Vastar Resources had a far better year in the field than it didin the commodity marketplace, reporting first-quarter 1999 netincome of $19 million, down from $48 million during the firstquarter of 1998. However, Vastar achieved a 24% increase inproduction and continued exploratory success, and is predictingbetter times ahead.

“On the gas side, our medium- to long-term view [for prices] isclearly very bullish, probably in line with expectations once youstart getting into next winter and beyond. It’s our view it will bea lot easier to predict gas prices a year out than it will be forthe next six months,” said Steven J. Shapiro, chief financialofficer, during a Thursday conference call.

“Clearly, inventories are close to their full stage a bit aheadof schedule, and so that to me opens an opportunity for someshort-term downside gas prices. Counter to that is there’s a realtrading mentality out there that’s very bullish, and that issupporting prices, and you still see a very strong contango [asituation in which prices of out months are successively highergoing forward] and people willing to buy for inventory. We wouldsay for the rest of the year we’re using numbers of around $2.20average for the rest of the year. But we see there could be widevariation on that.”

All of Vastar’s hedges are on gas production, Shapiro said. “Wehave about 27% of our production hedged in the second quarter,about 17% in the third quarter, and about 7% in the fourth quarter.Generally there are floors on them of about $2.20, $2.25. We startto participate on a penny-for-penny basis once you get below about$1.90 or $1.85, so we’re kind of protected 30 to 40 cents on thedownside.”

In the quarter just past, net income was diminished bysignificantly lower commodity prices as well as by higher depletioncosts from increased production, including the start-up of newproducing fields.

“While our financial results were clearly hampered by the lowcommodity prices, we continue to be encouraged by our strongoperating performance,” said CEO Charles D. Davidson. “We had oursixth straight quarter of production growth and a high rate ofexploratory success that included the significant Miragediscovery.”

Total production increased to a record average of 1.5 Bcfe/d, up24% over last year’s first-quarter rate of 1.2 Bcfe/d. Gasproduction rose 29% to an average of 1.2 Bcfe/d from 902 MMcfe/d inlast year’s first quarter. Crude and condensate production alsoincreased 29% to an average of 46.7 thousand b/d from 36.1 thousandb/d in the same period last year.

Natural gas liquids production averaged 9.2 thousand b/d in thefirst quarter of 1999, compared to 15.5 thousand b/d in last year’sfirst quarter. Volumes were down due to unfavorable processingeconomics that left liquids in the gas stream.

First-quarter production rose as a result of volumes added frominterests in 23 Gulf of Mexico shelf fields that were acquired latelast year and increases achieved from the Mississippi Canyon 148,West Delta 41, West Cameron 645, Main Pass 199, San Juan basin andother fields.

“We do expect volumes to dip somewhat over the next two quartersbefore turning up again in Q4. This reflects the timing of ourcapital expenditures and what we’re spending our money on,” saidShapiro. “We’re spending more on the longer-term investments, whichwill affect our [production] rate profile some. In addition we dohave some planned divestitures in Q2 and Q3. Gas in Q2 should be inabout 1.1 Bcf/d range, crude in kind of a 44,000 to 46,000 b/drange, and we expect NGLs to firm up, perhaps to as much as 13,000maybe 14,000 barrels/d, although that’s a little bit tougher topredict because it will depend on NGL margins. We believe we’re ontrack to achieve double-digit volume growth this year over lastyear. Full-year gas we expect to be up about 10%. Crude should beup 15 to 20%. NGLs are expected to be roughly flat.

During the first quarter of 1999 Houston-based Vastar realizedaverage gas wellhead prices of $1.62/Mcf, down from $1.92/Mcfduring last year’s first quarter. Average realizations during thefirst quarter of 1999 were $11.16/barrel for crude oil and$8.10/barrel for natural gas liquids; down from $17.09/barrel and$10.99/barrel, respectively, in the first quarter of 1998. Liquidsprices began recovering late in the quarter.

Shapiro would not comment on the prospect of a BP Amocoacquisition of Vastar majority shareholder Atlantic Richfield Co.(Arco). “We have no information outside of that which has been madepublic by [BP Amoco and Arco], so we’ve really got nothing to addthere.”

As for potential property acquisitions by Vastar, Shapiro saidthe company views the market as still a little pricey. “We wereseeing a lot of packages coming out, and clearly there are a lot ofpeople focusing their portfolios this year. I’m not sure that we’veseen the real quality properties, and with the last little bit ofoptimism in prices, I’m not sure that that hasn’t slowed down someof the processes some. We think the quality assets are still goingfor some premium prices at this point, but there’s clearly more outthere, and as you move down the food chain we are seeing somerealistic bids on what I’ll call the mid to lower end assets.”

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