Barrett Resources Takes a Hit On Low-Priced Sales
One of the more promising independent natural gas producing
companies, Barrett Resources Corp., announced last week its
earnings will suffer over the next few years from forward fixed
price sales in the $2.50/MMBtu range, well below current market
prices above $4/MMBtu, for a significant portion of its production.
Approximately 22 Bcf of Denver-based Barrett's projected 116 Bcf
of production in 2000 will go to fulfill contracts averaging
$2.55/MMBtu. This is in addition to previously disclosed hedges on
23.1 Bcf of gas production in 2000. In 2001 and 2002 a total of
12.5 Bcf each year will be sold at prices averaging $2.43/MMBtu. In
the out years an aggregate of 22 Bcf in declining annual levels
will go for between $2.40 and $2.47.
"Based upon the substantial increase in natural gas prices over
the last three months, we estimate second quarter mark-to-market
accounting treatment will cause a non-cash expense of $25 to $31
million, net of tax," said Frank Keller, Barrett's CFO.
Company officials were quick to point out that production,
drilling and cash flow all are strong, and even at the below-market
levels "our gas sales are very profitable at these prices." Also,
about 60% of production in 2000 and 70% in 2001 will be sold at
Accounting for these positions at an average 2000 Nymex price of
$3.40/MMBTU, Barrett anticipates 2000 cash flow of $5.20 to $5.50
per share. The company's stock, which had risen as high as $40 in
May, closed Friday at 30 and 7/16.
Peter Dea, who took over as CEO in March with the retirement of
the company's founder, William J. Barrett, explained that the
increasingly volatile market and multiple out-moded in-house
tracking systems were to blame for the problems. They were
discovered when the company brought in Arthur Andersen to reconcile
the systems and recommend a new comprehensive risk management
system capable of complex monitoring and quick reconciliation.
"This new, upgraded natural gas risk management system that
Arthur Andersen began implementing in March 2000 will be
operational in the third quarter of 2000," Dea said. "Considering
the tremendous volatility in natural gas prices, financial trading
activity will be virtually eliminated unless it is required to
manage our current positions and requires my approval."
Dea said Barrett would be continuing its capital expenditures as
planned, which include expanded exploration and production
drilling. The company currently is producing over 300 MMcf/d. It
was recently named as the second most active driller in the U.S. by
a national magazine. He also commented he believed a number of
independents, facing for the first time the highly volatile
upward-trending prices, may be experiencing similar problems.
The company, focused primarily in the Rocky Mountain region, is
active in the Powder River Basin Coal Bed Methane play and Piceance
Basin. It also has properties in the Mid-Continent and Gulf of