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It's an Embarrassment of Riches for Major Producers

Most consumers pick up a gas pump nozzle about once a week, but they never see a drillbit. That's a problem if you're an energy company holding a bag of money during a period of near-record natural gas, oil and gasoline prices.

Producers reporting first-quarter results last week had to tiptoe through earnings releases and conference calls to deliver good news to investors while not antagonizing politicians and their constituents. But multi-billion dollar profits are hard to miss, and earnings news from Exxon Mobil, BP, Chevron, ConocoPhillips and Apache was anything but unnoticed. While politicians tout a windfall profits tax, $100 energy rebates to taxpayers and other reparative/punitive measures, perhaps even energy companies can take heart in the expectation that high commodity prices are not expected to last.

"Keep in mind that all these profits are cyclical and that we are reaching a crest right now," Houston-based energy analyst John Olson told NGI. "The tide will start going out in the second half of this year. That is the consensus thinking."

Olson pointed out that crude prices were up 28% in the first quarter; natural gas wellhead prices were up 17%; refining margins were up 52%, and NGL frac spreads were up 23%. "So all of that made for some pretty healthy year-to-year gains."

And while prices are high energy companies will do well. The major oil companies are seeing return on equity of around 24% currently while the rest of corporate America is realizing about 16%. Olson said, however, the Wall Street consensus forecast sees lean days ahead. Return on equity in energy is projected to be 19.7% next year and 12.9% in 2008.

Exxon Mobil

Exxon Mobil Corp.'s $8.4 net profit from the first quarter was more than enough to get the goat of consumers and lawmakers, but it wasn't enough to impress analysts, who were expecting results to be a little better. While its U.S. and Canadian natural gas production declined somewhat, that didn't stop Exxon Mobil from posting its greatest first quarter profit ever and the fifth greatest quarterly profit of any public company ever.

Net income in 1Q2006 was $8.4 billion or $1.37/share, up $540 million from 1Q2005 results, which got a one-time $460 million boost from the sale of the company's Sinopec interest. Excluding this special item yields a $1 billion quarterly increase for 1Q2006.

First quarter worldwide natural gas production was 11,199 MMcf/d compared with 10,785 MMcf/d last year, the company said. "Higher volumes from projects in Qatar and increased European demand were partly offset by the impact of mature field decline."

Still, the strong results fell short of analyst expectations. The Wall Street consensus expectation was $1.46/share. Exxon Mobil blamed the lower-than-expected results on litigation and higher tax expenses.

Friedman Billings Ramsey's energy and natural resources group was estimating first quarter earnings would come in at $1.55/share. "As a result of the lower than forecasted quarterly earnings, we're reducing our 2006 estimate from $5.90 to $5.70 but maintaining our outperform rating and $72/share net asset value-derived price target," the firm said in a research note. Exxon closed down 68 cents Thursday at $62.42.

Exxon Mobil's gas production available for sale in the United States declined to 1,707 MMcf/d from 1,897 MMcf/d in 1Q2005. Canadian production declined to 882 MMcf/d from 923 MMcf/d. However, production increased in Europe, Asia Pacific/Middle East, and Russia/Caspian regions.

The average realized price for U.S. gas production was $8.31/Mcf in 1Q 2006, up from $6.18/Mcf in the first quarter of 2005 but down significantly from 4Q2005 when the average was $11.34/Mcf. U.S. price realizations have been stronger than those in the rest of the world for at least the last five quarters, according to company figures.

First quarter upstream spending in the United States was less than one-sixth what it was in the rest of the world. Exxon Mobil spent $548 million during the first quarter in the U.S., up from $441 million, compared to $3.54 billion in the rest of the world, up from $2.37 billion. Total upstream spending was $4.09 billion, up from $2.81 billion in the first quarter of 2005.

BP

At BP plc, residual impacts from last year's Gulf of Mexico hurricanes, higher taxes and a prolonged Texas refinery shutdown sent the company's 1Q2006 net profit down 15% from a year ago, despite higher commodity prices. The London-based major posted a net profit of $5.63 billion, compared with $6.602 billion in 1Q2005.

