Burlington Resources’ North American asset repositioning started to pay off in the fourth quarter 2002, with earnings of $157 million or $0.78 per diluted share, compared to a prior-year 4Q loss of $79 million or $0.39 per diluted share. And it’s just the beginning, company officials said, pointing to continued improved results it expects from its San Juan Basin and Barnett shale properties in the U.S. and further development of its Canadian acquisitions.

“We view 2002 as a turning point in the multi-year transformation of our asset base that has repositioned Burlington to achieve profitable per-share growth and high returns in the future,” said Bobby S. Shackouls, CEO. “We substantially upgraded our asset portfolio through major acquisitions while de-emphasizing or rationalizing assets that offered lesser potential. We also continued rapid progress on the major development programs that will help drive our growth in the years ahead.”

Company officials, speaking in an earnings conference call last Thursday explained its “manufacturing” or “programmed development,” which focuses on pilot programs to develop efficiencies and bring costs down before launching full-blown development.

Irene Haas with Sanders Morris Harris noted Burlington has “re-shuffled its portfolio to focus on the North American gas market, lauding its strategy of “penny-pinching all the way to the bank….Burlington has been going through a quiet, but steady transformation towards being more profitable and producing more predictable results….It has deliberately lowered its mix of high-risk exploration and is now focusing on long life assets and unconventional gas.”

The company’s focus is on “large areas conducive to program drilling and cost reductions. Burlington pays attention to capital efficiency, and this has resulted in lower exploration expense, a lower aggregate decline curve, and a lower overall cost structure,” Haas said in an assessment following the earnings report. She rates the company a “strong buy.”

The company sold off about 10% of its properties in 2002, concentrating on development of its core projects. It expects to spend $1.35 billion on exploration and production operations this year, a 10% increase, with about 10% of the capital expenditures going to Canadian projects and 15-20% spent in the U.S., primarily on its Barnett shale development. The company also has major long-term projects underway in China and Algeria.

With its Barnett shale unconventional resource program, Burlington conducted a pilot program on initial acreage it acquired before it made a large-scale acquisition. It now controls 800 locations and is increasing its rig count to drive down drilling and completion costs. It expects to drill 100 to 150 wells in the play this year at $690,000, or an 8% cost reduction.

In the San Juan Burlington has about 475 capital projects, including 200 new wells and 275 workovers, aimed at developing 1.5 Tcf of reserves. Short term, production in the basin is down about 50-60 MMcf/d net to Burlington due to El Paso’s Blanco turbine outage, which should be fixed by the end of the month, according to Randy Limbacher, executive vice president and COO.

Assessing transportation for Rockies gas following the start-up of the Kern River expansion this year, Limbacher said the prevailing view is that it will help the northern Rockies. The company has examined various scenarios and is looking at the possibility its San Juan gas will move east, rather than west. “We have secured options to move up to 80% of our San Juan gas east, either financially or physically to protect ourselves.” Burlington will be watching to see how basis shakes out once the additional capacity is in place.

In western Canada Burlington has about 80 rigs working and expects to drill about 750 wells in 2003. The company is targeting a 3-8% increase overall in production in each of the next two years, “from projects in inventory that we already have on hand,” Limbacher said. Growth is expected to be at the lower end of the range in 2003.

The company also has improved its cash position. In the fourth quarter 2002 the company said its discretionary cash flow was $528 million, compared to $290 million during the fourth quarter 2001.

Production during the fourth quarter of 2002 was 2,464 MMcfe/d, compared to 2,483 MMcfe/d in 4Q 2001. Actual natural gas production was 1,883 MMcf/d, compared to 1,791 MMcf/d during the prior year’s quarter. Natural gas liquids production was 59.6 thousand barrels per day (Mb/d), compared to 54.0 Mb/d in 4Q 2001. Oil production was 37.3 Mb/d, compared to 61.4 Mb/d in 4Q 2001, with the decline stemming from the previously announced 2002 divestitures of producing properties. Production increases occurred in Canada and in Wyoming’s Madden Field.

Fourth-quarter 2002 price realizations for natural gas averaged $3.74/Mcf, compared to $2.89/Mcf in 4Q 2001. Natural gas liquids price realizations were $16.18/bbl, compared to $11.26 the prior year quarter. Oil price realizations were $25.01/bbl, compared to $19.31/bbl in 4Q 2001.

Results for the full year of 2002 included net income of $454 million, or $2.25 per diluted share, compared to the previous year’s $561 million, or $2.70 per diluted share. Discretionary cash flow was $1.5 billion, compared to the prior year’s $1.9 billion. Total production in 2002 increased 8% (or 11% per diluted share) to 2,571 MMcfe/d, compared to 2,386 MMcfe/d in 2001. Average price realizations for natural gas were $3.13/Mcf, compared to $3.96/Mcf during 2001. Natural gas liquids price realizations were $14.46/bbl, compared to $16.79/bbl in 2001. Oil price realizations were $24.11/bbl, compared to $23.45/bbl in 2001.

Burlington’s average reserve replacement cost during 2002 was $1.03/Mcfe excluding acquisitions, or $1.06/Mcfe including acquisitions. It replaced 161%t of its 2002 worldwide production from all sources. Excluding acquisitions, the replacement rate was 103%. Worldwide reserve additions from all sources totaled 1,513 Bcfe. Total reserves at year-end were 11.4 Tcfe, compared to 11.8 Tcfe the year before, with the decrease primarily attributable to property sales.

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