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Hurricanes Impact E&P Output, but Higher Prices Lift Earnings

Hurricanes last year knocked out a lot of natural gas and oil production for both majors and independents in the final quarter, which affected year-end output. However, four of the top U.S.-based integrated majors, Chevron Corp., ConocoPhillips, Marathon Oil Corp. and Amerada Hess Corp., along with independents Kerr-McGee Corp. and Pogo Producing Co., reported phenomenal earnings growth in 4Q2005 and full-year 2005, boosted by soaring oil and natural gas prices, which overcame all of the production losses.

San Ramon, CA-based Chevron's 4Q profit rose 20% on higher prices and its acquisition of Unocal Corp. Net income rose to $4.14 billion ($1.86/share), from $3.44 billion ($1.63) in 4Q2004. Revenue increased 26% to $53.79 billion from $42.69 billion. However, 4Q profit missed Thomson First Call's mean earnings target of $1.89. For full-year 2005, net income was $14.1 billion ($6.54/share) on total income of $198.2 billion.

Chevron's average worldwide output totaled 2.5 million boe/d. Assisted by the Unocal purchase, Chevron's U.S. gas production rose 20% in the final quarter to 1.638 Bcf/d from 1.618 Bcf/d in 4Q2004. In Canada, 4Q2005 gas production fell to 7 MMcf/d from 10 MMcf/d a year earlier. This year, the company expects production will increase to a range of 2.7-2.8 million boe/d, with additional production coming mainly from properties acquired from Unocal and new project start-ups. Chevron expects 2006 production in the Gulf of Mexico will average about 200,000 boe/d, well below the 300,000 boe/d pre-Katrina, the company said.

Houston-based ConocoPhillips, which announced last month it would buy North American gas producer Burlington Resources (see NGI, Dec. 19, 2005), reported that 4Q earnings rose 52%, offsetting a continued impact from hurricanes on Gulf Coast operations. Profits reached $3.78 billion ($2.61/share), up from $2.48 billion ($1.72) in 4Q2004. Quarterly earnings included a $15 million loss from discontinued operations and a charge of $88 million from the effect of a change in accounting rules. Continuing operations reached $2.69/share, well ahead of Thomson First Call estimates of $2.62, and ahead of the $1.76 recorded for the same period of 2004. For the year, profit ballooned to $13.53 billion ($9.55/share) from $8.13 billion ($5.80) in 2004. Full-year revenue increased to $183.4 billion from $136.9 billion in 2004.

In the final quarter, ConocoPhillips produced 1.88 million boe/d, which included 1.59 million boe/d from the Exploration and Production (E&P) unit. In 4Q2004, E&P recorded 1.52 million boe/d. In the United States, gas output in 4Q2005 reached 1,436 MMcf/d, up from 1,377 MMcf/d in 4Q2004. For the year, domestic gas production was 1,381 MMcf/d, slightly lower than the 1,388 MMcf/d recorded in 2004. Canadian gas production fell in the final quarter to 430 MMcf/d from 442 MMcf/d a year earlier, and it also fell year-over-year to 425 MMcf/d from 433 MMcf/d in 2004.

Asked about rising service costs in the energy sector, which have gone up even more following the hurricanes last year, CEO Jim Mulva said ConocoPhillips was "obviously seeing quite a bit of pressure on the cost side for operations and maintaining production, and we also see it with the large capital programs going forward...the cost pressures as well." The "cost pressures," which the company noted in November "have not really abated much at all," have "pushed up higher development costs [and] operating costs."

Reflecting full ownership of its downstream and growth in upstream income, Marathon's 4Q2005 profit soared, with net income reaching $1.27 billion ($3.43/share), compared with $429 million, ($1.23) a year ago. Revenue was up 21% to $17.3 billion from $14.3 billion. U.S. natural gas sales grew in the quarter, but they were down overall for the year. Excluding a loss on UK natural gas contracts and an accounting rule change, earnings were $1.33 billion ($3.61/share) -- well above Thomson First Call estimates of $3.02 -- and triple 4Q2004 earnings of $415 million ($1.19).

