For 2001, gas-rich Cabot Oil & Gas Corp. saw a 21% increase in production volumes and benefited from early-year natural gas prices and favorable hedge positions between February and October 2001. However, the Houston-based company was hit late in the year with credit exposure related to Enron Corp.’s bankruptcy, and combined with other special items, reported overall losses of more than $10 million. For the entire year, however, Cabot set unprecedented income records of $56.7 million, or $1.87 per share, with discretionary cash flow of $231.2 million, or $7.64 per share.

Cabot reported it had some non-cash impairments of oil and gas properties, exposure to Enron, a severance tax refund and unrealized gains in derivative instruments. Cabot took an estimated $2.3 million charge to bad debt in the fourth quarter, relating to the Enron bankruptcy. After accounting for the special items, reported earnings were $51.8 million, or $1.71 per share, and discretionary cash flow is $230.5 million, or $7.61 per share. The year-end results surpassed 2000 net income of $30.2 million, or $1.10 per share, and the discretionary cash flow of $125.0 million, or $4.56 per share, excluding the impact of selected items.

Cabot reported a fourth quarter loss of $5.9 million, or $0.19 per share, and discretionary cash flow of $35.3 million, or $1.12 per share, compared to the fourth quarter of 2000, when Cabot reported net income of $18.7 million, or $0.64 per share, and discretionary cash flow of $52.5 million, or $1.81 per share, excluding the impact of selected items. With the other special items (including Enron) the fourth quarter loss was $10.8 million, or $0.34 per share, and discretionary cash flow was $33.9 million, or $1.07 per share.

While noting the problems Cabot and other energy companies experienced late in the year, CEO Ray Seegmiller said he was especially pleased with the company’s production last year. “The most important of these is the production increase, in particular the 12% increase through the drill bit resulting from our exploration program. This is the first time in our history that the company has delivered double-digit, organic production growth reinforcing the early success of our exploration efforts.”

For the year, Cabot’s production totaled 81.1 Bcfe, including 6.2 Bcfe of production related to its acquisition of Cody Oil. A year earlier, Cabot had 66.9 Bcfe. Fourth quarter production was 23.3 Bcfe, a 34% increase over 2000’s report of 17.4 Bcfe. Removing the 3.4 Bcfe associated with the Cody acquisition, production still would have increased 14% over last year’s comparable period. Sequentially, third quarter to fourth quarter of 2001, production increased 5% nearly all of which reflects a full three months of Cody production versus two months in the prior quarter.

Cabot’s 2001 average realized natural gas price was $4.36/Mcf compared to an average realization of $3.19/Mcf in 2000. Of the $1.17/Mcf increase in realized prices, $0.49/Mcf relates to the incremental value realized from Cabot’s hedge position. Oil prices dropped nearly $2/bbl from 2000 to an average of $24.91 in 2001. Cabot realized an average natural gas price for the fourth quarter of $2.87/ Mcf, 37% lower than 2000. Oil price comparisons for the fourth quarter reflected the same trend with the average realized price per barrel down 32% to $20.47 per barrel in 2001.

“We have once again entered a downturn in the energy price cycle,” said Seegmiller. “To provide some level of protection going into 2002, we have taken a defensive posture and entered into collar agreements covering approximately 60% of our anticipated natural gas production for the first four months of the year. These hedges provide us price protection at $2.50/MMBtu on a NYMEX equivalent basis for the early months of our 2002 budget.”

Exploration expense for 2001 was way up, $63.5 million compared to $19.9 million in 2000. “This increase relates to an expanded overall level of drilling activity which included 27 exploration wells in 2001 compared to 17 wells in 2000,” said Seegmiller. In 2001, Cabot incurred $30.2 million in dry hole expense and $20.6 million in seismic costs, of which $8.9 million and $11.6 million, respectively, related to the fourth quarter.

Although in the final stages of a year-end reserve audit, Cabot estimates total proved reserves are estimated between 1,140-1,165 Bcfe, up from the 1,019 Bcfe at the end of 2000. The increase, primarily because of the Cody acquisition and combined with the drill bit, is expected to replace production by more than 250%. Finding costs for the year will be higher than last year because of increased drilling costs, the Cody acquisition, extensive investments in seismic and leasehold expected to benefit future years, along with an increase in dry hole expense, said the company.

“What a difference 12 months make,” said Seegmiller. “The industry is once again dealing with extremes. We still feel the long-term fundamentals of the natural gas market are strong. However, with the current soft market, a recovery in commodity prices during the second half of the year is only a remote possibility; thus, Cabot has scaled back its drilling program but will still be testing 19 new exploration prospects.”

The CEO said Cabot also anticipates “numerous acquisition opportunities at reasonable prices during this low price environment and we would consider reducing our drilling program to fund a good reserve acquisition with upside potential. However, we do not intend to over extend the Company’s balance sheet. We believe the energy market will self correct as it has every time and those who have a long term view will benefit.”

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