Independents Up in 2Q, But Lower Earnings Expected Soon

Nearly all of the U.S. independents posted remarkable earnings in second quarter earnings announcements last week, boosted by high commodity prices and increased production -- especially in the natural gas sector. Anadarko Petroleum Corp. and Apache Corp., both headquartered in Houston, got a boost in production and earnings from strategic acquisitions, while Barrett Resources Corp., XTO Corp. and Mitchell Energy & Development Corp. relied on their own U.S.-based production reserves.

Notably, only mega-independent Kerr-McGee Corp., citing the "continued slowdown in the U.S. and worldwide economies" and lower oil and gas production, saw its second quarter net income decline 19%. Analysts noted that Kerr-McGee, seeing its production decline, was shoring up its production reserves with the strategic acquisition of Rocky Mountain producer, HS Resources Inc., which, when closed as expected by the third quarter, will boost gas reserves 77% (see NGI, May 21).

Anadarko: Higher prices and production drove this Houston-based independent's net income to $401 million for the second quarter, versus $64 million for the second quarter 2000. Cash flow from operations was $1.05 billion in the second quarter, compared with $167 million in the same period in 2000. Total production volumes were up more than 10% over the first quarter of this year, increasing 271% from the second quarter of 2000. In the second quarter, Anadarko's production of gas, crude, and gas liquids totaled 52 million boe/d, compared to 14 million boe/d for the second quarter of 2000.

Production for Anadarko came not only from higher commodity prices, but also recent acquisitions. It closed on its acquisition of Berkley Petroleum Ltd of Canada in the quarter (see NGI, March 26), while its purchase a year ago of Union Pacific Resources (see NGI, April 10, 2000) also upped production in the quarter.

Apache: This Houston independent also scored from higher commodity prices and its recent acquisitions, which upped production figures and revenue. It reported second-quarter earnings before nonrecurring items of $241 million, up 73% from $139 million in the prior-year period. Cash from operations rose 59% to $549 million, compared with $346 million in the second quarter of 2000.

Apache had a 53% increase in natural gas production in the quarter, up to 1.2 Bcf/d, and a 38% increase in liquid hydrocarbon production, to 163,449 bbl/d. During the second quarter, Apache realized $25.24/bbl, down slightly from $25.88/bbl from a year ago, and $4.01/MMcf/d, up from $3.07 for the same period. Production revenue was helped by Apache's second quarter closing on assets in Canada, which it purchased in a deal with Shell Overseas Holdings Ltd. from Fletcher Challenge Energy (see NGI, March 12). It also gained from Canadian holdings it purchased from Phillips Petroleum Corp. in 2000 (see NGI, Dec. 11, 2000).

Kerr-McGee: Net income for the quarter was $175 million, or $1.71 per diluted share, compared with $217 million, or $2.13 per share for the same period of 2000. Last year's second quarter included $107 million, or $1.02 per share, in special charges. No special charges were recorded for this year's second quarter. Net income for the first half of this year was a record $510 million, or $4.92 a share, compared with $295 million, or $3.02 per share a year earlier. Special items in the first half of 2001 contributed $102 million to net income, mostly because of new accounting requirements for derivatives, while the cumulative effect of the accounting change reduced net income by $20 million.

Total operating profit in the quarter was $340 million, down from $372 million excluding special charges a year ago. Exploration and production profit also was down, standing at $311 million from $325 million a year earlier. The decline, said the company, was because of lower oil and gas volumes and a decrease in average oil prices of $1.43/bbl, "which was not entirely offset by an increase in average gas prices of 94 cents/Mcf."

Daily oil production for the second quarter averaged 191,000 bbl, compared with 206,700 bbl for second quarter 2000. The average oil price declined to $24.90/bbl in the quarter, compared with $26.33/bbl a year ago. Daily natural gas sales averaged 523 MMcf, compared with 543 MMcf a year earlier. Average natural gas prices increased to $4.36/Mcf, a 27% increase from a year ago. Capital expenditures also were much higher than a year ago's second quarter, standing at $493 million, compared with $151 million in the second quarter of 2000. For the first six months of the year, capital expenditures excluding acquisitions were $886 million, compared with $235 million a year ago.

In the first quarter of this year, Kerr-McGee sold 202,000 bbl/d worldwide. Its natural gas sales totaled 512 MMcf/d. However, its first quarter natural gas production dropped 4%. Along with its U.S. assets, the company operates in the North Sea, Ecuador, Kazakstan, China and Indonesia.

XTO: This Fort Worth-based company, which also announced it will announce a major acquisition within the next two months, reported earnings from operations were $63.2 million, or 51 cents per share -- three-and-a-half times the $17.6 million or 17 cents per share earned a year earlier and well above analysts' expectations, which predicted earnings from 42-to-50 cents, with the consensus at 46 cents. The record net income, which included derivative fair value gains and non-cash incentive compensation, was $90.5 million, or 74 cents per share, compared with $1.2 million, or 1 cent a share for the second quarter of 2000.

Daily gas production averaged 403 MMcf, compared to second-quarter 2000 production of 331 MMcf/d, and daily oil production was 13,817 bbl, up 9% from a year ago. Natural gas liquids production was 4,495 bbl/d, a 4% increase. XTO attributed the increased production to its development program in the East Texas, Arkoma and San Juan basins.

Unlike other independents and majors, which are predicted to be scaling back under sliding prices, XTO announced that its natural gas production is expected to grow from its current 410-420 MMcf/d to 445-450 MMcf/d by the fourth quarter, averaging 410-415 MMcf/d for the year. Natural gas liquids production is expected to be relatively flat during 2001 at daily rates between 4,000-4,500 bbl, while oil production should grow to 13,000-13,500 bbl/d in the third quarter and to between 13,300-13,800 bbl/d in the fourth quarter, averaging 13,300-13,800 bbl/d for the year.

Mitchell Energy: The Woodlands, TX-based independent reported second quarter earnings of $1.53 per diluted share, or $78 million, a 72% increase over prior year earnings of 89 cents per diluted share, or $44.2 million. This brought net earnings for the first six months of the year to $201 million, more than double last year's level. The company also announced a $212 million increase in planned 2001 capital spending, raising the total to $685 million.

Mitchell attributed its higher earnings to gas sales volumes, which rose 40% in the quarter to 403 MMcf/d. Also contributing to the higher earnings was an 8% decrease in unit wellhead production costs -- excluding severance and ad valorem taxes -- and a 12% increase in natural gas liquids (NGL) volumes. Since the company stepped up drilling in mid-1999, gas volumes have increased at an average rate of 7% each quarter. This growth has primarily come from the Barnett Shale where production in the past year increased 87 MMcf/d -- 67%.

Barrett Resources: This Denver-based company, which is close to completing a merger deal with Williams (see NGI, July 9), saw its income rise because of its gas business in the Rocky Mountains. The company reported net income of $55.1 million, or $1.61 per diluted share, for the quarter, compared to a net loss of $4 million, or $0.12 per diluted share, a year earlier. In the last six months, Barrett posted net income of $112.1 million, or $3.27 per diluted share, compared with $3.8 million, or $0.11 per diluted share, for the comparable 2000 period.

The company also reported that production during the second quarter increased by 7% over the second quarter of 2000. Total production averaged 346 MMcfe/d, of which natural gas accounted for approximately 95%. The Piceance Basin, Powder River Basin and Wind River Basin properties accounted for 36%, 26% and 11% of total production, respectively.

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