Coastal Corp. hit pay dirt in the third quarter with highernatural gas production and prices and increased returns frompipeline operations, “the direct result of Coastal’s success inexecuting its integrated North American natural gas strategy,”according to Chairman David A. Arledge.

“We have increased natural gas production by 31% from the thirdquarter of 1998 and more than tripled earnings from Exploration andProduction. Coastal is the most active driller in North America,with 35 rigs drilling.” E&P earnings went from $15 million to$53 million, helped by an average unit price increase from$1.85/Mcf ($1.95 after hedging) to $2.47 ($2.23 after hedging).Third quarter production went from 504 MMcf/d in 1998 to 658 MMcf/dthis year. The company is targeting 900 MMcf/d in the fourthquarter.

Arledge also pointed to increased power production (by 55%) andearnings (by 45%). Coastal’s largest segment, its pipelineoperations, showed a year on year gain, from $109.1 million for the1998 quarter to $113.6 million in the last quarter. The oil sideshowed the only decline as refining, marketing and chemicalsdropped from $58 million to $52 million for the quarter.

Company earnings went from $91.8 million in 3Q 1998 to $102.1million in 3Q 1999.

“To continue this strong level of growth, we will invest about$2 billion in 1999 and have identified nearly $3 billion ofadditional capital investments through 2001. Almost two-thirds ofthis capital is for growth projects,” Arledge said, with most of itaimed at strengthening Coastal’s position in the North Americannatural gas market. The strategy is “structured so that Coastal canextract profits from multiple operations extending from thewellhead to gas-fired power facilities.”

Coastal set the strategy in 1993 when “an enormous amount ofanalysis was done on oil economics versus gas economics, and thegas economics won out every single time, long term, short term,intermediate term,” according to Stirling Pack, Coastal’s vicepresident for investor relations. Since then, the company has beenslowly reducing its investment in refining, marketing andchemicals.

It is that strategy that has put Coastal “ahead of the pack onramping up production,” said Coby Hesse, senior executive vicepresident during a conference call with analysts. “Nobody’s evenclose to us right now” in accelerating production. With 50 wellscompleted so far this year and another 61 underway Coastalcurrently is producing 740 MMcf/d. The company is working to bringthe 1999 well total to 90 and the fourth quarter production to 900MMcf/d.

“Looking into next year we’re very, very bullish on gas prices,”Hesse said. As evidence of this, he pointed to a significantportion of October production covered by “very high” hedges, 80% ofNovember hedged at “fairly high prices — higher than where theyare right now….. and December is about half hedged at pricescomparable to what we’re looking at today.” But at this pointCoastal has no hedges into next year. Questioned as to why theyweren’t taking advantage of a 12-month strip between $2.60 and$2.70, Hesse pointed to the bullish forecast. “If it’s a coldwinter it could draw storage down to a point where it could be verydifficult in 2000 reaching a comfortable storage level. That’s ourposition now, but we re-evaluate it every day.”

Hesse also responded to questions as to how profits were up atits joint marketing venture, Engage Energy, while volumes weredown. “We have stopped a lot of business at Engage that was notgenerating profits, activities that were losing money. We arefocused now on structured transactions and we will continue toreduce costs.” Engage went from a loss to $3.8 million earnings in3Q, “about a $6 million swing.”

Coastal expects the 150-mile Medicine Bow lateral on its WyomingInterstate Co. (WIC) to go into service in November with an initialcapacity of 273 MMcf/d and has filed to expand that to 400 MMcf/dnext year. In the last quarter the company increased its ownershipto 50% in HIOS, U-TOS and East Breaks Gathering and purchased 50%of Stingray in the Gulf, all of which connect with Coastal’s ANRPipeline. The company also increased its ownership in Mobile BayProcessing Partners and in the Gulf Coast NGL Pipeline.

Ellen Beswick

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