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North American Gas Output Still Hit and Miss for Majors, Independents

Most of the majors and several of the largest independents all reported soaring second quarter profits -- as expected -- last week. However, North American natural gas production continued to be a mixed bag, with few surprises.

Royal Dutch Shell, recovering from a reserves accounting scandal last year, Apache Corp., Burlington Resources Inc. and Kerr-McGee Corp. all reported higher North American gas output for the second quarter, while ExxonMobil Corp., ConocoPhillips, Marathon Oil Co., Anadarko Petroleum Corp. and EnCana Corp.'s gas production volumes fell.

ExxonMobil, which once again saw its profits shoot through the roof, continued to fend off criticism Thursday about keeping its cash and not looking for new resources, but Chairman Lee Raymond said that the producer's investment in new technologies will keep production steady.

In the second quarter, Exxon's production fell 4.3% worldwide and its North American gas production dropped 8% to 2,722 MMcf/d. U.S. gas production fell 9% to 1,809 MMcf/d and its Canadian gas production dipped 6.2% to 913 MMcf/d. Worldwide, Exxon's natural gas production decreased to 8.686 Bcf/d, compared with 9.061 Bcf/d in 2Q2004.

Exxon's Henry Hubble, who presided over a conference call with analysts Thursday, noted that the company's "mature fields continue to perform as expected and for those fields we operate, maintenance has been as anticipated."

Deutsche Bank analyst Paul Sankey, referring to Exxon's continuing production losses, wrote in a note to clients Thursday that "the market will not like these volumes." Sankey also criticized Exxon's decision to not raise its dividend, but instead repurchase shares. "We don't think the oil cycle is over and so we don't think this defensive game is the best place to be."

Exxon's net income in the quarter grew to $7.64 billion ($1.20/share), an increase of $1.85 billion for the same period a year ago. Capital and exploration expenditures of $4.537 billion were up $920 million compared with last year. Exxon Chairman Lee R. Raymond said the net income reported was the "highest second quarter ever" for the company, and he credited the continued strength in crude and natural gas prices.

Royal Dutch Shell plc, which reported its quarterly results on Thursday for the first time as a unified company, posted a 35% rise in net profit. However, executives said that oil and gas output worldwide has dropped, and they warned that industrywide costs would continue rising.

Shell's oil and gas production was nearly flat from a year ago, falling to 3.526 MMboe/d, compared with 3.578 MMboe/d in 2Q2004. Still, the output numbers were "slightly above our expectations," said CEO Jeroen Van der Veer. Shell previously said it expected its 2005 production in the lower range of its 3.5-3.8 MMboe/d.

On the plus side, natural gas production available for sale in the United States was slightly higher than in 2Q2004, to stand at 1.357 Bcf/d, compared with 1.327 Bcf/d in 2Q2004, but down sequentially from 1Q2005's 1.385 Bcf/d. For the first six months of 2005, Shell's U.S. production was 1.371 Bcf/d, up slightly from 1.366 Bcf/d for the same period of 2004.

Shell, the world's third-largest publicly traded oil company after BP plc and Exxon by market capitalization, said net profit rose to $5.236 billion for 2Q2005, up from $3.897 billion in 2Q2004. Wall Street had pegged income at $5.509 billion. However, quarterly earnings were impacted by several charges, including a settlement with U.S. pension holders related to last year's reserves accounting scandal.

Houston-based ConocoPhillips beat Wall Street forecasts in the second quarter, with income up 51% on high commodity prices and strong results in its marketing and refinery businesses. And even though production fell sequentially on planned and unplanned maintenance, CEO Jim Mulva said he expects the company's total 2005 oil and natural gas output to increase 3% over 2004.

In North America, ConocoPhillips reported 2Q2005 natural gas production of 1.343 Bcf/d, down slightly from 1.373 Bcf/d for the same period of 2004. In the Lower 48, output was 1.195 Bcf/d, down from 1.226 Bcf/d in 2Q2004. In Alaska, output fell to 148 MMcf/d, down from 147 MMcf/d a year earlier.