Last year's first quarter profit, said BP, benefited from $1.07 billion in asset sales, including BP's 10.34% stake in Ormen Lange, a natural gas field off Norway's continental shelf. Quarterly replacement cost profit was $5.282 billion, up 6% from $4.96 billion posted in 1Q2005. Replacement cost profit strips out inventory gains and losses. Wall Street had pegged BP's replacement cost profit to be about $5.1 billion.

Still recovering from hurricane damage in the deepwater Gulf of Mexico, U.S. natural gas production dropped in the quarter to 2.485 Bcf/d from 2.648 Bcf/d in 1Q2005. However, output was up sequentially from 4Q2005's 2.359 Bcf/d. Worldwide gas production reached 8.713 Bcf/d, down slightly from a year ago's output of 8,745 Bcf/d, but up from 4Q2005's 8,458 Bcf/d.

Production of more than 4 MMboe/d was down around 2% compared with a year ago, mostly because of the "lingering effects of last year's Gulf of Mexico hurricanes, notably on the Mars field," BP said. BP owns a 28.5% stake in the deepwater Mars field, which is majority owned and operated by Shell Exploration & Production Co. Shell expects initial production from the Mars platform to resume in late May (see NGI, April 24).

"Looking towards the end of the year we expect a marked pickup in production as a number of major projects come on stream, including Thunderhorse in the Gulf of Mexico, the BTC pipeline and the Shah Deniz gas project in Azerbaijan, and Dalia in Angola," said John Brown, CEO. "World economic growth appears robust. The U.S. appears to have rebounded in the first quarter, Europe continues to show promise of an acceleration of growth, and Asia and Latin America are growing at or around trend. The near-term global outlook appears strong."

U.S. gas prices averaged $9.01/MMBtu (Henry Hub first-of-month index) in the quarter, nearly $4/MMBtu below 4Q2005. "Demand weakness has more than offset supply lost following last year's hurricanes, resulting in a substantial gain in inventories relative to seasonal norms," BP said. "Mild winter weather has contributed to demand softness. As a result, prices have fallen below parity with residual fuel oil. U.S. gas prices are expected to track broadly with oil prices but are vulnerable to further relative declines if demand remains weak."

Chevron

Chevron Corp. joined other top oil majors in reporting colossal quarterly earnings, announcing profit of $4 billion ($1.80/share) for 1Q2006, two cents ahead of Wall Street estimates and up from year-ago profit of $2.68 billion ($1.28/share). Total revenue, including sales and income from equity affiliates, reached $54.62 billion, up from $41.6 billion. Sales jumped 32% to $53.52 billion, well ahead of the $40.49 billion reported in 1Q2005.

The San Ramon, CA-based major attributed its strong revenue increases to higher prices for crude oil, natural gas and refined products, as well as the inclusion of revenue from Unocal Corp., which it acquired in August. If not for continuing oil and natural gas production problems caused by hurricanes Katrina and Rita last year, Chevron would have made an additional $300 million in the quarter, which would have been the highest quarterly profit in the company's 127-year history.

In North America, Chevron's 1Q2006 net gas output improved to 1.79 Bcf/d, compared with 1.6 Bcf/d in 1Q2005, and up from 4Q2005's 1.64 Bcf/d. The company said the sequential gain followed restoration of some of the company's Gulf of Mexico operations.

"Higher earnings in the first quarter were primarily driven by the performance of our upstream business," said CEO Dave O'Reilly in a statement. "Prices for crude oil and natural gas were strong during the period, and oil-equivalent production increased nearly 10% from a year ago as a result of the Unocal acquisition last August. " O'Reilly said the Unocal businesses "have been efficiently integrated. We are on target to capture the savings we anticipated from operational synergies, and the economics of the acquisition as currently assessed are even more favorable than initially estimated."

