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Despite Huge Earnings Drop, Vastar Remains Bullish

Despite Huge Earnings Drop, Vastar Remains Bullish

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

"On the gas side, our medium- to long-term view [for prices] is clearly very bullish, probably in line with expectations once you start getting into next winter and beyond. It's our view it will be a lot easier to predict gas prices a year out than it will be for the next six months," said Steven J. Shapiro, chief financial officer, during a Thursday conference call.

"Clearly, inventories are close to their full stage a bit ahead of schedule, and so that to me opens an opportunity for some short-term downside gas prices. Counter to that is there's a real trading mentality out there that's very bullish, and that is supporting prices, and you still see a very strong contango [a situation in which prices of out months are successively higher going forward] and people willing to buy for inventory. We would say for the rest of the year we're using numbers of around $2.20 average for the rest of the year. But we see there could be wide variation on that."

All of Vastar's hedges are on gas production, Shapiro said. "We have 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 start to 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 the downside."

In the quarter just past, net income was diminished by significantly lower commodity prices as well as by higher depletion costs from increased production, including the start-up of new producing fields.

"While our financial results were clearly hampered by the low commodity prices, we continue to be encouraged by our strong operating performance," said CEO Charles D. Davidson. "We had our sixth straight quarter of production growth and a high rate of exploratory success that included the significant Mirage discovery."

Total production increased to a record average of 1.5 Bcfe/d, up 24% over last year's first-quarter rate of 1.2 Bcfe/d. Gas production rose 29% to an average of 1.2 Bcfe/d from 902 MMcfe/d in last year's first quarter. Crude and condensate production also increased 29% to an average of 46.7 thousand b/d from 36.1 thousand b/d in the same period last year.

Natural gas liquids production averaged 9.2 thousand b/d in the first quarter of 1999, compared to 15.5 thousand b/d in last year's first quarter. Volumes were down due to unfavorable processing economics that left liquids in the gas stream.

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

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

During the first quarter of 1999 Houston-based Vastar realized average gas wellhead prices of $1.62/Mcf, down from $1.92/Mcf during last year's first quarter. Average realizations during the first 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. Liquids prices began recovering late in the quarter.

Shapiro would not comment on the prospect of a BP Amoco acquisition of Vastar majority shareholder Atlantic Richfield Co. (Arco). "We have no information outside of that which has been made public by [BP Amoco and Arco], so we've really got nothing to add there."

As for potential property acquisitions by Vastar, Shapiro said the company views the market as still a little pricey. "We were seeing a lot of packages coming out, and clearly there are a lot of people focusing their portfolios this year. I'm not sure that we've seen the real quality properties, and with the last little bit of optimism in prices, I'm not sure that that hasn't slowed down some of the processes some. We think the quality assets are still going for some premium prices at this point, but there's clearly more out there, and as you move down the food chain we are seeing some realistic bids on what I'll call the mid- to lower-end assets."

Joe Fisher, Houston

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