Burlington's Production Drops, But Income is on the Rise
Even with its natural gas production lagging by more than 100
MMcf/d and oil production dropping by more than 15,000 b/d,
Burlington Resources was still able to boost its net income from
1999's third quarter of $61 million ($.28 per share) to this year's
third quarter level of $200 million ($.93 per share) due to
realized oil and gas prices rising 47% and 42% respectively from
last year's 3Q.
"If you total up the largest independents and focus on North
America, you're seeing that the industry is having a very difficult
time keeping production flat, in fact [for] most companies it is
declining," said Van Levy, an analyst with CIBC World Markets.
"What we are seeing is an industry that for years has grown
production pretty rapidly and is now flattening out; this is having
a dramatic impact on prices. The paradox is that the slight decline
has caused prices to triple, while the cash cost structures of
these companies are only going up 15-20%, maybe 25%. Cash margins
are just exploding --- doubling and tripling."
Burlington's gas production for the third quarter dropped to
1,849 MMcf/d, compared to 1,988 MMcf/d for the same time period
last year. The company blames the decrease in production on
processing and treating efficiency problems associated with the
summer heat in the San Juan Basin and mechanical downtime in the
San Juan Basin, Canada, the North Sea, the East Irish Sea and the
Gulf of Mexico. The company also cited natural base decline as
another reason for the lackluster production results.
"In the San Juan Basin the issue we have is coal-bed methane is
in decline. We have tried to offset that with conventional
production, but we have been limited with what we can do because of
the infrastructure constraints out there," said spokesman John
Carrara. "Canadian, just because we have not gotten the new
production on from last winter's drilling season you're seeing the
effects of base decline. From international [production] you're
seeing the decline from East Irish Sea, primarily Dalton field."
"Many people projected for years that the gas bubble would be
gone in the mid to late eighties. It is finally over with, we are
finally tight and it has been 20 years," said Levy. "The real
reason we are having prices where we are is that the system has
finally worked over these surpluses, even with the incredible
efficiencies that have been garnered over the last 15-to-20 years."
Burlington's realized gas prices rose to $3 per Mcf from last
year's third quarter mark of $2.11 per Mcf. Crude oil increased
from $18.21 per barrel to $26.81 per barrel.
"I think realistically in the longer term if we have prices
where they are now, you will see [producer] spending accelerate
pretty aggressively" because the economics are tremendous, Levy
said. "I am not in the camp that thinks $5 gas is here for the long
term, or even $4 gas. If you look at the last five years and look
at the forward 12-month curve, you can see that gas was between $2
and $2.80. You look at the five years before that, 1990 to 1995, it
was somewhere between $1.40 and $1.80, so it is clearly marching
up. 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 you
will start seeing partnerships show up again, you will start seeing
all these incremental sources come into the industry because the
returns are just way too high." On the other hand, in the short
term Levy thinks gas could possibly hit the $7 to $10 mark this
Burlington is currently awaiting the completion of pipeline
tie-ins for its Poco Petroleum acquisition to come online.
Depending on the severity of the winter, the company expects to
have 60 MMcf/d from the project come onstream in the fourth
quarter, with an additional 15 MMcf/d to follow during the first
quarter of 2001.
The company expects gas production in the fourth quarter to be
in the range of 1,830 to 1,970 MMcf/d, and forecasts natural gas
production in 2001 to be in the area of 1,800 to 2,000 MMcf/d.