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Majors' Profits Fail to Impress Analysts, Independents Show Gains

May 2, 2005
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Producer earnings topped the charts last week, with most of the majors and leading independents with stellar profits. Most analysts, however, were not impressed because of lower production numbers among the majors. Many of the majors reported double digit earnings gains from a year ago: ExxonMobil Corp., 44%, Royal Dutch/Shell Group, 42%, Unocal, 69%, but they also reported less worldwide production across the board.

For the independents, it was a somewhat different story. At least some of them had higher production numbers while also reporting much higher earnings results. EOG's production for example was up 19%. Leading independents Anadarko Petroleum Corp. and Apache Corp. also posted higher oil and natural gas sales worldwide.

Here's a review of some of the producers' earnings reports from last week.

ExxonMobil Corp., the number one public company in the world, earned $7.86 billion ($1.22/share) in the quarter, compared with $5.44 billion (83 cents) in 1Q2004. Excluding special items, earnings were $1.15/share, which is 5 cents lower than Thomson First Call estimates.

Natural field declines in mature areas, lower demand in Europe and divestment impacts led to lower oil and gas output, the oil major said. Even though the company reported higher volumes in Qatar, worldwide natural gas production fell to 10,753 MMcf/d, down from 11,488 MMcf/d in 1Q2004. On an oil-equivalent basis, production decreased by 5%. Excluding divestment and entitlement effects, production decreased by 2%.

In North America, ExxonMobil's natural gas production available for sale fell to 2.8 Bcf/d, down from 3.085 Bcf/d in 1Q2004. Worldwide, oil-equivalent production fell to 4.3 billion boe/d from 4.55 billion boe/d.

BP plc's chief executive said last week that a better-than-expected 1Q2005 earnings increase -- up 29% from a year earlier -- is a sign of things to come this year as oil and natural gas prices remain high. Using a replacement cost profit basis for earnings, BP reported that earnings were up to $5.491 billion from $4.264 billion in 1Q2004. Replacement cost profit eliminates the impact of inventory gains and losses from the bottom line. Net profit was $6.663 billion, compared with $4.946 billion a year earlier.

"This strong start in 2005 reflects the results of our significant investment program over the past years and improvements in underlying performance," said CEO John Browne. "Our strategy is unchanged. We continue to execute it with discipline and focus. Strengthening cash flow enabled shareholder distributions in the form of dividends and share buybacks amounting to $4 billion in the quarter."

BP expects oil to remain above $40/bbl "for the rest of the year on the back of world consumption growth and limited spare production capacity."

Royal Dutch/Shell Group reported 1Q2005 earnings rose 40% from a year earlier to $6.8 billion, compared with $4.85 billion in 1Q2004. The company recorded a net gain of $220 million in the quarter, which included gains from divestments, partly offset by a mark-to-market charge of $172 million related to long-term natural gas contracts. In the year-earlier period, Shell took a net credit of $490 million.

Oil and gas production were down worldwide. Crude oil production was 2.1 million bbl/d from 2.3 million bbl/d in 1Q2004, an 8% loss. Gas production available for sale fell to 9.875 Bcf/d from 10.05 Bcf/d in 1Q2004, a 2% decline. Excluding divestments, Shell's gas production actually rose by 4%. The biggest gains were in its liquefied natural gas unit, where sales were up 15% to 2.88 million tons from 2.5 million tons in 1Q2004.

Like its peers, ChevronTexaco Corp. earnings were sky high, but they still failed to impress analysts. The company also reported a 7% decline over 1Q2004 in worldwide oil-equivalent production. Most of the decline, said the producer, was associated with asset sales, cost recovery and royalty provisions, as well as a shut in from last September's Hurricane Ivan.

Quarterly net income rose 4% to $2.68 billion ($1.28/share), from $2.56 billion ($1.20) in 1Q2004. Wall Street had pegged earnings at $1.38/share, according to Thomson First Call. First-quarter revenue rose to $41.6 billion from $33.65 billion a year ago.

U.S. exploration and production income was $767 million, down $93 million from a year ago. U.S. net oil-equivalent production declined 18% to 719,000 boe/d. The liquids component was down 15%, and net natural gas production averaged 1.6 Bcf/d, down 22%. Excluding sales and Hurricane Ivan's effects, U.S. production fell 8%.

