While 1998 was a year of misery for most energy companies,especially producers, it was a banner year for The Coastal Corp.,which set a new earnings record. The company weathered the toughcommodity price environment so well in large part thanks to itsposition as a big gas transporter and large refiner, noted analystStuart Wagner of Petrie Parkman. Unlike Coastal, others reportingearnings yesterday suffered from not having a major pipelinebusiness to lean on for revenue.

With oil prices in the tank and expected by most to remain therefor some time, Coastal is leaning more heavily than ever on naturalgas for future growth.

“Coastal has developed a clearly defined growth strategy whichis being implemented to maximize earnings from our uniqueintegrated asset base. In the near-term, commodity prices andrefining margins are at levels that indicate 1999 will be achallenging year for all of us in the energy industry. However,specific projects and plans are in place to provide significantearnings growth over the longer-term,” said David A. Arledge, CEO.”Coastal has the financial flexibility, balance sheet strength andoperational expertise to compete profitably in each of ourbusinesses.”

Coastal’s reserve replacement last year was a whopping 519%,marking the fourth consecutive year reserve replacement hasexceeded 300%. Last year the company added more than 1.1 Tcfe,increasing total proved reserves to more than 2.6 Tcfe at year-end,88% of which is natural gas.

Stirling Pack Jr. of Coastal’s investor relations departmentsaid the company is focusing on gas now more than ever. The companysees prices coming up in the second half of the year when demandpicks up and deliverability declines. Pack pointed to record lowrig counts and cuts to E&P budgets as evidence supply will betightening up. Demand growth is expected to come both at theresidential level and in power generation.

Coastal traditionally has sought growth through the drillbit.The company now sees opportunities for growth through acquisitions,Pack said. Any acquisitions likely would be in one or more of thethree areas where Coastal has focused E&P operations: theshallow Gulf of Mexico, South Texas, and the Rocky Mountains, Packsaid. He said the company expects to increase production by as muchas 20 to 25% this year and as much as 15 to 20% in 2000. Lastyear’s E&P budget started at $500 million, grew by $50 million,and then by another $100 million at a time when other companieswere cutting back. For this year, the initial E&P budget isabout $700 million, $200 million of which is targeted foracquisition of developable reserves.

Coastal is budgeting for continued low prices, too. The companyis expecting oil to be at $14 for WTI and gas to be at $2.00/Mcf atthe Henry Hub, Pack said. Realized prices for gas in 1998 were$1.95/Mcf versus $2.40/Mcf for 1997. Gas production in 1998averaged 508.9 MMcf/d, compared with 436.0 MMcf/d in 1997.Throughput for Coastal’s pipeline subsidiaries in 1998 was 2,132Bcf, compared with 2,190 Bcf in 1997.

While Coastal clearly dodged the low-price bullet last year,many others did not.

“Occidental’s 1998 results reflect significantly lower oil andgas and chemical prices than we realized in 1997,” said CEO Ray R.Irani. “The 1999 capital spending budget will be reduced to $350million compared with $1.06 billion for 1998. Of the $350 millionin 1999 capital spending, oil and gas will be allocatedapproximately $275 million, with Elk Hills and Qatar receiving thehighest priority, and the remainder will go to chemicals. We expectthat 1999 worldwide oil and gas production will remain atapproximately the same level as 1998 even with the reduced spendinglevel.”

Union Pacific Resources Group (UPR) blamed the oil pricecollapse for a 1998 loss of $899 million despite a 53% increase inproduction and a 49% increase in proved reserves. The 1998financial results were strongly affected by a number of one-timeitems, most notably a previously announced $760 million after-tax,non-cash, asset impairment charge. Reserves increased by 49%, to ayear-end total of 6.124 Tcfe, up from the 1997 year-end total of4.100 Tcfe. Including the Norcen acquisition, the company achieveda reserve replacement rate of 403%.

Phillips Petroleum Co. 1998 net income was less than a third ofwhat it was in 1997. Major special items included charges of $267million for oil and gas property impairments. Excluding the effectof all special items, 1998 net operating income was still off 57%.Phillips has cut its capital spending for 1999 to $1.5 billion,about $600 million less than 1998 spending.

USX Corporation Board Chairman Thomas J. Usher said, “TheMarathon Group’s earnings were significantly impacted by lowerworldwide liquid hydrocarbon and natural gas prices. Nevertheless,1998 saw us gain momentum in growing and improving the business.

Amerada Hess Corp. reported a ’98 net loss of $459 million .

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