Net quarterly losses were reported by ConocoPhillips, in its first financial report since completing its merger, and Amerada Hess last Thursday, putting downward pressure on major oil shares. Hess shares fell more than 11% to $58.54 by mid afternoon, while ConocoPhillips shares were down only about 2% to $47.20 because the charges were expected and its results from continuing operations were in line with Wall Street forecasts.

Amerada Hess reported a net loss of $136 million ($1.54 per share), including a $256 million charge lower reserve values in the Gulf of Mexico. The writedown of reserves, most of which were acquired in the LLOG acquisition early in 2001, was related to poor reservoir performance and steeper than expected production declines. As a result, Amerada Hess de-booked 29 million boe of reserves, or about 2% of its total 1.4 billion boe of proved reserves.

The writedown was slightly offset by a gain of $67 million from sales of six U.S. flag tankers and other special items. Net income was $153 million ($1.72 per share) in the first nine months of 2002. Operating earnings, excluding special items, were $121 million ($1.36 per share) compared to $167 million ($1.86 per share) in 3Q2001. Operating revenues fell slightly to $2.8 billion. Capital expenditures rose to $3.2 billion, including $2.7 billion for the acquisition of Triton Energy Limited.

The company’s oil and gas production rose 2% to 441,000 boe/d. However, U.S. natural gas production fell to 355 MMcf/d from 464 MMcf/d in 3Q2001 and from 422 MMcf/d in the second quarter. Realized crude oil prices rose to $26.24/bbl, an increase of $1.93, and realized domestic natural gas prices were flat at about $3.40/Mcf.

Moody’s Investors Service confirmed Hess’s Baa2 long-term and Prime-2 commercial paper ratings, but changed the rating outlook for both to negative based on near-term expected declines in its crude oil and natural gas production, which is projected to average about 415,000 boe/d in 2003, almost 9% below current levels and below the company’s earlier volume projections for 2003.

“The production decline reflects both reduced performance from the Gulf of Mexico reserves and delayed production from Equatorial Guinea as the company revises its spending plans to optimize field development and reservoir management,” Moody’s said.

Hess is on track for $600 million of debt reduction in 2002 and may undertake further asset sales in 2003 to help further reduce its debt. “However, the company’s financial leverage remains elevated following its $3.2 billion acquisition of Triton Energy in 2001, and it faces increased spending over the next two years tied primarily to the development of the Okume, Oveng and Elon fields in Equatorial Guinea,” Moody’s said. The agency said it will keep a close watch on Hess’s progress in Equatorial Guinea, its hedging program, capital spending, asset sales, debt reduction program and the changing prices of oil and gas. “Greater than expected production declines or cash flow deficits and increased debt levels due to negative commodity pricing impacts could lead to a ratings downgrade for Amerada Hess,” Moody’s said.

Merger Related Charges Lead to ConocoPhillips Loss

ConocoPhillips, which closed its merger on Aug. 30, said it lost $116 million, or 24 cents a share, including $572 million in one-time merger-related and discontinued-operations charges. Combined results for 3Q2001 were $364 million, or $1.30 a share. However, net operating income (which excludes special items) was $456 million, or 94 cents per share, compared with $373 million, or $1.33 per share.

CEO Jim Mulva said despite the one-time charges the company is moving forward and will announced operating plans and synergy targets on Nov. 22.

“On the whole, the new company has performed well, especially in the areas of safety and operational consistency. Upstream, we benefited from improved crude oil prices, but at the same time, we have seen difficult market conditions in our downstream businesses.”

In addition to merger related charges, the company also posted an $8 million loss from an oil and gas hedging program related to Conoco’s July 2001 Gulf Canada acquisition, as well as $2 million in foreign currency exchange gains.

Worldwide crude oil sales realized an average price of $25.96/bbl, up from $24.65 in the same period a year ago. Lower 48 natural gas prices averaged $2.65 compared with $2.53 in the third quarter of 2001.

Production for the quarter was adversely affected by OPEC-related cuts, totaling 9,600 boe/d, a decline in U.S. Lower 48 output, and a late-2001 Denmark property sale. In addition, during the quarter, daily production was reduced by 19,000 boe/d as a result of operating interruptions at Prudhoe Bay in Alaska and Britannia in the United Kingdom, as well as from tropical storms in the Gulf of Mexico.

Nevertheless, Lower 48 natural gas production rose to 922 MMcf/d from 759 MMcf/d and Canadian gas production was up to 172 MMcf/d from 18 MMcf/d. The company’s worldwide gas production rose substantially to 1.98 Bcf/d from 1.33 Bcf/d in 3Q2001.

“Upstream, we expect our fourth-quarter 2002 production to be 8% above third-quarter pro forma,” Mulva said. “Improvements are expected to come from seasonal increases in the North Sea and Alaska, and new production in the North Sea and China. We continue to move forward with legacy projects in the deepwater Gulf of Mexico, Bohai Bay, the Timor Sea, Venezuela, Indonesia and the Caspian Sea.

“In our downstream business, we are seeing improved market conditions through better margins and lower inventory levels. Our after-tax planned turnaround costs are expected to impact fourth-quarter earnings by approximately $15 million. Despite the impact of Hurricane Lili in the Gulf of Mexico and a power interruption at the Humber refinery in the United Kingdom, we expect our fourth-quarter crude oil utilization rate to be comparable with the third-quarter pro forma rate of 91%.”

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