Exploration and production companies’ quarterly earnings continue to eclipse Wall Street forecasts on higher natural gas and oil prices, but the profits masked overall gloomy numbers for natural gas production in North America. To be fair, the lower output can partly be attributed to asset sales, but of the majors reporting last week — BP plc, ExxonMobil Corp., Royal Dutch/Shell Group, ChevronTexaco Corp., ConocoPhillips Corp., Marathon Oil Corp. and Amerada Hess Corp. — only BP showed worldwide gas gains, and none reported higher North American gas output.

The lower numbers were not restricted to the majors. Three of the largest independents’ North American gas output was up — EnCana Corp., Kerr McGee Corp. and Murphy Oil Corp. — and two others, Anadarko Petroleum Corp. and Newfield Exploration Corp., recorded flat gas production. Apache Corp. showed respectable worldwide gas gains, but its North American output also failed to surpass 2Q2003 figures.

London-based BP’s oil and gas production grew by 18% year-over-year to 3.97 MMboe/d. However, all of the growth was in Russia, where the company completed an $8 billion deal to create the TNK-BP joint venture in late 2003. Production outside of Russia declined 2% in the first six months. BP blamed the decline on asset sales, lower seasonal natural gas production in the North Sea, as well as unplanned shutdowns in its Gulf of Mexico Mars field and a Trinidad field.

In the Gas, Power and Renewables segment, BP reported another strong quarter for gas sales, including a higher contribution from its natural gas liquids (NGL) business in North America. Gas sales volumes worldwide totaled 27.3 Bcf/d, compared with 24.28 Bcf/d for 2Q2003. In the United States, gas sales volumes totaled 12.47 Bcf/d, up from 10.441 Bcf/d a year earlier. NGL sales in the United States stood at 334,000 bbl/d compared to 289,000 bbl/d in 2Q2003.

Meanwhile, BP’s quarterly earnings were 35% higher because of higher commodity prices. BP posted a profit of $3.43 billion, up from $2.54 billion in 2Q2003. Pro forma profit, which excludes losses and gains, was $3.91 billion, up from $3.17 billion, which was slightly below Wall Street’s forecast of $4.14 billion. Quarterly sales were $71.2 billion, up from $54.8 billion a year ago.

ExxonMobil reported net income of $5.79 billion (88 cents/share), which was 39% higher than 2Q2003’s $4.17 billion (62 cents). The company also repurchased 45 million common shares in the second quarter. Revenues totaled $70.69 billion, up 24% from $57.17 billion a year earlier. The company spent $3.62 billion on capital and exploration projects, down 5.6% from a year earlier. However, earnings in its exploration and production (E&P) division were $3.85 billion, up 36% from 2Q2003 on higher commodity prices.

Worldwide, quarterly gas production at ExxonMobil decreased only slightly to 9 Bcf/d from 9.283 Bcf/d in 2Q2003. However, the Irving, TX-based major’s U.S. gas production fell 15%, and North American gas sales totaled 2.961 Bcf/d, down from 3.268 Bcf/d in 2Q2003. Included in the shortfall was about 70 MMcf/d in North American asset sales, according to controller Pat Mulva, who presided over a conference call with analysts on Thursday.

Although U.S. gas production has fallen, Mulva enthusiastically promoted Exxon’s new liquefied natural gas (LNG) projects, which include a large project with Qatar. He said the company would continue to diversify its portfolio with more LNG and gas-to-liquids projects, which offer “very competitive returns.”

Shell, which settled an inquiry with U.S. and British regulators into its reclassification of reserves (see related story), announced a 54% increase in quarterly net income, with most of the improved performance in its downstream businesses. Net income was $4 billion, compared with $2.6 billion in the year-earlier period, it said.

However, earnings fell 3% within the E&P unit. There was a 5% decline in production and a $330 million charge from unsuccessful explorations, the company said. A decrease of 2% from the effect of asset sales (95 MMboe/d) and the price effect on production entitlements was not included in the declining numbers. In addition, the London-based major said it would only replace 60-80% of its expected full-year production of 3.7-3.8 MMboe.

“E&P was clearly a disappointment and a challenge,” said Jeroen van der Veer, Shell’s chairman. He said production in 2005 and 2006 “is likely to remain in the range of 3.5-3.8 MMboe/d.”

Record earnings for ChevronTexaco Corp. in the second quarter masked a 13% decline in U.S. natural gas production from the same period a year ago. On nearly every financial level, the news at San Ramon, CA-based ChevronTexaco was good. The producer reported record quarterly net income of $4.1 billion ($3.88/share diluted), compared with net income of $1.6 billion ($1.50) in the year-ago period. For the first six months of 2004, net income was $6.7 billion ($6.28/share diluted), almost double for the first six months of 2003’s $3.5 billion ($3.31).

However, in the United States, Chevron’s net oil-equivalent production declined 8%, or 78,000 boe/d, from 2Q2003. Excluding the effect of property sales, net oil-equivalent production declined about 6% between periods. Chevron said normal field declines accounted for most of the reduced production, the effects of which were only partially offset by new or increased production in certain fields. The net liquids component of production was down 5% to 535,000 bbl/d. And net natural gas production averaged 2 Bcf/d, down 13%.

Worldwide oil-equivalent production, including volumes produced from oil sands and production under an operating service agreement, declined about 4% from the 2003 second quarter. About one-half of the decline was associated with properties sold since last year’s second quarter. The average sales price for U.S. natural gas increased 9% to $5.59/Mcf, while internationally the average natural gas price of $2.55 declined 4% from a year ago.