ConocoPhillips said despite the negative impact of planned and unplanned downtime in its exploration and production segment, the company was still able to report strong first quarter 2005 earnings due in part to a "favorable commodity price environment" for natural gas and crude oil.

The Houston-based company reported first quarter net income of $2.9 billion, or $4.10 per share, compared with $1.6 billion, or $2.33 per share, for the same quarter in 2004. Total revenues were $38.9 billion, versus $30.2 billion a year ago.

"Overall, our performance for the quarter was good, and would have been stronger without unplanned downtime," said CEO Jim Mulva. "In our Exploration and Production segment, oil and gas production was negatively impacted by planned and unplanned downtime. This resulted in total production of 1.80 million boe/d, including our share of estimated LUKOIL production of 0.2 million boe/d."

ConocoPhillips reiterated that its capital spending for 2005 is expected to be $7.4 billion, excluding capitalized interest and minority interest, as well as the ConocoPhillips share repurchase program and additional equity investment in LUKOIL.

Unocal, which recently agreed to a merger with ChevronTexaco, reported earnings of $454 million ($1.66/share), compared with $269 million ($1.00) for the same period of 2004. The net earnings, the highest quarterly level in the company's history, included a number of special items discussed below in connection with Unocal's adjusted after-tax earnings.

Worldwide gas and oil production was up 5% over a year ago. Spurred by higher output in Asian operations, worldwide hydrocarbon liquids and natural gas production averaged 429,000 boe/d, up from 409,000 boe/d in 1Q2004. Unocal currently expects worldwide average production for the full-year 2005 to exceed 430,000 boe/d, up from 425,000 boe/d that was previously estimated.

Pending Unocal's anticipated merger with ChevronTexaco, the company has discontinued providing its forecast of adjusted after-tax earnings per share, including its related assumptions for future commodity prices and future dry hole costs. Unocal has also discontinued holding quarterly earnings conference calls.

Marathon's quarterly earnings were $324 million (93 cents/share), up from $258 million (83 cents) a year earlier. U.S. upstream income was $305 million, nearly flat from $306 million in 1Q2004. Higher liquid hydrocarbon and natural gas prices and business interruption insurance recoveries of $46 million related to Hurricane Ivan storm-related damage claims were offset by lower sales, which primarily related to natural field declines and the storm-related downtime in Petronius and Camden Hills in the Gulf of Mexico.

In the United States, natural gas sales were down at 570.3 MMcf/d from 701.4 MMcf/d in 1Q2004. Internationally, however, gas sales were up at 455.2 MMcf/d from 434.9 MMcf/d.

Marathon also announced a deal Thursday to buy Ashland Inc.'s 38% interest in their joint refinery venture for between $3.7-3.9 billion.

Anadarko Petroleum Corp. reported a 25% increase in 1Q profit on strength in oil and gas prices and better-than-expected production, and it beat Street estimates by 6 cents. Earnings were $490 million ($2.05/share), up from a year-ago profit of $392 million ($1.55). Revenue rose 5% to $1.53 billion from $1.46 billion.

Oil and natural gas sales volumes totaled 41 MMboe, or 455,000 boe/d, which was higher than expected. Natural gas sales volumes averaged 1.454 Bcf/d, and oil sales volumes in the quarter were 177,000 bbl/d.

However, in the United States, gas volumes fell to 107 Bcf from 121 Bcf in 1Q2004. Average daily volumes were 1.18 Bcf/d, compared with 1.3 Bcf/d a year ago. In Canada, volumes fell to 24 Bcf from 36 Bcf, and daily volumes fell to 271 MMcf/d from 395 MMcf/d.

Apache Corp., based in Houston, reported earnings of $559 million ($1.67/share), up from $345 million ($1.05) a year earlier. Oil and natural gas production averaged 462,000 boe/d, up 7% from a year ago and slightly higher sequentially from the 4Q2004. In North America, gas volumes rose to 98.5 MMcf/d from 95.8 MMcf/d.

Apache's natural gas liquids prices increased 16% to $26.68/bbl, while natural gas prices grew by 11% to $5.30/Mcf. Also, the producer cut its debt-to-capitalization ratio to 23% in the quarter, down from 24% at the end of 2004.

Burlington Resources Inc. said "higher commodity prices" helped the company report record estimated quarterly earnings of $471 million, or $1.21 per diluted share, during the first quarter of 2005, a 33% increase over the $354 million, or $0.89 per diluted share on a post-stock-split basis, earned during the first quarter of 2004.

