One of the more promising independent natural gas producingcompanies, Barrett Resources Corp., announced last week itsearnings will suffer over the next few years from forward fixedprice sales in the $2.50/MMBtu range, well below current marketprices above $4/MMBtu, for a significant portion of its production.

Approximately 22 Bcf of Denver-based Barrett’s projected 116 Bcfof production in 2000 will go to fulfill contracts averaging$2.55/MMBtu. This is in addition to previously disclosed hedges on23.1 Bcf of gas production in 2000. In 2001 and 2002 a total of12.5 Bcf each year will be sold at prices averaging $2.43/MMBtu. Inthe out years an aggregate of 22 Bcf in declining annual levelswill go for between $2.40 and $2.47.

“Based upon the substantial increase in natural gas prices overthe last three months, we estimate second quarter mark-to-marketaccounting treatment will cause a non-cash expense of $25 to $31million, net of tax,” said Frank Keller, Barrett’s CFO.

Company officials were quick to point out that production,drilling and cash flow all are strong, and even at the below-marketlevels “our gas sales are very profitable at these prices.” Also,about 60% of production in 2000 and 70% in 2001 will be sold atmarket prices.

Accounting for these positions at an average 2000 Nymex price of$3.40/MMBTU, Barrett anticipates 2000 cash flow of $5.20 to $5.50per share. The company’s stock, which had risen as high as $40 inMay, closed Friday at 30 and 7/16.

Peter Dea, who took over as CEO in March with the retirement ofthe company’s founder, William J. Barrett, explained that theincreasingly volatile market and multiple out-moded in-housetracking systems were to blame for the problems. They werediscovered when the company brought in Arthur Andersen to reconcilethe systems and recommend a new comprehensive risk managementsystem capable of complex monitoring and quick reconciliation.

“This new, upgraded natural gas risk management system thatArthur Andersen began implementing in March 2000 will beoperational in the third quarter of 2000,” Dea said. “Consideringthe tremendous volatility in natural gas prices, financial tradingactivity will be virtually eliminated unless it is required tomanage our current positions and requires my approval.”

Dea said Barrett would be continuing its capital expenditures asplanned, which include expanded exploration and productiondrilling. The company currently is producing over 300 MMcf/d. Itwas recently named as the second most active driller in the U.S. bya national magazine. He also commented he believed a number ofindependents, facing for the first time the highly volatileupward-trending prices, may be experiencing similar problems.

The company, focused primarily in the Rocky Mountain region, isactive in the Powder River Basin Coal Bed Methane play and PiceanceBasin. It also has properties in the Mid-Continent and Gulf ofMexico regions.

Ellen Beswick

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