North America’s independents Wednesday reported strong natural gas production in 3Q2006, but higher-than-expected operating expenses and lower gas prices pummeled quarterly profit. Gas-weighted Devon Energy Corp., Pioneer Natural Resources Corp. and Ultra Petroleum Corp. all reported increases in their gas output, but all of them also posted earnings declines.

The CEO of Oklahoma City-based Devon said high expenses will force a reduction in pricey Canadian exploration and production (E&P) projects in 2007. “We will not invest in low margin projects just to chase production volumes,” CEO J. Larry Nichols told financial analysts. Nichols said the company’s Canadian E&P costs are now the company’s most expensive.

“While the budget is still very much a work in progress, early indications are that we will reduce activity levels in the conventional gas business in Canada,” Nichols said.

Devon’s realized price for natural gas fell 21% to $5.62/Mcf, compared with $7.13/Mcf in 3Q2005. Total quarterly production averaged 602,000 boe/d, 1% higher than the 598,000 boe/d reported in 3Q2005. North American gas production totaled 212 Bcf in the quarter, a rise from 205.8 Bcf. Average daily gas production in the United States was higher at 1,623.8 MMcf/d from 1,485.1 MMcf/d in 3Q2005. Canada’s average daily gas production fell to 662.1 MMcf/d from 725.3 MMcf/d. In the quarter, U.S. gas output rose to 149.4 Bcf, from 136.6 Bcf reported in 3Q2005. Canada contributed 60.9 Bcf in the quarter, down from 66.7 Bcf a year ago.

Lease operating expenses (LOE) increased 20% to $382 million in quarter. Higher ad valorem taxes and repair and maintenance costs, driven by rising oilfield service and supply costs, contributed to the increase. Higher well workover and transportation costs also contributed to the increase in LOE. Production taxes increased 13% to $92 million. General and administrative (G&A) expenses increased 48% to $104 million, mostly on higher employee-related costs.

Pioneer Natural Resources Co. reported quarterly profit dropped 35% from a year ago, while gas production increased 7%. Net income dropped to $80.8 million (64 cents/share), from $123.6 million (88 cents) in 3Q2005. In 3Q2005, income from discontinued operations boosted results by $62.1 million, compared with $473,000 in 3Q2006. Revenue jumped 9% to $432.6 million, up from $397.9 million.

The Dallas-based company’s production costs averaged $11.36/boe. Exploration and abandonment costs were $44 million, which included $13 million for unsuccessful drilling costs, $27 million for geologic and geophysical expenses including seismic and personnel costs and $4 million for acreage and other costs.

Oil and gas sales from continuing operations averaged 98,525 boe/d. Gas production rose to 332.8 MMcf/d from a year ago. However, average gas prices declined to $6.33/Mcf, down from $7.22 in 3Q2005. Pioneer said its production growth is on track in 2006 to reach 36 million boe, near the high end of a guidance range of 33-37 million boe.

Pioneer also increased its 2007 gas hedge position by 91 MMcf/d. The 2007 hedges were added at New York Mercantile Exchange-equivalent prices of more than $9.00/Mcf “in order to protect a portion of the economics associated with the company’s planned 2007 gas drilling program,” the company said.

Pioneer CEO Scott D. Sheffield said he is confident the company will reach a 10% or higher per share growth target in 2007.

Houston-based Ultra Petroleum, with E&P operations concentrated in Wyoming and China, reported earnings of $52.5 million (33 cents/share), down from $60.9 million (38 cents) in 3Q2005. Cash flow was $106.3 million (66 cents/share), essentially unchanged from $108.3 million (67 cents) a year earlier.

Quarterly oil and gas production in Wyoming and overseas jumped 25% from a year ago — a record — to 23.6 Bcfe, up from 18.8 Bcfe in 3Q2005. The total included 20.5 Bcf of gas production in Wyoming, ahead of the 16.1 Bcf produced there in 3Q2005. Including the effects of hedging, average realized gas prices decreased to $5.68/Mcf, down from $6.86 in 3Q2005.

“We continue to be one of the leading companies in delivering organic production growth,” said Ultra CEO Michael D. Watford. “Our third quarter 2006 production increased 25% over year ago numbers and year-to-date production increased 21% over the same period in 2005. We’re delighted with this success in spite of the delays in rig deliveries in Wyoming and facilities installation in Bohai Bay, China.”

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