NGI The Weekly Gas Market Report / NGI All News Access

Acquisitions Conceal Gas Production Struggle

Acquisitions Conceal Gas Production Struggle

On average, U.S. gas production appears to have been up slightly (2%, according to financial reports from 25 producers) at the end of the third quarter compared to 3Q99. However, there was a wide variation among producers, with some reporting huge increases, such as Mitchell Energy, Devon and Coastal, while others reported large declines, including Amerada Hess, Texaco, Kerr McGee and Ocean Energy (see preliminary tally).

Nearly all of the producers showed huge realized gas price increases, with an average hike of $1.40/Mcf. Occidental showed the largest price increase, a jump of $2.06/Mcf in its realized gas prices. Cabot Oil & Gas managed to capture an increase of only 58 cents, however, with a realized price of $2.90/Mcf for 3Q2000.

But the production contrast may have been even more striking than the prices as producers at varying speeds and with varying techniques began to make a turnaround from last year's slump to this year's recovery. Acquisitions are up significantly this year and are expected to continue to increase, which has caused difficulty for those attempting to make apples-to-apples production comparisons year to year, several analysts noted. That is the case with Devon Energy, for example, which in the past year and a half has had three acquisitions, including the latest pooling-of-interests merger with Santa Fe Snyder. Devon reported a 37% increase in U.S. natural gas production to 972 MMcf/d. Anadarko reported a massive 229% increase in U.S. gas production to 1,498 MMcf/d. But when 1999 production figures from its merger partner Union Pacific Resources are combined with its own 3Q99 figures, the company shows a U.S. gas production decline of 12%.

Others, such as Apache, had medium sized purchases but also made large gains through the drill bit. Apache reported a 15% increase in U.S. gas production to 572 MMcf/d.

Then there were those who had been hugely successful in finding gas in the ground during the quarter. Mitchell Energy, which raised its gas production by 38%, topped the list in the plus column on a percentage basis. It did it the old fashioned way, i.e., through the drill bit, as did Coastal, up 33% to 877 MMcf/d, and Cross Timbers, which reported an 18% hike in U.S. gas production to 342 MMcf/d. Still others showed large declines, such as Ocean --- down 10% to 386 MMcf/d --- because of asset sales.

"Most of the growth that your seeing among the E&P companies is coming from acquisitions," said J.P. Morgan producer analyst Waqar Syed. "There is some organic growth, but it's just a few companies." Syed laughed when asked if he expected the strong acquisition trend to continue. "Yeah, I expected it to continue because companies aren't growing production through the drill bit so they have to acquire others.

"You have to explore your way out this time, but companies still are not willing to take that much risk. These companies will go and drill in areas that they know. They'll do some infill drilling, workovers and easy stuff like that. But that won't materially change your production outlook if you're just fighting high decline rates," said Syed. "They're just finding enough gas to offset declines."

Irene Haas of Sanders Morris Harris agreed that many of the production increases being reported are a result of consolidation among producers. "There has been and will be more consolidation going on because for a lot of the small firms it just doesn't make any sense any more," she said. "They really have few compelling reasons to be public anymore because the equity market is not looking to the small caps very favorably. For those who have gotten themselves in a bind [over the past year or two], be it through write downs or things of that nature, and still have not been able to repair it, I think they're going to have a tough time getting money out of the public market. For that reason, I don't think you will see very many IPO's coming out. Secondarily, the existing smaller companies will just be consolidated by the Devons and Apaches of the world."

Haas believes when all is said and done for the third quarter she will see a production decline. Going forward, she expects to see little change in that picture. "I expect third quarter, this year compared to last year, to be down because it's been hard. I just don't expect the big players, such as BP Amoco and ExxonMobil to grow a whole lot." ExxonMobil reported a 0.2% decline in U.S. gas production for the quarter.

"The geology is getting real mature," Haas noted. "It's hard to find new fields or deposits large enough to make those numbers grow substantially unless you go ultradeep or do a lot of coal-bed methane. I think we are hitting a bit of a brick wall here. I'm skeptical about whether all the additional drilling is really generating an incremental increase in supply."

Goldman Sachs released a report last week projecting U.S. gas production growth next year of 4-5%. "I just couldn't believe it," said Haas. "I'm having cognitive difficulty expecting that much growth. The geology just doesn't support it. It's physically impossible."