In the past 12 months, Chevron has achieved a 24% return on capital employed. Capital and exploratory spending was $3 billion in the quarter, up more than 80% from a year ago. Chevron also purchased $1 billion of its common stock in the open market in 1Q2006 as part of a $5 billion buyback program initiated last December.

ConocoPhillips

ConocoPhillips reported that net profit surged in the first quarter, reaching $3.29 billion ($2.34/share), compared with profit of $2.91 billion ($2.05) in 1Q2005. To perhaps inoculate itself from criticism about soaring oil company profits, ConocoPhillips also reported that it reinvested 141% of the net income into developing new resources and its global refining business.

The Exploration and Production (E&P) segment's net income was $2.55 billion, up sequentially from $2.43 billion in the fourth quarter, but well ahead of $1.79 billion reported in 1Q2005. The acquisition of Burlington Resources Inc. closed on the final day of the 2006 quarter, March 31, and its earnings and operating results were not reflected in the quarter.

"We ended the quarter by successfully completing the acquisition of Burlington Resources and are pleased with the progress toward integrating the combined companies," said CEO Jim Mulva in a statement. "This transaction establishes ConocoPhillips as the leading natural gas producer in North America, with a portfolio comprised mainly of high-quality, long-life natural gas reserves."

In the upstream business, ConocoPhillips produced 1.93 million boe/d, including 1.61 million boe/d from its E&P segment and 0.32 million boe/d from its LUKOIL investment segment. Total daily production, including Canadian Syncrude operations and excluding LUKOIL, averaged 1.61 million boe/d, up slightly from the 1.6 million boe/d reported for the same period a year ago. Increased production from the Timor Sea, Venezuela and the U.S. Lower 48 was partially offset by an unscheduled shutdown at the Alaskan Prudhoe Bay operations, as well as lower volumes from Canada, Vietnam and Indonesia.

Total U.S. oil and gas output in the quarter reached 636,000 boe/d, down slightly from 648,000 boe/d in 1Q2005 but slightly ahead of 633,000 boe/d in 4Q2005. Natural gas production in Alaska and the Lower 48 climbed to 1.43 Bcf/d in the quarter, compared with 1.35 Bcf/d reported in 1Q2005. U.S. gas prices in the quarter reached $7.42/Mcf/d, up from $5.57/Mcf reported in 1Q2005.

Gas liquids production in the United States totaled 14,000 bbl/d, up from 13,000 bbl/d from the same period a year ago, and up from 9,000 bbl/d in 4Q2005. Canadian gas production reached 424 MMcf/d, flat compared with the previous quarter but ahead of 417 MMcf/d reported for the same period a year ago.

Kenai, AK liquefied natural gas sales totaled 128 MMcf/d in the quarter at a sales price of $6.45 MMcf/d. The total was down from the 132 MMcf/d reported for the same period a year ago, but the price was lower then at $5.27 MMcf/d.

Apache

Higher prices and overall record production boosted Apache Corp. earnings by 30 cents a share in the first quarter to $1.97/diluted share or $660 million, up from $559 million in 1Q 2005.

Natural gas production of 1.4 Bcf/d was 8% above levels in 1Q2005. However, Apache's U.S. gas production declined to about 601 MMcf/d from 637.8 MMcf/d in the first quarter of 2005. Canadian production rose to nearly 386 MMcf/d from about 347 MMcf/d in 1Q2005. The average price for domestic production was $7.14/Mcf, up from $6.04/Mcf. Canadian production garnered an average of $7.73/Mcf, up from $5.59/Mcf. Production grew significantly in Egypt and Australia, although prices were weaker than in the United States and Canada.

"Apache got off to a strong start in the first quarter, and, barring some unforeseen world-changing event, the coming quarters should be even stronger," said CEO G. Steven Farris. "We are well into a very active drilling campaign for the year; we have closed on the Pioneer acquisition in Argentina, and we plan to close the BP Gulf of Mexico transaction by the end of the second quarter.

"We expect our production growth will continue to build over the remainder of the year. We believe Apache is on track to achieve 12% to 17% production growth in 2006."

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