ConocoPhillips' E&P daily production, including Canadian Syncrude and excluding the LUKOIL segment, averaged 1.54 MMboe/d, down from 1.60 MMboe/d sequentially from 1Q2005, and down slightly from 1.56 MMboe/d from a year ago, but the company said the decline was expected.

The Houston-based major reported 2Q income of $3.138 billion ($2.21/share), compared with $2.075 billion ($1.48) in 2Q2004. Total revenues were $42.6 billion, versus $31.9 billion a year ago. Income from continuing operations was $3.131 billion ($2.21/share), compared with $2.013 billion ($1.44) for the same period a year ago.

Houston-based Apache Corp.'s North American gas volumes increased during the second quarter, pushed by a 16% increase in Canadian gas output. Overall, gas volumes in North America rose 4.19%, to 1.034 Bcf/d from 992 MMcf/d in 2Q2004.

In the United States, gas volumes fell to 653 MMcf/d from 665 MMcf/d for the same period a year ago, while in Canada, volumes rose to 380.5 MMcf/d from 327.5 MMcf/d for 2Q2004. For the first six months of 2005, Apache's Canadian gas production has risen 13%.

Worldwide, oil and gas production averaged 470,000 boe/d in the second quarter, 6% ahead of 2Q2004 production. For the first six months, Apache's production was up 7% to 466,000 boe/d.

Apache generated a 54% increase in quarterly earnings to $587 million ($1.76/share), up from $382 million ($1.16) in 2Q2004. It was the company's sixth consecutive quarter of record earnings. Cash from operations before changes in operating assets and liabilities totaled a record $1.1 billion in the quarter, up 53% from $721 million in the year-earlier period.

Anadarko Petroleum Corp., also based in Houston, saw its revenues climb 10% on higher prices, but it said that overall production volumes fell because of asset sales over the past year. The company reported net income of $506 million ($2.12/share), compared with $405 million ($1.59) in 2Q2004.

Oil and natural gas sales volumes totaled 39 MMboe in the quarter, or 428,000 boe/d. Natural gas sales volumes averaged 1.434 Bcf/d, at an average realized price of $6.25/Mcf. In the United States, gas volumes fell to 1.147 Bcf/d from 1.388 Bcf/d, while in Canada, gas volumes fell to 286 MMcf/d from 398 MMcf/d in 2Q2004.

"Operationally, our exploration and development program continues to deliver very good results on all fronts," said CEO Jim Hackett. "Onshore North America, our existing core properties remain solid contributors, with some exciting exploration underway. Our deepwater Gulf of Mexico portfolio is growing, with first volumes from the K2 field produced during the quarter, along with the Genghis Khan discovery and good preliminary exploration results at the Knotty Head prospect.

Houston-based Marathon Oil Corp. said total oil and gas production available for sale worldwide averaged 353,000 boe/d in the second quarter. In the United States, gas production available for sale fell 9.6% in the quarter, to 597 MMcf/d, from 641 MMcf/d in 2Q2004. Worldwide, however, Marathon's gas and liquid sales rose to 379.9 MMboe/d, from 338.8 MMboe/d a year earlier.

The producer reported quarterly net income of $673 million ($1.92/share), compared with $352 million ($1.02) in 2Q2004. Net income adjusted for special items was $755 million ($2.16), up from $407 million ($1.18) a year ago.

"A key contributor to Marathon's strong second quarter results was the consistent and successful execution of the company's strategy and business plans," said CEO Clarence P. Cazalot Jr. "While we continued to realize the benefits of high commodity prices and margins throughout the quarter, our results were also positively impacted by the strong operating performance of each of our businesses. In particular, the solid results of our exploration and production operations demonstrate the improvements being made, which are positioning Marathon for longterm value growth."

