) reported record preliminary net earnings for the second quarter 2004 of $341 million, or $1.25 per share (diluted), 93 percent above the $177 million, or 68 cents per share (diluted), reported in the same period a year ago. The record earnings included a number of special items discussed below in connection with Unocal's adjusted after-tax earnings.

Unocal's preliminary adjusted after-tax earnings for the second quarter 2004 were $231 million, or 86 cents per share (diluted). This compares with the Thomson/First Call mean of analyst estimates (published July 26, 2004) of 83 cents per share. Unocal's adjusted after-tax earnings were $191 million, or 73 cents per share (diluted), in the second quarter 2003, and $239 million, or 89 cents per share (diluted), in the first quarter 2004. Adjusted after- tax earnings are net earnings excluding special items (discussed below) and cumulative effects of accounting changes.



     CONSOLIDATED RESULTS (UNAUDITED)

     Millions of dollars except                    2nd Q     1st Q     2nd Q
      per share amounts                             2004      2004      2003

     Earnings from continuing operations            $282      $266      $165
     Earnings from discontinued operations            59         3        12

     Net earnings                                    341       269       177

       Less: Special items in continuing
        operations                                    54        30      (22)
       Less: Special items in discontinued
        operations                                    56        --         8

     Adjusted after-tax earnings                    $231      $239      $191

     DILUTED EARNINGS PER SHARE
      DATA (UNAUDITED)

     Net earnings per share:
       Continuing operations                       $1.04     $0.99     $0.64
       Discontinued operations                      0.21      0.01      0.04

     Total net earnings per share                  $1.25     $1.00     $0.68

     Adjusted after-tax earnings per share         $0.86     $0.89     $0.73

     REVENUES FROM CONTINUING
      OPERATIONS (UNAUDITED)                      $1,980    $1,885    $1,613


"We had an outstanding second quarter, recording the highest quarterly profit in the company's history," said Charles R. Williamson, Unocal chairman, chief executive officer and president. "In the second quarter, we benefited from higher commodity prices and lower exploration expense."

Williamson went on to say, "We continued to execute on our major development programs in the Caspian Sea, Thailand, Bangladesh and deepwater Gulf of Mexico -- programs that we believe will contribute to production growth in 2005 and 2006."

Recent operations highlights
Unocal's operational highlights and other developments during the second quarter and through the date of this news release include:

  • Deepwater oil discovery drilled on the Tobago prospect in the Gulf of Mexico (Unocal operator, 40.01% working interest)
  • Deepwater appraisal wells encountered hydrocarbons on the St. Malo prospect in the Gulf of Mexico (Unocal operator, 28.75% working interest) and on the deepwater Ranggas, Gehem and Gula prospects in Indonesia (Unocal operator of production-sharing contracts (PSCs), 80% working interest)
  • Ramp-up of production continued on the deepwater West Seno project in Indonesia (Unocal operator of PSC, 90% working interest), although slower than initially forecast
  • Construction progressed on the Phase 1 and 2 developments of the Azerbaijan International Operating Company (AIOC) project in the Caspian Sea (Unocal, 10.28% working interest); first oil at the wellhead expected in early 2005 for Phase 1
  • AIOC participant companies are reviewing the Phase 3 development project for approval; official sanction expected by year-end 2004
  • Approximately 70 percent of construction completed on the Baku-Tbilisi-Ceyhan export pipeline from the Caspian Sea (Unocal, 8.9% equity interest)
  • Sold certain fee mineral interests in the U.S. for approximately $190 million
  • Settlement of an eight-year dispute over operation of the Tiwi and Mak-Ban geothermal steam fields in the Philippines
  • Arbitration panel decision received in dispute over gas deliveries to Agrium's Kenai, Alaska, fertilizer plant; Unocal is required to pay $36 million for past underdeliveries through April 2004 plus $2 million in interest
  • Approximately $67 million cash received from the sale of Unocal's indirect interest in its last remaining oil and natural gas assets in Brazil; possible future payments contingent on achieving certain natural gas prices and/or volume thresholds
  • Installed a floating storage unit for oil production from fields in the Gulf of Thailand that resulted in decreased production during the installation process


  • 2Q 2004 financial and operating details
    In the second quarter 2004, after-tax special items included a $78 million gain from the sale of North American assets, a $46 million gain from the settlement of litigation related to Unocal's Philippine geothermal business, and $27 million for net settlements and adjustments relating to tax matters. Partially offsetting these gains were environmental and litigation provisions of $13 million and a provision related to the arbitration settlement on Alaska gas deliveries of $29 million.

    Unocal's second quarter 2004 adjusted after-tax earnings (compared with 2Q 2003) reflected higher worldwide crude oil and natural gas prices and lower exploration expense. These positive factors were partially offset by lower worldwide natural gas and liquids production and higher dry hole costs.

    Worldwide hydrocarbon liquids and natural gas production for the second quarter 2004 averaged 404,000 barrels of oil equivalent (BOE) per day, compared with 463,000 BOE per day in the same period a year ago. The production decline was due primarily to the sale of oil and gas producing assets in North America, which accounted for nearly 34,000 BOE per day during 2003, natural production declines in North America, and lower contractor's cost recovery barrels from certain PSCs in Asia, as a result of higher commodity prices and recovery of sunk costs, which reduced production by about 7,000 BOE per day.

