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Independents Post Solid Growth, Mixed Bag for Larger E&Ps

Even with ExxonMobil Corp.'s record profit in the third quarter, slower earnings growth continues to be the theme for most of the largest oil and natural gas producers. Slammed by lower natural gas prices and soaring costs, integrated producers are taking some of the biggest hits to their bottom lines, while the smaller domestic producers, able to pivot more quickly because of their size, are overcoming the obstacles and posting solid production and income.

Royal Dutch Shell, which joined ExxonMobil is unveiling its quarterly earnings Thursday, was hit particularly hard by higher costs in the quarter, despite posting strong oil and gas production numbers. Super independent Apache Corp. reported a net profit decline, but it said it remains on track to achieve 10-15% production growth by the end of the year. Newfield Exploration Corp., which lost money in the year-ago period on hurricane damage in the Gulf of Mexico (GOM), moved into the black, and reported a 6% increase in its U.S.-focused gas output. And Cabot Oil & Gas Corp., another gas-weighted domestic producer, reported record income and a 12% jump in production.

Irving, TX-based ExxonMobil reported the second-highest quarterly profit ever for a publicly traded U.S. company, with net income of $10.49 billion ($1.77/share), an increase of $570 million (6%) from the same period of 2005. Even with the soaring profits, the top major said higher oil and gas realizations and improved marketing and chemical margins were partly offset by lower refining margins.

Aware of the political pressure to prove it does more than make money for its shareholders, ExxonMobil noted in its earnings release that global production rose 7% to 270,000 boe/d, reflecting its "active efforts to increase world energy supplies." ExxonMobil also said it spent $5.06 billion, or 15% more, on its worldwide exploration efforts in the quarter. Global gas production increased to 8.16 Bcf/d from 7.72 Bcf/d in 3Q2005.

However, ExxonMobil's rising output was everywhere but in North America. Gas available for sale in North America fell compared with a year ago, even though 3Q2005 output was down on damage caused by the GOM hurricanes. North American gas available for sale fell slightly to 2.45 Bcf/d in 3Q2006, with 1.58 Bcf/d for sale in the United States and 864 MMcf/d in Canada. In 3Q2005, ExxonMobil had 2.54 Bcf/d available for sale in North America, with 1.61 Bcf/d in the United States and 926 MMcf/d in Canada.

European-based Royal Dutch Shell squeezed out a little more oil and gas production worldwide compared with a year ago, but rising costs pressured earnings, cutting net profit by 34% in 3Q2006. Shell reported profit of $6.9 billion, down from $7.2 billion a year ago. Shell, which announced an ultra-deepwater project in the GOM with Chevron Corp. and BP plc (see related story), posted better-than-expected results in all of its business units, but total costs in the quarter jumped substantially on higher upstream operating costs and increased predevelopment activity.

Gas & Power segment earnings rose to $787 million from $556 million a year earlier, reflecting "higher liquefied natural gas volumes, up 19%, and continued strong marketing and trading earnings in the United States. U.S. Henry Hub prices in the quarter averaged $6.05/Mcf, down from $9.50 in 3Q2005.

"Cost pressure remains a significant challenge for our industry," said CEO Jeroen van der Veer. Shell, he said, is "focused on making the right portfolio choices to create long-term shareholder value."

In the United States, Shell's gas production available for sale rose slightly to 1.186 Bcf/d from 1.175 Bcf/d in 3Q2005. Worldwide, oil and gas output rose only 1% to 3.25 million boe/d. Total production numbers included gains from Shell's emerging oil sands projects. Earlier this week, Shell unveiled a $6.8 billion offer to buy out the 22% of shares it doesn't already own in Shell Canada Ltd., in the hope of further expanding its oil sands efforts in North America (see Daily GPI, Oct. 24).

Houston-based Apache posted record production in the quarter, and CEO G. Steven Farris said the company remains on track to achieve 10-15% output growth this year. However, net profit slumped 6% on falling gas prices, losses from shut-ins and the sale of some overseas assets. Earnings fell to $645.6 million ($1.94/share) from $686 million ($2.05) in 3Q2005. Revenue increased almost 10% to $2.26 billion from $2.06 billion; revenue from oil and gas production rose a modest 1% to $2.07 billion from $2.05 billion.

