Even with its natural gas production lagging by more than 100MMcf/d and oil production dropping by more than 15,000 b/d,Burlington Resources was still able to boost its net income from1999’s third quarter of $61 million ($.28 per share) to this year’sthird quarter level of $200 million ($.93 per share) due torealized oil and gas prices rising 47% and 42% respectively fromlast year’s 3Q.

“If you total up the largest independents and focus on NorthAmerica, you’re seeing that the industry is having a very difficulttime keeping production flat, in fact [for] most companies it isdeclining,” said Van Levy, an analyst with CIBC World Markets.”What we are seeing is an industry that for years has grownproduction pretty rapidly and is now flattening out; this is havinga dramatic impact on prices. The paradox is that the slight declinehas caused prices to triple, while the cash cost structures ofthese companies are only going up 15-20%, maybe 25%. Cash marginsare just exploding — doubling and tripling.”

Burlington’s gas production for the third quarter dropped to1,849 MMcf/d, compared to 1,988 MMcf/d for the same time periodlast year. The company blames the decrease in production onprocessing and treating efficiency problems associated with thesummer heat in the San Juan Basin and mechanical downtime in theSan Juan Basin, Canada, the North Sea, the East Irish Sea and theGulf of Mexico. The company also cited natural base decline asanother reason for the lackluster production results.

“In the San Juan Basin the issue we have is coal-bed methane isin decline. We have tried to offset that with conventionalproduction, but we have been limited with what we can do because ofthe infrastructure constraints out there,” said spokesman JohnCarrara. “Canadian, just because we have not gotten the newproduction on from last winter’s drilling season you’re seeing theeffects of base decline. From international [production] you’reseeing the decline from East Irish Sea, primarily Dalton field.”

“Many people projected for years that the gas bubble would begone in the mid to late eighties. It is finally over with, we arefinally tight and it has been 20 years,” said Levy. “The realreason we are having prices where we are is that the system hasfinally worked over these surpluses, even with the incredibleefficiencies that have been garnered over the last 15-to-20 years.”

Burlington’s realized gas prices rose to $3 per Mcf from lastyear’s third quarter mark of $2.11 per Mcf. Crude oil increasedfrom $18.21 per barrel to $26.81 per barrel.

“I think realistically in the longer term if we have priceswhere they are now, you will see [producer] spending acceleratepretty aggressively” because the economics are tremendous, Levysaid. “I am not in the camp that thinks $5 gas is here for the longterm, or even $4 gas. If you look at the last five years and lookat the forward 12-month curve, you can see that gas was between $2and $2.80. You look at the five years before that, 1990 to 1995, itwas somewhere between $1.40 and $1.80, so it is clearly marchingup. The new range may be $2.50 to $3.50 on the forward twelve, or$2.70 to $3.70, but it is not $4 to $5; it can’t be because youwill start seeing partnerships show up again, you will start seeingall these incremental sources come into the industry because thereturns are just way too high.” On the other hand, in the shortterm Levy thinks gas could possibly hit the $7 to $10 mark thiswinter.

Burlington is currently awaiting the completion of pipelinetie-ins for its Poco Petroleum acquisition to come online.Depending on the severity of the winter, the company expects tohave 60 MMcf/d from the project come onstream in the fourthquarter, with an additional 15 MMcf/d to follow during the firstquarter of 2001.

The company expects gas production in the fourth quarter to bein the range of 1,830 to 1,970 MMcf/d, and forecasts natural gasproduction in 2001 to be in the area of 1,800 to 2,000 MMcf/d.

Alex Steis

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