Independents Put in Blockbuster 2nd Quarter
Independent producers who took advantage of soaring gas and oil prices
put in a blockbuster second quarter, according to the numerous financial
reports released yesterday. "Essentially everybody beat my earnings
forecasts," said Irene Haas, E&P analyst for Sanders Morris Harris
"It's been a pretty good quarter for the producers," she said.
"Production has tended to exceed my expectations and so has pricing.
So far the costs have not escalated yet. We kind of expect that to happen,
but we don't know when. It's a natural part of the business cycle. So I
think everybody now is in a nice sweet spot. There's excess cash flow.
For example, EOG is going to have more money that they have capital expenditures
signed for, and they plan to pay down debt and buy back shares and perhaps
make some strategic acquisitions. Marathon, which is an integrated story,
is buying back shares. Santa Fe Snyder had a strong quarter. Things are
pretty good. It's probably one of the best quarters in a long time."
"I think it's no real surprise that second quarter results are
tremendous," added PaineWebber's Bill Featherston. "We all knew
that prices were extremely high. I had gas prices averaging around $3.45,
which is up from $2.08 in the year-ago quarter and up nearly a $1 from
the first quarter, and of course oil prices averaged $28.80. My companies
year-over-year had a double-digit increases in cash flow."
Despite the excellent financial situation for the E&P group, however,
investor interest has declined significantly over the past two weeks. According
to Haas, concerns about oil production increases and the impact of the
mild summer in the Northeast on gas demand has led to some investor uncertainty.
"I follow roughly 10 E&P stocks. The sector has only gained
27% year-to-date and that's bad because a month ago they were at about
60% year-to-date gain. Really in the last two weeks my sector lost a lot
of value," said Haas. "Directionally both crude and natural gas
prices have fallen. I would expect that to level out and find some equilibrium
point. This is probably a short-term phenomenon. Today near-month crude
is $28, and while that is not a huge number, historically speaking it's
a great number. Oil above $20/bbl is a good price and natural gas at $3.65/MMBtu
is something we haven't seen in a long time. In fact, I probably feel better
about gas at this level. More demand will be available."
Featherston also noted that the rally on energy stocks this year also
came at a time when investors started dumping NASDAQ stocks. "Money
had to find another new place to park and a lot of it parked in energy
because the stocks were cheap and the earnings and cash flow momentum was
"If you fast-forward to today on the oil side, you have the Saudis
making a lot of noise that they want push the oil price down to $25/bbl.
Gas prices have made a strong move but over the next four or five weeks
you have difficult storage comparisons on a weekly basis and we have yet
to have weather [in the midwestern an eastern markets]. And then of course
the NASDAQ, until the last couple of days, has been acting pretty well;
of course over the last couple days the energy stocks have picked back
Featherston said he thinks gas stocks have significant room for growth.
"I think that the E&P stocks right now are reflecting gas prices
in the $2.30-35 range."
As more financial reports trickle out over the next week or so, Haas
said she thinks they will show "a fantastic quarter as long as they
have not hedged their upside away, which some producers have." Some
of the independents made the mistake of hedging too much of their production
too early, prior to the major run-up in commodity prices. "[Barrett
Resources] is the one that kind of hedged a lot of their upside away"
Cross Timbers Oil also reported some hedging problems. While its second
quarter cash flow of $57.7 million, or $1.26 per share, was up 190% before
charges, its earnings after charges were only $800,000. After recording
a $15.7 million after-tax loss in the fair value of certain derivatives
related to the company's hedging activities and a $200,000 after-tax gain
on investment in equity securities, earnings available to common stock
were significantly reduced for the quarter. Total revenues for the quarter
were $121.7 million, an 86% increase. Operating income was $46.5 million,
a 332% increase.
"The second quarter met all of our expectations, as the acquisition
of about one trillion cubic feet of gas reserves during the past three
years continues to pay big dividends," stated Cross Timbers Chairman
Bob R. Simpson. "For the rest of this year, we expect continued growth
in natural gas production, dramatically higher earnings and cash flow,
substantial debt reduction and further increases in our stock price."
The company's second quarter gas production averaged 331 MMcf/d, a 37%
increase from 2Q99. The average gas price for the quarter was $2.72/Mcf,
a 50% increase from $1.81/Mcf in 2Q99.
Pioneer Natural Resources was another exception among E&P companies.