    Second-quarter 2004 worldwide price realizations (including hedging activities) for natural gas averaged $3.65 per thousand cubic feet (mcf), up from $3.53 during the prior year's second quarter. The company's second quarter 2004 worldwide liquids price realizations (including hedging activities) were $32.61 per barrel, up from $25.36 in the second quarter 2003. Hedging activities in the 2004 second quarter decreased worldwide liquids realizations by $1.94 per barrel and decreased worldwide natural gas realizations by 11 cents per mcf.

    Unocal's preliminary EBITDAX for the second quarter 2004 was $762 million, or $2.74 per share (diluted). This compares with $720 million, or $2.65 per share (diluted), for the same period in 2003. EBITDAX is net earnings before interest, taxes, depreciation, depletion and amortization, impairments, exploration expenses, dry hole costs, special items, and cumulative effects of accounting changes.

    The company's total consolidated long-term debt (including current maturities) was $3.34 billion at June 30, 2004. Because of an accounting rule change, in the first quarter 2004 the $522 million obligation for the Unocal Capital Trust convertible preferred securities was removed from the balance sheet and replaced by a debt liability of $538 million in 6-1/4-percent junior subordinated debentures of Unocal payable to Unocal Capital Trust. Cash and cash-equivalents were $939 million at June 30, 2004.

    Six-months results
    Preliminary net earnings for the first six months of 2004 were $610 million, or $2.25 per share (diluted), compared with $311 million, or $1.20 per share (diluted), reported for the same period a year ago.

    Unocal's preliminary adjusted after-tax earnings for the six months 2004 were $470 million, or $1.75 per share (diluted). Unocal's adjusted after-tax earnings were $420 million, or $1.60 per share (diluted), for the six months 2003.

    
    
         CONSOLIDATED RESULTS (UNAUDITED)
                                                          For the Six Months
                                                            Ended June 30,
         Millions of dollars except
          per share amounts                              2004            2003
    
         Earnings from continuing operations             $548            $379
         Earnings from discontinued operations             62              15
         Cumulative effect of accounting changes           --             (83)
    
         Net earnings                                     610             311
    
           Less: Special items in continuing
            operations                                     84             (34)
           Less: Special items in discontinued
            operations                                     56               8
           Less: Cumulative effects of accounting
            changes                                        --             (83)
    
         Adjusted after-tax earnings                     $470            $420
    
         DILUTED EARNINGS PER SHARE
          DATA (UNAUDITED)
    
         Net earnings per share:
           Continuing operations                        $2.03           $1.45
           Discontinued operations                       0.22            0.05
           Cumulative effect of accounting changes         --           (0.30)
    
         Total net earnings per share                   $2.25           $1.20
    
         Adjusted after-tax earnings per share          $1.75           $1.60
    
         REVENUES FROM CONTINUING
          OPERATIONS (UNAUDITED)                       $3,865          $3,395
    


    3Q 2004 earnings outlook
    For the third quarter 2004, Unocal is forecasting adjusted after-tax earnings of 90 cents to $1.00 per share (diluted). This forecast compares with the Thomson/First Call mean of analyst estimates (published July 26, 2004) of 75 cents per share for the third quarter 2004. Unocal's third quarter forecast assumes average NYMEX benchmark prices of $39.90 per barrel of crude oil and $6.15 per million British thermal units (mmBtu) for North America natural gas for the period.

    Unocal's third quarter 2004 adjusted after-tax earnings are expected to change $8 million for every $1 change in its average worldwide realized price for crude oil and $3 million for every 10-cent change in its average realized North America natural gas price, excluding the effect of hedging activities. The forecast also assumes pretax dry hole costs in the third quarter of $15 to $25 million.

    The third-quarter adjusted after-tax earnings forecast excludes special items and accounting changes. Because of the inherent uncertainty related to these items, determining whether or when they will occur and quantifying their dollar impact, Unocal does not believe it is able to provide a meaningful forecast of third-quarter net earnings.

    2004 production outlook
    In the past, Unocal has had a goal to provide investors with a forecast amount for future production volumes that had an equal likelihood of being below or above the actual amounts. Because recent actual production levels have often fallen below Unocal's estimates, the company has decided to adopt a new approach for its production forecasts.

    Previous production estimates have been affected by factors such as different than anticipated declines, project start-up timing, and performance of new projects. In addition, the company's production is sensitive to constrained markets and/or pipeline capacity, and by the volatility associated with oil price changes in Unocal's PSCs.

    Beginning with today's outlook, Unocal will now offer production forecasts that the company expects will be exceeded by actual production. Accordingly, the production outlook based on the prior methodology is being revised from approximately 425,000 BOE per day to approximately 400,000 BOE per day for the full-year 2004. This reduced forecast reflects lower volumes in the second half of the year (annualized basis) due to dispositions of producing assets in the U.S. onshore and in Brazil (4,000 BOE per day), as well as the impact of higher prices on PSCs (3,000 BOE per day), infrastructure turnarounds, reduced West Seno performance (8,000 BOE per day), and other various factors (10,000 BOE per day).

    As a part of this new approach, Unocal will also disclose on its website additional detailed ranges of the numerous areas of production, which describe the company's lowest and highest production estimates in those areas. In locations where Unocal is limited by market demand or pipeline capacity, the range will be between the contract minimum and the highest past production or the estimated capacity limits of the producing assets. A sensitivity factor will also be provided to adjust future production for the impacts of PSC adjustments due to changes in oil prices.
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