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Price Squeeze Sets Back Independents

Price Squeeze Sets Back Independents

Results of Burlington Resources, Apache Corp., Vastar Resources, and Union Pacific Resources began the tale of woe that independent producers' will be telling with their third quarter earnings. The companies cited a common cause for their malaise - depressed gas and oil prices and liquids margins that are at historic lows.

Burlington's realized gas prices dropped 3% to $1.89/Mcf from $1.95/Mcf in the third quarter of 1997. Oil prices fell 31% to $12.60 per barrel in 1998's third quarter from $18.28 per barrel in the same period of 1997. Burlington gas sales averaged 1,630 MMcf/d during the third quarter of 1998 compared to 1,671 MMcf/d in the third quarter of 1997.

Apache realized an average gas price of $1.86/Mcf, down 9% from $2.05/Mcf in the third quarter of 1997. Apache's oil sold at an average price of $12.49 per barrel, down 32% from an average price of $18.48 in the year earlier period. Apache gas production averaged 576 MMcf/d compared with 620 MMcf/d in the comparable 1997 period.

Vastar realized wellhead prices of $1.79/Mcf for gas, down from $1.86/Mcf during last year's third quarter. Crude oil price realizations were $13.11/barrel, down from $19.59/barrel during last year's third quarter. NGL prices were $8.38/barrel, down from $11.34/barrel during the third quarter of 1997. Gas represented 78% of Vastar production. During the third quarter gas production rose 10% to 977 MMcf/d, from 888 MMcf/d.

Production of all three companies was impacted by storms and hurricanes in the Gulf of Mexico.

UPR had a 68% increase, to 2,605 MMcf/d, in third-quarter daily production volumes, up from 1,550 MMcf/d for the same period last year. But like other independents, the company was hit by low gas and oil prices, as well as high debt service levels associated with the 1998 acquisition of Norcen Energy Resources Ltd. UPR sold its domestic produced gas for an average of $1.73/Mcf in the third quarter, down from $1.85/Mcf in Q3 1997. However, Canadian gas production sold for an average of $1.25/Mcf, up from $1.18/Mcf. UPR domestic crude prices were off to an average of $12.43/barrel from $17.98/barrel, and Canadian oil production was down sharply to $8.73/barrel from $20.24/barrel.

Burlington reported third quarter net income of $15 million, or 8 cents/share. For the same period last year, the company had net income of $65 million, or 37 cents/share. Operating cash flow for the third quarter of 1998 was $231 million compared to $269 million in the same period in 1997.

Apache reported third quarter net income of $2.6 million, or 3 cents/share, down from $30.8 million, or 34 cents/share, in the prior-year period. Cash from operations totaled $96.9 million, compared with $142.3 million in 1997's third quarter.

"Apache is in good shape to operate in a difficult time for the oil and gas industry," said G. Steven Farris, president. "When we decided to sell producing properties late last year, we traded high-cost production for a stronger balance sheet. Our third-quarter production was below what it would have been without the property sales. However, with our increased financial flexibility, we can continue to grow through drilling and exploitation, by acquiring the right assets in the right place at the right price, or by a combination of both."

Vastar reported third-quarter 1998 earnings of $37.6 million, 39 cents/share, compared to $52.4 million, 54 cents/share, reported in the third quarter of 1997. "Vastar continues to operate profitably despite the unfavorable market conditions that are impacting the entire industry, said CEO Charles D. Davidson. "Our low costs coupled with record production volumes have enabled us to maintain our base investment programs while positioning Vastar for the future."

Bobby S. Shackouls, Burlington CEO, lamented the weak price environment but said the company will push ahead with its capital spending plans. "Financial results for the third quarter of 1998 were adversely impacted by continued low oil prices, moderate gas prices and unscheduled production interruptions. We are pleased to have posted positive earnings for the quarter, given the pricing environment the industry has experienced. The company's financial strength allows us to prudently maintain our capital program and continue moving ahead with our long-term growth strategy, in spite of short-term price declines."

UPR reported a net loss of $17 million compared to net income of $67 million in the third quarter of 1997. Earnings per share declined to a loss of seven cents a share, down from a gain of 27 cents a share a year earlier. "Our entire industry is operating in difficult conditions - crude oil prices are as low as they have been in half-a-century when adjusted for inflation. At the same time, we at UPR are digesting a major acquisition that will prove to be positive to the future of our company," said CEO Jack Messman. "While some in our industry are struggling to survive, we have more than doubled our asset base, increased production by 68% this quarter, and are on track with our de-leveraging program.

"De-leveraging is moving ahead." The company signed purchase-sales agreements on several other properties, and is negotiating the properties not yet sold, Messman said. UPR said last week its Canadian subsidiary has nearly completed its 1998 property divestiture program.

Joe Fisher, Houston

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