It reported a second quarter net loss of $16.1 million or $0.16 per share.
Results were negatively impacted by several non-cash charges: a $12.3 million
extraordinary loss on early extinguishment of debt (related to the establishment
of a new bank facility), a $4.8 million loss on the disposition of assets
(primarily the sale of an office building in Midland, TX) and a $28.5 million
mark-to-market charge (related to derivatives not treated as hedges). Earnings
as adjusted for the above items were $29.5 million or $0.30 per share.
Cash flow from operations was $122.2 million compared to $89.1 million
in 2Q99. Strong cash flow allowed the company to reduce long-term debt
by $43 million to $1.7 billion while growing daily production. Pioneer
also repurchased 1.1 million shares through July 15 at an average price
of $9.97 per share. Its domestic gas production fell 31% to 230 MMcf/d,
while realized prices rose 50% to $3.24/MMBtu.
Probably one of the bigger disappointments, according to Featherston,
was Burlington Resources. "A bunch of companies left money on the
table with hedges, but that really didn't come as any surprise because
most are pretty good about disclosing their hedging positions. Barrett
had pre-announced problems. Cross Timbers hedged; there's was a greater
position, however, than generally known on the Street. That came as a surprise.
Burlington, which is another example, had a very big hedge position that
was losing money, but that had been disclosed and the reaction probably
should not have been so negative."
Burlington Resources Inc.'s management team took heat from investors
and some analysts, after it reported its natural gas production rose only
slightly compared with 1999 and fell 7% from the first quarter. Burlington
reported that its natural gas production for the entire year will be flat
compared with last year, and said that its oil production probably will
be 10% lower from a year ago (see NGI, July 24)
Featherston said EOG Resources (formerly Enron Oil and Gas) is an example
of a company that did very well during the quarter. EOG reported net income
available to common of $74.7 million, or $0.64 per share, compared to as
adjusted net income of $8.1 million, or $0.07 per share in 2Q99. Discretionary
cash flow increased 119% to $223 million. EOG said it has exceeded its
annual 7% North America production growth target and remains on track to
meet the 2000 goal. Production in North America increased 8.4% during the
second quarter and 8.3% year to date versus a year ago. The company's domestic
natural gas production was down 1% to 633 MMcf/d from 2Q99 production of
"EOG's operating earnings for the second quarter are the strongest
in the company's history," said CEO Mark G. Papa. "Successful
drilling and operating results throughout North America combined with record
natural gas prices and EOG's unhedged natural gas position were key drivers
in setting this new record."
Anadarko reported record results as a stand alone company, and pro forma
results for the combined operations of APC and Union Pacific Resources.
In early July, the merger involving the two companies was completed. "Anadarko,
by itself, had a great quarter with record earnings per share, cash flow
and production," said Anadarko Chairman Robert J. Allison. "On
a pro forma basis, the combined companies would have generated second quarter
earnings of $210 million, cash flow of $560 million and total production
of 44.8 million energy equivalent barrels (492,000 per day). With the production
added by the UPR merger in the last six months of the year, Anadarko's
2000 annual production will easily double our 1999 production. We expect
to produce more than 200 million energy equivalent barrels in 2001."
Anadarko's net income available to common shareholders was $74.9 million,
or $0.58 per share, compared to $8 million, or $0.06 per share in 2Q99.
Cash flow totaled $180 million, a 156% increase. Natural gas prices at
the wellhead averaged $3.20/Mcf, up 64%. Gas production averaged 536 MMcf/d,
an increase of 16%.
Santa Fe Snyder was another company with an above-average performance.
It reported record second quarter net income of $52 million or $0.28 per
diluted share on revenues of $236 million. This compares to a net loss
of $148 million or $1.02 per share on revenues of $112 million in the second
quarter of 1999. The 1999 results included $151 million of non-recurring,
after-tax charges related to the Snyder merger. Discretionary cash flow
for the quarter was a record $158 million or $0.86 per share compared with
$57 million or $0.40 per share in the same period of 1999.
"In this period we had the benefit of high commodity prices and
strong additional volumes from the recently acquired deepwater assets,
causing us to set continued record volumes, earnings and cash flow levels,"
said CEO James L. Payne. "We are having an excellent performance this
year as we proceed with the proposed merger with Devon Energy."
The company's second quarter production increased 35%. Oil production
rose 29% and gas production increased 41% versus the comparable period