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Independents' 3Q Profit Up, Domestic Gas Output Strong

U.S.-based independents last week continued to report substantial quarterly earnings on high oil and natural gas prices. Many were affected by the storms in the quarter, which curtailed some production and increased service costs, however, overall, the independents are doing something the majors didn't do: increase North American natural gas output.

Property sales and to a lesser degree, the recent hurricanes, sent Oklahoma City-based Devon Energy Inc.'s combined oil and natural gas production down from a year ago, but even with the divested assets, high commodity prices lifted net earnings 44%, to $744 million ($1.63/share), compared with $517 million ($1.03) in 3Q2004. The $744 million in net earnings includes special items which reduced profit by $108 million (24 cents/share). The most significant of these items, changes in the fair value of derivatives, reduced profit by $134 million pre-tax ($86 million after tax). Quarterly earnings also fell by $51 million pre-tax ($34 million after tax) for additional interest costs associated with the early debt redemption.

Worldwide oil, gas and natural gas liquids production in the quarter was 598,000 boe/d, down from 679,000 boe/d in 3Q2004. Total U.S. gas production fell almost 9%, to 136.6 Bcf from 150 Bcf, and in Canada, gas output was down 5%, to 66.7 Bcf from 70.1 Bcf. Excluding divested assets, total U.S. gas production increased to 135.9 Bcf, up from 129.8 Bcf, and in Canada, Devon's "retained" properties showed an increase to 66.6 Bcf, from 60.1 Bcf.

A big reason for Devon's 3Q production increases was success through the drillbit. Devon drilled 644 productive wells overall in the quarter, with a 98% success rate. Among other things, production began on its 2,000th operated well in the Barnett Shale of North Texas, where it is the largest producer. Devon also completed its third successful well in Matagorda County, TX, which is currently producing 22 MMcf/d. And it continued its drilling programs in two promising gas exploration areas onshore, in the northern Louisiana Bossier play, where it holds 200,000 net areas, and the 70,000 net acres in the Arkoma shale play in eastern Oklahoma.

Chesapeake Energy Corp.'s quarterly production jumped 28% from the same period a year ago, to 1.308 Bcfe/d, with output up 5% sequentially from the second quarter. The producer, which focuses its exploration in the MidContinent, now estimates production will climb more than 25% this year, with organic growth through 2006 exceeding 10%. Including special items, the Oklahoma City-based independent reported 3Q2005 net income up about 42%, to $149.1 million or $0.43/share, compared with $85.6 million or $0.29 in 3Q2004. Operating cash flow was $635.2 million on revenue of $1.08 billion.

Daily production averaged 1.308 Bcfe/d, an increase of 284 MMcfe, or 27.7% over the 1.024 Bcfe/d in 3Q2004, and an increase of 64 MMcfe/d, or 5.1%, over the 1.244 Bcfe/d in 2Q2005. Of the 64 MMcfe/d sequential increase, 53% came from organic growth and 47% from acquisition growth, making the company's quarterly organic growth rate 2.9%, its year-to-date organic growth rate 8.0% and its annualized 2005 organic growth rate 10.7%. The effects of Hurricane Rita reduced Chesapeake's 3Q output by 0.3 Bcfe as a result of onshore facility shut ins.

Quarterly output consisted of 108.8 Bcf of natural gas (90% on a natural gas equivalent basis) and 1.93 million bbl of oil and natural gas liquids (10% on a natural gas equivalent basis). Chesapeake's average daily production rate of 1.308 Bcfe consisted of 1.183 Bcf/d of gas and 20,935 bbl/d of oil and natural gas liquids.

With a solid contribution from the recently acquired Patina Oil and Gas assets, Noble Energy Corp. reported its highest quarterly net income ever, with 3Q profit increasing 111% to $177.0 million (99 cents/share), compared with $83.7 million (70 cents) in 3Q2004. Daily production rose 61% worldwide, and domestic output also climbed, despite the impact of Hurricanes Katrina and Rita.

Noble operates throughout major basins in the United States, but until it acquired Patina for $3.4 billion in 2004, it was best known domestically for its successes in the deepwater Gulf of Mexico. However, despite the hurricanes, which reduced domestic impact by about 7,600 boe/d, Noble's daily production increased 61%, to 168,666 boe/d in the quarter. In North America, production increased to 99,440 boe/d from 59,884 boe/d in 3Q2004. Natural gas output, which was boosted with Patina, climbed to 4.14 MMcf/d from 2.32 MMcf/d in 3Q2004.

In North America, Noble reported operating income of $150.9 million, an increase of 99% over $75.7 million in 3Q2004. Higher production and commodity prices were offset by increased exploration expenses, which climbed $51.7 million from 3Q2004. The increase resulted from higher dry hole expense in the Gulf Coast region and offshore. Domestically in the quarter, the company had 24 drilling rigs running onshore (10 in the Rocky Mountains, 10 in the MidContinent and four in the Gulf Coast) and 47 workover rigs (26 in the Rocky Mountains and 21 in the MidContinent). Noble plans to drill nearly 643 onshore wells in 2005, of which 53 are to be drilled in the Gulf Coast, 415 are planned for the Rockies and 175 for the MidContinent.

