As exploration and production companies begin to release their third quarter production figures, early results show equal volumes or a slight decline compared to the same quarter a year ago. Dominion and Occidental Petroleum Corp., which announced earnings on Wednesday, both revealed slight production declines.

Richmond, VA-based Dominion said it produced 50.2 Bcf in the United States during the third quarter 2001, marking a slight decline from the 50.9 Bcf it reported during the second quarter and a larger one from its 56.3 Bcf figure in the third quarter 2000. Likewise, U.S. gas production for Occidental dropped from 687 MMcf/d in the third quarter 2000 to 602 MMcf/d last quarter.

Weighing in on the topic, John Olson, energy analyst with Sanders, Morris & Mundy in Houston, said, “Despite peaking out at a high level with the rig count in the third quarter, history seems to be repeating itself. Gas production still looks like it is going to be plus or minus 1% for the industry as a whole. We had production boosted much of the first half of the year by NGL plant rejection (not taking ethanes out of the gas stream) and that boosted production, unusually in the first quarter especially.”

However, the analyst said that will not be the case in the third quarter because margins on NGL processing have come back recently. Calling the cycle “the treadmill effect,” Olson said that while new gas well completions are adding “some plush production,” they are being offset by the natural decline curves of some of the older fields and some field blowdowns, “like Exxon was having out in Wyoming.”

“We will continue to see some offsetting trend,” Olson said. He said some companies will have good production comparisons such as Mitchell Energy, which Olson said is typically the best of the bunch. He added that he does not expect much of a jump in either direction from the first or second quarter.

Looking forward, Olson warned, “An air pocket has been created by the overkill in gas storage by the big energy marketers, all of whom have been playing the price contango. That has been very apparent for the last six months, and indeed, still refuses to go away. As a result, what we have had is a market that has been driven more by accounting justifications than by reality.

“This market in terms of sheer supply/demand fundamentals is probably not going to get back on its feet until April 1 presuming normal weather,” Olson added. “The trends for the fourth quarter should basically be mostly negative simply because of the fact that you see El Paso Energy having 65 rigs out there running, and that may head towards 20-25.” He added that signs of this scaling back are beginning to show throughout the industry.

Dominion Earnings Jump 21%, Oxy Results Rise 10%

Overall, Dominion revealed that its unaudited consolidated earnings on the quarter increased by $74 million over the same quarter in 2000. The company posted 3Q earnings of $344 million ($1.37 per share), compared to operating earnings of $270 million ($1.13 per share) for the same period in 2000. Dominion Exploration & Production contributed $78 million ($0.31 per share) in the quarter, up from $66 million ($0.28 per share) in the prior-year period. The company said the increase was primarily attributable to higher realized gas and oil prices, partially offset by higher operating expenses and lower production. Dominion reaffirmed its earnings targets of $4.15 or better in 2001 and $4.85 to $4.90 in 2002, excluding the addition of Louis Dreyfus Natural Gas. Dominion said the acquisition is expected to close by year-end and add about $0.05 per share to 2002 earnings.

“The third quarter was outstanding, despite a difficult business environment,” said CEO Thomas Capps. “Dominion generated record cash flow from operations and earnings of $1.1 billion and $344 million, respectively. Dominion’s performance demonstrates the strength of its well-balanced portfolio of energy businesses.”

Los Angeles-based Occidental reported a 10% increase in net income after special items to $444 million ($1.19 per share), compared with $402 million ($1.09 per share) for the same period of 2000. The quarter included the sale of non-strategic assets, including its interest in the Tangguh LNG project in Indonesia and the sale of the entity that leased a pipeline in Texas to Occidental’s former MidCon subsidiary for after-tax cash proceeds of $750 million, resulting in a net after-tax gain of $127 million. The third quarter 2000 included net after-tax gains of $31 million. Occidental’s oil and gas segment earnings before special items were $528 million for the quarter, compared with $690 million for the same period in 2000. The company said the decline in earnings was primarily due to lower worldwide crude oil prices and higher exploration expense. Including special items, its oil and gas segment earnings for the quarter were $927 million compared to $696 million last year.

“The strong third quarter performance of our oil and gas segment and the profitability of our chemical segment, despite the slowing economy, has kept us on track for another record year,” said CEO Ray Irani. “Our earnings before special items of $1.3 billion, or $3.48 per share, through the first three quarters nearly equaled our record performance for the entire year 2000. The combination of strong cash flow from operations and proceeds from non-strategic asset sales has resulted in substantial debt reduction that, along with outstanding earnings, has enabled us to slash our debt-to-capitalization ratio to 46% , the lowest level in nearly two decades.”

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