Although it beat consensus estimates by a fairly large margin, higher production by Burlington Resources failed to offset lower commodity prices during the second quarter, as the company reported a 26% drop in net income to $170 million, or $0.84 per diluted share, compared to $231 million, $1.10/share in 2Q2001. Wall Street was expecting about 38 cents per share.

Burlington’s North American gas production was up to 1.8 Bcf/d from 1.5 Bcf/d in 2Q2001 but down slightly (65 MMcf/d) from the first quarter. The company’s total worldwide production of gas and liquids was up about 13% from last year’s second quarter but down about 2.5% from the first quarter of this year. Realized gas prices (worldwide) after hedging were down $1.23/Mcf to $3.14.

Burlington said it had lower costs, continued advancement on major projects and substantial progress on its non-core asset divestiture program. The divestiture program contributed a net gain of $0.10 per diluted share to the quarter’s results. Its discretionary cash flow was $378 million compared to $557 million in the prior year’s quarter.

“Our programs are very much on track, especially in Canada, and we have far surpassed the original divestiture objectives set immediately after the Canadian Hunter acquisition,” said CEO Bobby S. Shackouls. “We have also achieved our goal of reducing our debt-to-total-capitalization ratio, which positions us very favorably for the future.”

Property sales closed during the quarter generated proceeds of $900 million. Assuming the successful completion of transactions anticipated during the third quarter, Burlington now estimates that the property sales will reach $1.3 billion, compared to the previously announced maximum of $1.2 billion. With the sales, Burlington’s total debt, less cash on hand at the end of the quarter, stood at $3.6 billion, representing a net-debt-to-total-capitalization ratio of 49%.

During the quarter Burlington recognized a pre-tax gain on sales of $73 million that, along with a pre-tax charge of $40 million attributable to the subletting of a deepwater drilling rig currently under lease to the company, resulted in the $0.10 per-share gain. Burlington has de-emphasized its operated deepwater drilling program as part of the portfolio upgrading process.

Total natural gas production during the second quarter averaged 1,927 MMcf/d, up 15% from the prior year’s second-quarter average of 1,679 MMcf/d. Natural gas liquids (NGL) production averaged 65,000 b/d compared to 46,500 b/d during the prior year’s quarter. Oil production was 54,800 b/d, compared to 64,300 b/d during the prior year’s quarter. Production of all three commodities achieved or exceeded the high end of the guidance range previously provided, due to better performance and the timing of property sales.

Cash costs (excluding non-income taxes and transportation expenses) were $0.62/Mcfe compared to $0.73/Mcfe for comparable costs during the prior year’s quarter. All other costs were roughly in line with prior guidance. Exploration expense in the second quarter including the deepwater rig charge was $104 million, compared to $52 million during the prior year’s quarter. Exploratory results for the year’s first half included 41 successful wells of 72 drilled for a 57% success rate.

All of the company’s major growth projects remain on schedule. The first, an expansion that will more than double the Madden Field processing plant’s inlet capacity, is scheduled for start-up early in the third quarter of 2002.

For the remainder of 2002, Burlington expects production to decline from the second-quarter totals as a result of planned property divestitures as well as annual plant and pipeline maintenance extending into the third quarter. Declines will be partially offset by the startup of additional production in the Madden Field and the initiation of winter drilling in Canada. Third-quarter total equivalent production is expected to range from 2,240 to 2,536 MMcf/d. Production of natural gas is expected to range from 1,700 to 1,900 MMcf/d with NGL production to range from 54,000 to 62,000 b/d and crude oil production to range from 36,000 to 44,000 b/d.

The company has hedged 45% of its third-quarter 2002 North American natural gas production with collars of roughly $3 to $4.30/Mcf; 25% of fourth-quarter production with collars of roughly $2.90 to $4.15/Mcf and 20% of 2003 production with collars of roughly $3.25 to $5.10/Mcf. Hedge prices are given on a Henry Hub equivalent basis. However, the company also hedged its basis differentials as part of the hedging program.

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