Acquisitions Conceal Gas Production Struggle
On average, U.S. gas production appears to have been up slightly (2%,
according to financial reports from 25 producers) at the end of the third
quarter compared to 3Q99. However, there was a wide variation among producers,
with some reporting huge increases, such as Mitchell Energy, Devon and
Coastal, while others reported large declines, including Amerada Hess,
Texaco, Kerr McGee and Ocean Energy (see preliminary tally).
Nearly all of the producers showed huge realized gas price increases,
with an average hike of $1.40/Mcf. Occidental showed the largest price
increase, a jump of $2.06/Mcf in its realized gas prices. Cabot Oil &
Gas managed to capture an increase of only 58 cents, however, with a realized
price of $2.90/Mcf for 3Q2000.
But the production contrast may have been even more striking than the
prices as producers at varying speeds and with varying techniques began
to make a turnaround from last year's slump to this year's recovery. Acquisitions
are up significantly this year and are expected to continue to increase,
which has caused difficulty for those attempting to make apples-to-apples
production comparisons year to year, several analysts noted. That is the
case with Devon Energy, for example, which in the past year and a half
has had three acquisitions, including the latest pooling-of-interests merger
with Santa Fe Snyder. Devon reported a 37% increase in U.S. natural gas
production to 972 MMcf/d. Anadarko reported a massive 229% increase in
U.S. gas production to 1,498 MMcf/d. But when 1999 production figures from
its merger partner Union Pacific Resources are combined with its own 3Q99
figures, the company shows a U.S. gas production decline of 12%.
Others, such as Apache, had medium sized purchases but also made large
gains through the drill bit. Apache reported a 15% increase in U.S. gas
production to 572 MMcf/d.
Then there were those who had been hugely successful in finding gas
in the ground during the quarter. Mitchell Energy, which raised its gas
production by 38%, topped the list in the plus column on a percentage basis.
It did it the old fashioned way, i.e., through the drill bit, as did Coastal,
up 33% to 877 MMcf/d, and Cross Timbers, which reported an 18% hike in
U.S. gas production to 342 MMcf/d. Still others showed large declines,
such as Ocean --- down 10% to 386 MMcf/d --- because of asset sales.
"Most of the growth that your seeing among the E&P companies
is coming from acquisitions," said J.P. Morgan producer analyst Waqar
Syed. "There is some organic growth, but it's just a few companies."
Syed laughed when asked if he expected the strong acquisition trend to
continue. "Yeah, I expected it to continue because companies aren't
growing production through the drill bit so they have to acquire others.
"You have to explore your way out this time, but companies still
are not willing to take that much risk. These companies will go and drill
in areas that they know. They'll do some infill drilling, workovers and
easy stuff like that. But that won't materially change your production
outlook if you're just fighting high decline rates," said Syed. "They're
just finding enough gas to offset declines."
Irene Haas of Sanders Morris Harris agreed that many of the production
increases being reported are a result of consolidation among producers.
"There has been and will be more consolidation going on because for
a lot of the small firms it just doesn't make any sense any more,"
she said. "They really have few compelling reasons to be public anymore
because the equity market is not looking to the small caps very favorably.
For those who have gotten themselves in a bind [over the past year or two],
be it through write downs or things of that nature, and still have not
been able to repair it, I think they're going to have a tough time getting
money out of the public market. For that reason, I don't think you will
see very many IPO's coming out. Secondarily, the existing smaller companies
will just be consolidated by the Devons and Apaches of the world."
Haas believes when all is said and done for the third quarter she will
see a production decline. Going forward, she expects to see little change
in that picture. "I expect third quarter, this year compared to last
year, to be down because it's been hard. I just don't expect the big players,
such as BP Amoco and ExxonMobil to grow a whole lot." ExxonMobil reported
a 0.2% decline in U.S. gas production for the quarter.
"The geology is getting real mature," Haas noted. "It's
hard to find new fields or deposits large enough to make those numbers
grow substantially unless you go ultradeep or do a lot of coal-bed methane.