Production losses from tropical storms in the Gulf of Mexico also loom on the horizon, Cazalot said. The biggest risks in the last half of 2005 will be related to mechanical reliability at some of its facilities, weather conditions in the Gulf and seasonal gas sales in Alaska and Europe, the CEO noted. He projected the company could lose between nine and 15 days of production in the Gulf from evacuating staff and shutting in production because of storms in the second quarter.

As it begins to settle in as a pure-play exploration and production company, Kerr-McGee Corp. reported natural gas output surging 51% over a year ago, mostly on the acquisition of Denver-based Westport Resources Inc. and the ramp-up of production at Red Hawk in the deepwater of the Gulf of Mexico.

Natural gas sales worldwide averaged 1.118 Bcf/d in 2Q2005. U.S. offshore gas sales grew to 452 MMcf/d from 314 MMcf/d in 2Q2004, while onshore gas sales were up to 571 MMcf/d from 334 MMcf/d for the same period of 2004.

Through the rest of 2005, Kerr-McGee is projecting gas output worldwide to rise from its current 361.3 Bcf/d to a range of 353-367 Bcf/d. In the United States, both onshore and offshore, production is expected to grow from its current 1.118 Bcf/d to 1.117-1.158 Bcf/d.

The producer reported net income for the quarter of $370.8 million ($2.60/share), substantially more than the $110.6 million ($1.01) in 2Q2004. The company's 2005 second-quarter adjusted after-tax income was $378.4 million ($2.65), compared with $119.9 million ($1.09) a year ago.

Burlington Resources Inc. reported a 42% quarterly jump in profit, fueled by high commodity prices. The Houston-based producer also reported a 4% increase in overall production volumes -- and gas production in North America was higher.

For the quarter, Burlington set an all-time production record, averaging 2.88 Bcfe/d, compared with 2.76 Bcfe/d in 2Q2004. In the United States, Burlington's gas production for the quarter was 950 MMcf/d, up from 905 MMcf/d in 2Q2004. In Canada, production fell slightly to 830 MMcf/d from 834 MMcf/d a year earlier.

Higher production was achieved in Canada, while in the United States, increases came from the Bossier, Cedar Creek Anticline, Bakken and South Louisiana programs. Production decreased from the San Juan Basin due to unscheduled maintenance performed by pipeline companies serving the area and the lingering impact of unfavorable weather earlier in the year.

Burlington reported net earnings of $537 million ($1.40/share), up from $379 million (96 cents) in 2Q2004. Revenue rose to $1.69 billion from $1.33 billion.

EnCana Corp., based in Calgary, attributed improved cash flow and earnings in the quarter to higher sales, but following several stellar quarters of production increases in North America, gas output was down slightly in the second quarter. Total produced gas in North America was 3.179 Bcf/d, down slightly from 3.212 Bcf/d in 2Q2004. Gas production rose slightly in the United States for the quarter, to 1.064 Bcf/d, from 1.061 Bcf/d for the same period in 2004. However, in Canada, output fell to 2.115 Bcf/d from 2.151 Bcf/d in 2Q2004. Still, EnCana expects to exit the year with production at 3.6-3.7 Bcf/d, well above the 2.968 Bcf/d for 2004.

Quarterly cash flow rose 45% to $1.57 billion ($1.76/share).Net income totaled $839 million (94 cents), up from $250 million (27 cents) in 2Q2004. On a continuing operations basis, EnCana earned $786 million (88 cents/share), compared with $265 million (28 cents) a year earlier. Operating earnings rose to $655 million (73 cents). Wall Street had forecast earnings of 79 cents/share.

EnCana said operating costs from continuing operations in the second quarter were 66 cents/Mcfe, slightly higher than its full-year forecast range. It blamed industry inflation, the impact of a depreciating U.S. dollar and weather delays in the timing of planned production additions. EnCana expects full-year operating costs to be near the higher end of its guidance of 55-60 cents/Mcfe.

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