Syed concurred. "A lot of these companies will make claims that they will grow production by X and X amounts but very few of them will actually live up to that. A lot of companies will miss their numbers. That's what we've seen historically. I think we'll see somewhere between zero and 2% gas production growth. That would be a good number for next year. But if you have good demand growth, I don't think there will be enough to meet that. You will have a tight market. If demand suffers to like 1-1.5% growth, they should be able to meet that."

Haas noted that the tendency among producers when gas prices are high is to drill more but to drill for smaller finds with high decline rates. "That's the kind of game we're playing right now. Simply because the rig count doubles doesn't mean they are being as efficient as they have been in the past. They're drilling for stuff that can go poof!"

Salomon Smith Barney uses a model based on the Baker Hughes rig count that projects production additions per rig using a historical calculation. Although some observers, such as Irene Haas, might expect that model to be declining in accuracy, Michael Schmitz, Salomon's small cap producer analyst, insists it's been on target this year.

"It's saying production for the third quarter versus the second quarter (2000) should be up around 1%. It says third quarter of this year versus third quarter of last year is still down about 0.5%.

"We also take a survey of some of the larger producers that represents about 50-65% of production," said Schmitz. "Looking at third quarter compared to second quarter based on 20 companies that have actually reported results and another 20 that have estimated results, we show U.S. gas production up about 1.2%. And for 3Q2000 versus 3Q1999, our survey shows it down about 0.3%." But the jury is still out because half the producers still have not released their third quarter numbers.

Rocco Canonica

Large Variations in 3Q U.S. Production Results

              U.S. Gas Production (MMcf/d)     U.S. Realized Prices
                3Q2000  3Q1999  Change      3Q2000   3Q1999    Change
Chevron          3,535   3,436      3%       $4.42      NA        NA     
ExxonMobil       2,867   2,872   -0.2%         NA       NA        NA     
Burlington       1,484   1,382      7%       $2.89    $2.20     $0.69    
Texaco           1,273   1,416    -10%       $4.01    $2.44     $1.57    
Anadarko*        1,260   1,434    -12%       $4.01    $2.40     $1.61    
Devon**            972     711     37%       $3.77    $2.33     $1.44    
Coastal            877     659     33%       $4.22    $2.47     $1.75    
Conoco             826     843     -2%       $3.90    $2.09     $1.81    
Unocal             793     729      9%       $4.26    $2.26     $2.00    
Phillips           774     826     -6%       $3.83    $2.33     $1.50    
Marathon           716     731     -2%       $3.61    $2.22     $1.39    
Occidental         687     673      2%       $4.18    $2.12     $2.06    
EOG                652     642      2%       $4.14    $2.40     $1.74    
Apache             572     495     15%       $4.22    $2.58     $1.64    
El Paso            503     520     -3%       $2.32    $2.18     $0.14    
Kerr McGee**       464     516    -10%       $4.42    $2.66     $1.76    
Ocean              386     428    -10%       $4.09    $2.38     $1.71    
Cross Timbers      342     289     18%       $3.68    $2.32     $1.36    
Mitchell           320     232     38%       $4.50    $2.79     $1.71    
Amerada Hess       282     346    -18%       $3.98    $2.39     $1.59    
Pioneer            235     240     -2%       $3.65    $2.39     $1.26    
Equitable**        205     182     12%       $3.10    $2.41     $0.69    
HS Resources       203     192      6%       $3.24    $2.33     $0.91    
Cabot O&G          169     186     -9%       $2.90    $2.32     $0.58    
Pogo               159     148      8%       $3.11    $2.32     $0.79    
National Fuel      109     103      6%       $4.44    $2.60     $1.84    
Total/Average   20,664  20,230      2%       $3.77    $2.37     $1.40    
* Combines UPR and Anadarko production figures for 3Q99
** Prices are simple averages of several regions.
*** Prices include Canadian gas prices.

©Copyright 2000 Intelligence Press, Inc. All rights reserved. The preceding news report may not be republished or redistributed in whole or in part without prior written consent of Intelligence Press, Inc.

Copyright ©2018 Natural Gas Intelligence - All Rights Reserved.
ISSN © 2577-9877 | ISSN © 1532-1266
Comments powered by Disqus