Weak natural gas prices in the third quarter have so far moved Alberta Energy Co. Ltd. to escalate a maintenance program and reduce its produced gas volumes by about 50 MMcf/d. At Burlington Resources Inc., total third quarter production actually increased 2%, but analysts noted on Thursday that the Houston-based producer probably will be an exception to the rule for the next three quarters — as producers face the likelihood of lower earnings until energy prices rebound.

However, instead of curtailing production, which EOG Resources and Newfield Exploration recently said they plan to do (see Daily GPI, Sept. 26), some analysts expect to see more maintenance activities like those begun at AEC, where drilling and exploration activity will slow but work will continue on other activities. As the exploration and production (E&P) companies have begun reporting their third quarter earnings, many are highlighting strong fuel sales and opportunities they plan into 2002 — when natural gas and oil prices may rise.

Irene Haas of Sanders Morris Harris in Houston said that Burlington, which may have had higher production figures but lost money in the third quarter, will do “okay” in light of the Canadian Hunter acquisition (see Daily GPI, Oct. 10). However, in general, she said, Burlington’s production rise will be an exception. Into the fourth quarter and through the second quarter of 2002, Haas said, “I would expect to see a lot of E&Ps lower their production expectations.”

Haas said that the lowered expectations are a function of price, and for the foreseeable future, the “gas prices will be soft [and]…oil prices are uncertain.” She said with that uncertainty, E&Ps are more likely to spend less money until they can get a “better footing.” Haas said she thought there would be more announcements about production curtailments. She expects those announcements to come during third quarter earnings releases or into the first quarter. National Fuel said yesterday it probably would curtail production in the first quarter (see related story).

“Ultimately, the companies have to make a profit,” Haas said, and with the softening market, it will be important for them to ensure their companies are on solid ground instead of spending money on exploitation and drilling. However, for those companies “who have cash and a good balance sheet,” Haas expects to hear about additional acquisitions and consolidations. “This is a better time to buy, and I foresee more” from the majors, she said.

Tom Driscoll of Lehman Brothers disagreed with Haas that companies may begin to shut in production. Driscoll expects, however, to see a slowdown on the drilling side.”Prices have to rebound before you see any upswing on the drilling,” he said. With the volatility of gas prices, Driscoll said it’s difficult for any of the E&Ps to get a handle on the “forward curve,” so they move resources to maintenance activities until the prices meet their expectations.

For Calgary-based AEC, production may have been down, but its third quarter saw record oil and gas sales of 368,000 boe/d, a 21% increase from the third quarter a year ago. Third quarter daily natural gas sales were up 27% to 1.4 Bcf, while oil and liquid sales were up 13% to nearly 136,000 bbl/d over last year. The midstream division also saw a 68% increase in operating cash flow.

“Our strong operating performance was not able to overcome the dramatic slump in natural gas prices and the retreat in oil prices, but our operational progress has never been better,” said CEO Gwyn Morgan. He noted that the first nine months of the year were “highlighted by discoveries, acquisitions and dispositions” that strengthened AEC’s future. “We are in an outstanding position to capitalize on the expected return of the natural gas story.”

Morgan said that the “quality of AEC’s upstream assets is evidenced” by its growth in oil and gas sales, and has targeted a sales growth rate “exceeding 35% from existing assets to a forecast of more than 500,000 boe/d by 2004.” AEC also injected about 70 MMcf/d into storage in the third quarter and expects to enter the winter heating season with about 22 Bcf in storage.

However, things come into focus when looking at the earnings figures — and AEC is no exception. For the third quarter, AEC’s cash from operations was C$436 million, or C$2.66 per share diluted, a 23% decrease from the third quarter of 2000. Net earnings were down 16% to C$230 million.

Third quarter earnings included a gain of C$100 million after tax on the sale of the Jonah Gas Gathering Co., net of the cost of closing out purchased gas contracts. Houston-based Texas Eastern Products Pipeline Co. LLC finalized its acquisition of the Jonah Gas Gathering Co. from Green River Pipeline LLC and McMurry Oil Co., both wholly owned subsidiaries of AEC earlier this month (see Daily GPI, Oct. 2).

At Burlington, a conference call with the investment community on Thursday also highlighted its increased production in the third quarter and its ramping up for the coming year — when it expects to see 3-8% growth coming from its acquisition of Canadian Hunter. That deal is expected to close as early as Nov. 20. However, executives downplayed the reduced earnings report.

Burlington reported net income of $73 million for the quarter, or $0.36 per diluted share, compared to net income of $200 million or $0.93 per share for the same period a year ago. Total production, however, increased 2% to 2,326 MMcfe/d, or by 8% per diluted share. “The production increase was more than offset by significantly lower commodity prices,” Burlington stated in its income release.

Burlington CFO Steven J. Shapiro said during the teleconference on earnings that “volumes in the third quarter were in line” with forecasts, and said that the company had been “very active…despite the lower time for drilling.” He said the company offset some drilling programs to focus on nonrestrictive access areas and the fourth quarter would see a “ramping up in drilling speed.”

Shapiro cautioned that despite maintaining a “fair level of high activity,” the company would “continue to monitor the conditions” on whether to reduce drilling into next year. For now, he said, the company is focusing on “executing a busy winter schedule of drilling in Canada,” bringing Canadian Hunter into the fold by the end of the year and beginning planned divestitures in Gulf of Mexico assets and non-core onshore assets.” He would no elaborate on the divestitures, but said the company was selling “some of its higher cost operating things.”

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