Total production was stable at 2,846 MMcfe/d, compared to 2,849 MMcfe/d during 1Q2004. Natural gas production sagged slightly to 1,896 MMcf/d, compared to 1,953 MMcf/d during the prior year's quarter. Natural gas liquids (NGLs) production increased 2% to 68.4 thousand b/d, from 66.9 thousand b/d during the prior year's quarter.

Burlington said it benefited from higher commodity prices during the quarter, with price realizations for natural gas of $5.90/Mcf, compared to $5.31/Mcf during the same quarter in 2004. Price realizations for NGLs were $28.40/bbl, compared to $22.08/bbl during the prior year's quarter. Crude oil price realizations were $47.57/bbl, compared to $29.57/bbl during the prior year's quarter.

Looking to full-year 2005, the company said its production guidance is unchanged,with total production of 2,800 to 3,000 MMcfe/d expected. For full-year 2005, Burlington anticipates natural gas production of 950-995 MMcf/d from the United States and 1,890-2,005 MMcf/d internationally.

EOG Resources Inc.'s total daily production rose 19.3% in the first quarter compared to levels during the same quarter last year, with natural gas production in the United States and Canada up 12.4%, the company said Tuesday.

"We can confidently reaffirm our previously stated 13.5% production growth target," said CEO Mark Papa. "As the year progresses, we may reevaluate this goal with the possibility of increasing our full year target."

EOG's 1Q2005 net income more than doubled on higher prices to $200.8 million (83 cents/share), compared with $98.1 million (42 cents) in 1Q2004. The results for the quarter included a previously disclosed $0.9 million ($0.6 million after tax, or less than $0.01/share) loss on the mark-to-market of financial commodity price transactions. During the quarter, the net cash inflow from the settlement of financial commodity price transactions was $9.8 million ($6.4 million after tax, or 3 cents/share).

The market value of crude oil put options purchased last year, along with the impact of a rising stock price on a stock-based employee compensation plan, made Nexen one of the few producers to report sharply lower first quarter 2005 financial results. The company's net income was down 80% to C29 cents/share (C$37 million) despite its cash flow being up 26% and its production being up about 0.8%.

Following its US$2.1 billion North Sea acquisition from EnCana late last year, Nexen purchased put options on 60,000 bbl/d of oil production for 2005 and 2006 for US$144 million to ensure base cash flow to support development projects. The options created an average floor price for this production of US$43.17/bbl in 2005 and US$38.17/bbl in 2006. However, accounting rules required that the options be recorded at fair value throughout their term. As a result, changes in forward crude oil prices cause gains or losses to be recorded on these options each quarter.

While a gain of C$56 million ($38 million after tax) was recorded in the fourth quarter of 2004, a significant increase in forward crude oil prices during the first quarter of 2005 resulted in an expense of C$173 million (C$114 million after tax). The carrying value of the options at the end of the first quarter was C$27 million.

"Unlike other hedging strategies, the maximum cost of our put strategy is limited to the price we paid last year. This strategy allows us to realize the benefits of higher crude oil prices on all of our production while receiving protection against lower prices," said Nexen CEO Charlie Fischer. "Although accounting for these options adds volatility to our earnings quarter over quarter, it does not change the fundamentals of the strategy, which cost $144 million to implement. The volatility will decrease as these instruments get closer to their expiry."

The company also had an adverse impact from its stock-based compensation plan. During the first quarter, Nexen's stock price increased 36% or C$17.50/share, adding C$2.3 billion in shareholder value. As a result, C$125 million (C$83 million after tax) of stock-based compensation expense was recognized. Approximately 20% of this expense was in cash, while the balance represents the change in value of Nexen's accrued stock-based compensation.

Meanwhile, Nexen's production rose slightly compared to the fourth quarter of 2004, with higher rates from Yemen and the North Sea and a solid quarter from Canada, more than offsetting shortfalls from the U.S. and Syncrude. Production from the Gulf of Mexico plummeted 15%, largely because of lower result from the Aspen field where Nexen experienced increased water production. Nexen's U.S. natural gas production was down 24% to 127 MMcf/d compared to 167 MMcf/d in the first quarter of 2004. Its Canadian natural gas production was down 4% to 143 MMcf/d.

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