Strong drilling results from the Barnett Shale play in Texas, along with solid gains in the state and in North Louisiana, helped lift EOG Resources Inc. daily output 13.7% in the third quarter over a year ago. Total North American output was up 12%, with U.S. production up 16.2% from 3Q2004. EOG's 3Q2005 income also scored, more than doubling from a year earlier to $341.9 million ($1.40/share) from $169.6 million ($0.71) in 3Q2004. Last year's quarterly results included a $22.7 million ($14.6 million after tax, or $0.06/share) gain on the mark-to-market of financial commodity price transactions. Reflecting these items, 3Q2004 net income was $134.1 million ($0.56/share).

U.S. production increases reflected strong drilling results from its Barnett Shale play in Central Texas, combined with positive results in South Texas, East Texas and North Louisiana. Natural gas volumes in the United States grew to 724 MMcf/d from 623 MMcf/d for the same period a year ago. Canadian volumes reached 950 MMcf/d from 834 MMcf/d. In the Barnett Shale, EOG is operating nine rigs in Johnson County, TX, where it completed several wells in early August on its western acreage.

The company has found success with all of its wells there, and the Campbell Unit #1H in eastern Johnson County, in which EOG has a 100% working interest, came on-line in late October at 7.7 MMcf/d. EOG also scored with solid drilling results in Trinidad and the North Sea, with oil and gas production climbing almost 21% over a year ago. In Trinidad, gas volumes rose to 213 MMcf/d from 203 MMcf/d in 3Q2004, while in the North Sea, volumes were up to 44 MMcf/d from 8 MMcf/d.

Dallas-based independent Pioneer Natural Resources lost a platform during Hurricane Rita, but it still reported a 53% increase in net income on strong commodity prices, with 3Q profit $124 million (88 cents/share) from $81 million (67 cents) for the same period of 2004. Income from continuing operations was $105 million (74 cents/share), from $77 million (64 cents).

Pioneer's net income for the quarter included discontinued operations of $30 million ($19 million after-tax) related to the sale of some noncore assets on the Gulf of Mexico shelf. Net income also included a $33 million pre-tax charge ($21 million after-tax) related to the incremental abandonment obligation for its offshore East Cameron 322 field, which was lost during Hurricane Rita.

Pioneer is abandoning the East Cameron 322 field because the pre-hurricane production of a 600 boe/d and future production profile "do not justify the cost of replacing the platform, it said in a statement. However, the offshore Devils Tower production is in the process of being restarted, and production is expected to return to pre-hurricane levels of approximately 5,000 boe/d net shortly after start up. The subsea wells at the Triton and Goldfinger satellite fields have been tied back to the Devils Tower platform and are ready to flow.

Gas sales averaged 640 MMcf/d in the quarter, up from 632 MMcf/d reported in 3Q2004. North American gas prices averaged $7.10/Mcf, including $.48/Mcf associated with the volumetric production payment transactions. Production costs averaged $7.61/boe, with an increase in lease operating costs attributed to increases in higher production taxes, decreases in deepwater Gulf of Mexico production (which has lower per boe operating costs), and price increases in services and supplies related to field operations.

Denver-based Bill Barrett Corp., which focuses its exploration on Rockies gas, reported 3Q production hit a record 10.1 Bcfe, a 24% jump from the same period of 2004, and an 18% sequential increase over 2Q2005. The independent also reported net income of $13.3 million, well ahead of its $3.9 million net loss in 3Q2004. Cash flow also rose 80% to $47.7 million.

The company spent $86.3 million on capital expenditures in the quarter, including $3.9 million for more property; $77.2 million for drilling, development, exploration and exploitation of natural gas and oil properties; $4.8 million for geologic and geophysical costs; and $0.4 million for equipment and other expenditures. About $34.7 million was spent in the Piceance Basin, with 21 wells drilled during the quarter. Another $26.9 million was spent to develop nine wells and other drilling in the Uinta Basin, and $7.6 million was spent in the Powder River Basin, where 82 wells were drilled. It also spent $6.6 million in the Wind River Basin, and it drilled two wells there.

The company plans to end the year with about 357 wells drilled, including 17 exploration wells. Through the first nine months of 2005, 241 wells were spud. Capital expenditures for 2005 are expected to total between $310-320 million, net of sales proceeds.

Despite taking a hit from storms, major Occidental Petroleum Corp. said last week high prices lifted earnings to $1.747 billion ($4.32/share), more than double the $758 million ($1.91) reported in 3Q2004. The Los Angeles-based major also reported a 13% rise in domestic natural gas production from fields in California, the Hugoton Basin and the Permian Basin.

Within its four core production areas of the United States, three showed improved gas output. Compared with 3Q2004, production rose in California to 239 MMcf/d from 228 MMcf/d, in the Hugoton Basin to 133 MMcf/d from 124 MMcf/d, and in the Permian Basin to 186 MMcf/d from 122 MMcf/d. The only asset showing gas declines in the quarter was in Horn Mountain, Occidental's only Gulf of Mexico field, which was down 57% at 6 MMcf/d from 14 MMcf/d in 3Q2004.

Oil and gas segment earnings were $1.760 billion, compared with $1.216 billion for 3Q2004, a 45% increase. In 3Q2005, Occidental was hit with a $9 million insurance premium increase related to hurricanes in the Gulf. After adjusting for the impact of the storm increases, core earnings were $1.769 billion. The improvement in core earnings included $692 million from higher worldwide crude oil and gas prices, partially offset by higher operating, exploration and other costs.

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