I think we are hitting a bit of a brick wall here. I'm skeptical about
whether all the additional drilling is really generating an incremental
increase in supply."
Goldman Sachs released a report last week projecting U.S. gas production
growth next year of 4-5%. "I just couldn't believe it," said
Haas. "I'm having cognitive difficulty expecting that much growth.
The geology just doesn't support it. It's physically impossible."
Syed concurred. "A lot of these companies will make claims that
they will grow production by X and X amounts but very few of them will
actually live up to that. A lot of companies will miss their numbers. That's
what we've seen historically. I think we'll see somewhere between zero
and 2% gas production growth. That would be a good number for next year.
But if you have good demand growth, I don't think there will be enough
to meet that. You will have a tight market. If demand suffers to like 1-1.5%
growth, they should be able to meet that."
Haas noted that the tendency among producers when gas prices are high
is to drill more but to drill for smaller finds with high decline rates.
"That's the kind of game we're playing right now. Simply because the
rig count doubles doesn't mean they are being as efficient as they have
been in the past. They're drilling for stuff that can go poof!"
Salomon Smith Barney uses a model based on the Baker Hughes rig count
that projects production additions per rig using a historical calculation.
Although some observers, such as Irene Haas, might expect that model to
be declining in accuracy, Michael Schmitz, Salomon's small cap producer
analyst, insists it's been on target this year.
"It's saying production for the third quarter versus the second
quarter (2000) should be up around 1%. It says third quarter of this year
versus third quarter of last year is still down about 0.5%.
"We also take a survey of some of the larger producers that represents
about 50-65% of production," said Schmitz. "Looking at third
quarter compared to second quarter based on 20 companies that have actually
reported results and another 20 that have estimated results, we show U.S.
gas production up about 1.2%. And for 3Q2000 versus 3Q1999, our survey
shows it down about 0.3%." But the jury is still out because half
the producers still have not released their third quarter numbers.
Large Variations in 3Q U.S. Production Results
U.S. Gas Production (MMcf/d) U.S. Realized Prices
3Q2000 3Q1999 Change 3Q2000 3Q1999 Change
Chevron 3,535 3,436 3% $4.42 NA NA
ExxonMobil 2,867 2,872 -0.2% NA NA NA
Burlington 1,484 1,382 7% $2.89 $2.20 $0.69
Texaco 1,273 1,416 -10% $4.01 $2.44 $1.57
Anadarko* 1,260 1,434 -12% $4.01 $2.40 $1.61
Devon** 972 711 37% $3.77 $2.33 $1.44
Coastal 877 659 33% $4.22 $2.47 $1.75
Conoco 826 843 -2% $3.90 $2.09 $1.81
Unocal 793 729 9% $4.26 $2.26 $2.00
Phillips 774 826 -6% $3.83 $2.33 $1.50
Marathon 716 731 -2% $3.61 $2.22 $1.39
Occidental 687 673 2% $4.18 $2.12 $2.06
EOG 652 642 2% $4.14 $2.40 $1.74
Apache 572 495 15% $4.22 $2.58 $1.64
El Paso 503 520 -3% $2.32 $2.18 $0.14
Kerr McGee** 464 516 -10% $4.42 $2.66 $1.76
Ocean 386 428 -10% $4.09 $2.38 $1.71
Cross Timbers 342 289 18% $3.68 $2.32 $1.36
Mitchell 320 232 38% $4.50 $2.79 $1.71
Amerada Hess 282 346 -18% $3.98 $2.39 $1.59
Pioneer 235 240 -2% $3.65 $2.39 $1.26
Equitable** 205 182 12% $3.10 $2.41 $0.69
HS Resources 203 192 6% $3.24 $2.33 $0.91
Cabot O&G 169 186 -9% $2.90 $2.32 $0.58
Pogo 159 148 8% $3.11 $2.32 $0.79
National Fuel 109 103 6% $4.44 $2.60 $1.84
Total/Average 20,664 20,230 2% $3.77 $2.37 $1.40
* Combines UPR and Anadarko production figures for 3Q99
** Prices are simple averages of several regions.
*** Prices include Canadian gas prices.