Global gas production averaged 1.7 Bcf/d, a 35% jump from a year earlier and up 9% from 2Q2006. Gas prices in 3Q2006 averaged $4.83/Mcf, down 26% from a year earlier and 3% lower than in 2Q2006. Oil prices averaged $63.66, up 9% from a year ago but down 1% from 2Q2006.

In the United States, Apache's gas output in its U.S. Central Region rose to 265 MMcf/d because of drilling success at the Stiles Ranch in the Texas Panhandle, the Red Fork and Springer formations in western Oklahoma, and in the Permian Basin. The Gulf Coast region's gas output rose to 455 MMcf/d after Apache took over operations at 96 offshore platforms acquired from BP plc (see Daily GPI, June 7). Recovery from hurricanes Katrina and Rita is progressing, but Apache warned net production of 3,000 bbl/d and 10 MMcf/d will likely remain shut-in at year's end. Apache expects to recover those volumes during the first half of 2007. In Canada, Apache's quarterly gas output was flat sequentially from 2Q2006, averaging 422 MMcf/d (gas) and 22,613 bbl/d (oil). However, on a barrel-equivalent basis, output rose 8% from 3Q2005.

Independent Newfield Exploration Co., which focuses most of its gas-directed exploration efforts in the United States and offshore in the Gulf of Mexico (GOM), swung to a quarterly net profit of $266 million ($2.06/share), compared with a loss of $0.2 million in 3Q2005. Adjusted for unrealized commodity derivative income and other items, the Houston-based producer earned $115 million (89 cents/share) in 3Q2006, down from $128 million ($1) in 3Q2005. Revenue was off 7.6% from a year ago to $425 million -- below Wall Street's forecast of $472.3 million.

Total oil and gas production rose 6% to 62.6 Bcfe from 59.2 Bcfe a year ago, when it was stung by hurricane damage in the GOM. Newfield's gas production rose to 51.2 Bcf from 46.8 Bcf, a 9% increase. Average realized gas prices fell 18% to $6.21/Mcf from $7.60/Mcf.

In the final quarter of 2006, Newfield expects gas output to range between 53-55 Bcf, with oil production ranging between 2.3-2.5 million bbl. Based on current prices, Newfield estimates that its realized price for gas production from the GOM and onshore Gulf Coast, after basis differentials, transportation and handling charges, will average 40-60 cents less per MMBtu than the Henry Hub Index. Realized gas prices for Midcontinent production, after charges, typically averages 70-80 cents less per MMBtu than the Henry Hub Index, Newfield said.

Houston-based Cabot Oil & Gas, 96% weighted to gas, announced record 3Q2006 income, even before recording a $143.6 million after-tax gain from the sale of its GOM and South Louisiana assets, which closed in September (see Daily GPI, Aug. 30). Net income reached $189 million ($3.92/share), while cash flow from operations totaled $86.7 million. After removing the benefit of the asset sale, 3Q2006 net income would have been $45.4 million (94 cents/share), well ahead of 3Q2005's $33.8 million (69 cents).

Driving Cabot's positive results was a 12% increase in production during the quarter, along with increased oil price realizations. Each of Cabot's North American regions contributed to production increases, with the biggest gains from its remaining Gulf Coast operations. Total gas produced was 20.7 Bcf, compared with 18 Bcf in 3Q2006. Total production for the quarter was 23 Bcfe, ahead of 20.5 Bcfe a year earlier. Cabot's gas price realizations were essentially flat at $6.76/Mcf in 3Q2006, compared with a year ago. Oil prices rose 52% to $69.80/bbl.

Though its earnings report was positive, Cabot noted that recent gas price declines during October in the Rocky Mountains forced it and its partners to shut-in about 6 MMcf/d from several newly completed wells there and another 5.5 MMcf/d in West Virginia, which will affect 4Q2006 results (see related story). All of the production is expected to be restored in the near future.

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