Overall, Marathon estimated average daily output available for sale this year at 365,000-395,000 boe/d, excluding the impact of any transactions. In the United States, net sales of gas rose to 599.1 MMcf/d from 585.3 MMcf/d in 4Q2004. However, for the year, gas sales fell to 577.6 MMcf/d from 631.2 MMcf/d in 2004.

In the U.S. upstream, income was $468 million for the quarter and $1.564 billion for the year, compared with $238 million and $1.073 billion in the same periods of 2004. "The higher sales volumes in the fourth quarter of 2005 are a result of weather-related downtime in the Gulf of Mexico in the comparable period of 2004. The year-over-year increase was a result of higher liquid hydrocarbon and natural gas prices partially offset by lower sales volumes as a result of weather-related downtime in the Gulf of Mexico and natural field declines," Marathon noted in a statement.

New York-based Hess doubled its 4Q profit over a year ago with a more than 100% increase in the sales price of natural gas and a strong contribution from refining and marketing. Hess earned $452 million in the quarter ($4.31/share), up from $229 million ($2.22) in 4Q2004. The result easily topped analyst expectations of $3.26/share. Revenue reached $7.15 billion, nearly double for the same period of 2004. For the full year, net income was $1.242 billion, compared with $977 million in 2004.

Oil and gas production declined to 316,000 boe/d from 346,000 boe/d a year earlier. Lost production in the Gulf of Mexico as a result of the hurricanes cut output by 19,000 boe/d, the company said. For 2005, U.S. gas output was 137 Mcf/d, well below the 171 Mcf/d recorded in 2004. Worldwide, gas production fell to 544 Mcf/d from 2004's 575 Mcf/d. However, Hess made up the difference in prices, selling gas for an average of $11.75/Mcf, up from $5.83 in 4Q2004.

Oklahoma City-based Kerr-McGee, which last week sold the rest of its Gulf assets to W&T Offshore (see related story), also reported soaring profit in the final quarter of 2005. However, after deducting for discontinued operations from numerous asset sales and the spin-off of its chemicals unit, profit was off 3% from a year ago. In 4Q2005, earnings were $2.2 billion ($18.46/share), compared with $133.8 million (86 cents) for the same period of 2004. Profit from continuing operations was $653.9 million, compared with $276.1 million in 4Q2004. Adjusted after-tax income was $125.7 million ($1.07/share), down from $129.7 million (84 cents) in 4Q2004. Thomson First Call analysts had pegged earnings at $1.61/share.

Kerr-McGee's gas sales worldwide fell to 883 MMcf/d from 1.04 Bcf in 4Q2004. Domestically, Kerr-McGee's offshore gas output -- where most of the sales were concentrated -- fell to 288 MMcf/d from 418 MMcf/d in 4Q2004. Domestic onshore gas output fell to 595 MMcf/d from 623 MMcf/d. Gas sales fetched an average price of $7.28/Mcf, up from $5.29 a year earlier.

Houston-based independent Pogo reported the strongest earnings in its history, with 4Q2005 profits nearly tripled to $114.5 million ($1.98/share), compared with $38.3 million (60 cents) in 4Q2004. For full-year 2005, Pogo's net income was $750.7 million ($12.43/share), compared with $261.75 million ($4.10) in 2004. Pogo, which has been on the short list of possible acquisition targets, also reported year-end reserves grew by 15%, its fourteenth consecutive year of growth.

In 2005, Pogo added proven equivalent oil and natural gas reserves of 761.6 Bcfe. Net of a Thailand-based asset sale (340.8 Bcfe of proven reserves), Pogo replaced an estimated 268% of its 2005 production of 156.8 Bcfe, which included Northrock's estimated 604.1 Bcfe of reserves in Canada. Pogo's year-end 2005 estimated equivalent proven oil and natural gas reserves, as calculated by its independent engineering consultants, rose to a record 2.042 Tcfe, with 657.2 Bcfe in Canada. Averaged across the full year, Pogo's 2005 production was negatively impacted by Katrina and Rita by 40 MMcf/d and 10,000 bbl/d of oil. As 2006 begins, only 4,000 net bbl/d and 20 MMcf/d remain shut in as a lingering result of the 2005 hurricanes.

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