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Major, Independent Earnings Strong but Gas Output Mixed

Major producers and large independents continued to report soaring earnings last week, with at least double-digit profit on higher commodity prices. Producers with operations in the Gulf of Mexico continued to feel the effect of hurricanes in the final quarter of the year, but several managed to overcome offshore losses with strong domestic drilling results.

London-based BP plc posted a 22% hike in 2005 profits, but reported weaker-than-expected 4Q earnings from ongoing storm repairs in the Gulf of Mexico and one-time charges in its refining unit. Net profit for the quarter was $3.685 billion, up from $3.010 billion in 4Q2004, while net profit for the year rose to $22.341 billion, up 31% from $17.075 billion in 2004.

Despite the high numbers, the second-largest major behind ExxonMobil Corp. failed to hit analysts' targets. It tempered the report with a strong reserve replacement record and the promise to return up to $65 billion to shareholders through dividends and buybacks in the next three years if commodity prices remain high.

Within BP's Exploration and Production unit, quarterly profit was hurt by about $950 million in "opportunity losses caused by the hurricanes" and net nonoperating charges of $979 million, primarily from losses on the value of overseas natural gas contracts. BP's output averaged 4.022 million boe/d in the quarter, slightly lower than the 4.095 million boe/d in 4Q2005.

In the United States, gas production in the quarter fell to 2.359 Bcf/d from 2.651 Bcf/d in 4Q2004, and was down sequentially from 3Q2005's 2.456 Bcf/d. For the year, domestic gas output fell to 2.547 Bcf/d from 2.748 Bcf/d in 2004.

CEO John Browne said during a conference call the company is forecasting 2006 output to range between 4.1-4.2 million boe/d. With more than 20 new projects due on stream in the next three years, and assuming the same level of oil and gas prices (oil ranging around $40/bbl), Browne said the annual rate of increase should continue at about 4% to 2010.

"Based on our proven track record, we should add an extra 10 billion barrels to our resource base from our existing exploration portfolio," Browne said. "It is the quality and magnitude of this resource that underpins our expectation of continued strong growth in output beyond 2010."

Browne also denied a report that the company is considering a bid for Spanish-based Repsol YPF SA -- or anything else in the near future.

"We don't need to acquire anything," Browne said. "It's not a good idea to add poorer assets to a strong base."

Los Angeles-based Occidental Petroleum Corp. reported 4Q net income jumped 55% to $1.152 billion ($2.84/share), compared with $742 million ($1.86) in 4Q2004. Net income for 2005 was $5.281 billion ($13.09/share), more than double the $2.568 billion ($6.49) reported in 2004.

CEO Ray R. Irani said last year was notable "for a number of important achievements that we expect to contribute to future production and earnings growth." Among other things, Occidental enhanced its position in the Permian Basin in Texas and New Mexico through a series of producing property acquisitions, including its takeover of Vintage Petroleum Corp.

Quarterly worldwide production averaged 589,000 boe/d, an increase of 4.8% sequentially from 3Q2005, and up from 558,000 boe/d in 4Q2004. In the United States, quarterly gas output rose to 572 MMcf/d from 499 MMcf/d in 4Q2004, with most of the increase attributed to the Vintage acquisition. For the year, domestic gas output rose to 553 MMcf/d from 507 MMcf/d.

Houston-based independent Newfield Exploration Co.'s Gulf operations were hammered by hurricanes last fall, but at the end of the year, it still managed to add 467 Bcfe to its proved reserves, upping the total 12% to 2 Tcfe, which was nearly two times 2005's production, the company said Thursday. With no significant acquisitions completed last year, about 96% of the new reserves came through the drillbit.

However, Newfield, with extensive domestic natural gas operations on- and offshore, reported 4Q2005 production dropped dramatically, to 50.3 Bcfe from 69.5 Bcfe for the same period of 2004, reflecting an estimated 16 Bcfe of deferred production related to last fall's hurricanes. For its U.S. operations, natural gas output fell 27% to 39.5 Bcf from 53.8 Bcf in 4Q2004. Total 2005 gas output last year in the United States fell 3%, to 190.9 Bcf from 197.6 Bcf in 2004. In 2005, Newfield oil and gas production reached 241.6 Bcfe worldwide, reflecting a total deferral of about 22 Bcfe related to hurricanes, compared with 2004's 243.6 Bcfe.

"The damage to infrastructure, pipelines and processing facilities continues to impact Newfield's Gulf of Mexico production in early 2006," the company reported. Currently, the company is producing about 215 MMcfe/d, with 80 MMcfe/d of deliverability off-line. Production is expected to ramp up to 250 MMcfe/d by the end of 1Q2006, moving up to 275 MMcfe/d by mid-year. The company also expects 2006 Gulf production will be negatively impacted by the "inability to execute drilling and recompletion programs" in the final half of 2005. Deferrals associated with the hurricanes are forecast to be about 15 Bcfe this year; gas production is expected to range between 42-47 Bcf (465-520 MMcf/d).

In 4Q2005, Newfield reported net income of $184 million ($1.43/share), compared with $90 million (72 cents) in 4Q2004. The quarter's earnings were impacted by a $147 million gain (74 cents/share) associated with unrealized changes in open derivative contracts, and a $10 million ceiling test writedown (7 cents) associated with a decreased emphasis in Brazil and other international exploration efforts. Without special items, Newfield's net income would have been $99 million (77 cents/share). For 2005, Newfield posted net income of $348 million ($2.73/share) on revenues of $1.8 billion. Discounting special items, net income was $482 million ($3.77). Net income in 2004 was $312 million ($2.63) on revenues of $1.4 billion.

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