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Barrett Resources Takes a Hit On Low-Priced Sales

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 market prices.

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 Mexico regions.

Ellen Beswick

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