Houston-based Conoco’s higher earnings resulted from gains in its refining business, despite the fact that three of its refineries had unscheduled or unexpectedly long shutdowns that increased maintenance costs. It reported earnings of $2.1 billion ($2.97/share), which was well ahead of 2Q2003’s $1.2 billion ($1.73/share). Revenue was up 25% to $31.9 billion from $25.6 billion.

In the second quarter, Conoco produced 913,000 bbl/d of oil, which was down 5.6% from 2Q2003, and it produced 3.3 Bcf/d of gas, which was off 5.5% from a year earlier. Declines in existing oil fields and sales of production assets contributed to the declines. To reverse this trend, Conoco said it is close to a transaction with Russian-based OAO Lukoil that would give Conoco a 7.6% stake. It also would commit another $3 billion in a joint exploration deal.

At Houston-based Marathon, total production worldwide was down to stand at 338.8 MMboe/d, compared with 395.5 MMboe/d in 2Q2003. In the United States, net natural gas production fell to 641.1 MMcf/d from 707.4 MMcf/d; net liquid hydrocarbon production also fell to 87,200 bbl/d from 114,400 bbl/d in 2Q2003. Marathon blamed the lower production primarily on asset sales, increased administrative expenses and up-front costs related to outsourcing activities.

However, Marathon’s earnings, excluding one-time times and discontinued operations, rose 48% to $348 million ($1.01/share), compared with $248 million (80 cents/share) in 2Q2003. Wall Street had pegged 2Q2004 earnings at $1.05 a share.

Marathon also reported positives in its LNG shipment plans to the United States from Equatorial Guinea, which it said are on pace to begin in late 2007. The project is expected to be one of the lowest-cost LNG operations in the Atlantic basin with an all-in LNG operating, capital and feedstock cost of approximately $1/MMBtu at the loading flange of the LNG plant. Efforts also are underway to expand the utilization of the LNG facility “above and beyond” the contract to supply 3.4 million metric tons/year to BG Gas Marketing Ltd. for 17 years, the company said. And Marathon is seeking additional gas supply in the area that could lead to the development of a second LNG train.

New York-based Amerada Hess reported its quarterly production fell 7% to 351,000 boe/d, mostly on the sales of older, higher-cost fields worldwide. Still, Hess reported that the first six months performance would allow it to exceed its previous production forecast by 4.6% by the end of the year. Hess now expects output to average 340,000 boe/d, up from a previous forecast of 325,000 boe/d.

On the gas side, Hess produced 160 Bcf in the quarter, well off of the 264 Bcf it produced in 2Q2003, and also down from the 183 Bcf it produced in 1Q2004. Worldwide, the company produced 601 Bcf in the quarter, down from 695 Bcf a year ago, and flat sequentially.

Hess’s reported net income beat the Street’s forecast, with $288 million ($2.84/share), up slightly from 2Q2003’s $252 million ($2.83). Wall Street had forecast on average earnings of $2.46/share in the quarter.

Calgary-based EnCana reported a 26% rise in production in the second quarter, fueled by its North American assets. However, EnCana’s output failed to overcome a 69% drop in profit, which the producer blamed on several non-cash items that hurt bottom-line results.

Production showed strong gains, rising to 775,885 boe/d from 617,408 boe/d in 2Q2003. Natural gas production was up more than 23% in the quarter to average 3.04 Bcf/d, while oil and natural gas liquids sales rose 31% to 270,000 bbl/d. The gas increase was attributed to strong growth from Greater Sierra, Cutbank Ridge and Southern Plains shallow gas in Canada and Mamm Creek in the U.S. Rockies. Gas sales included production as of May 19 from its Denver-based Tom Brown acquisition, which added an average of 132 MMcf/d over the quarter.

EnCana earned $250 million (54 cents/share), down from $807 million ($1.67) for the same period of 2003. Cash flow rose 12% to $1.13 billion ($2.43/share), up from $1.01 billion ($2.08). Earnings for the quarter were impacted by a change in accounting policy for unrealized hedging, and included an after-tax unrealized mark-to-market loss of $104 million related to hedges, as well as an after-tax unrealized $25 million loss because of changes in foreign exchange rates.

Kerr-McGee, headquartered in Oklahoma City, reported net income of $110.6 million ($1.01/diluted share), up 59% from 2Q2003’s $69.6 million (68 cents). Adjusted after-tax net income from continuing operations was $119.8 million ($1.09/share), compared with $113.0 million ($1.07) for 2Q2003. Adjusted after-tax net income from continuing operations was determined by excluding net income results from discontinued operations and the effect of special items.

“During the second quarter, we met our production projections, continued to control costs and experienced improving performance by our chemical operations, while completing the merger with Westport Resources, which adds significant depth, breadth and balance to our oil and gas exploration and production program,” said CEO Luke R. Corbett. He said Kerr-McGee expects total oil and gas volumes to increase by more than 25% in the third quarter “as we ramp up production from new developments in the deepwater Gulf of Mexico at the Red Hawk and Gunnison fields and our new core area in Bohai Bay, China; bring on additional volumes from our successful exploitation programs; and realize the full impact of the merger with Westport Resources.”

Kerr-McGee’s daily oil production from continuing operations averaged 140,500 bbl/d in the second quarter, down 9% from 154,800 bbl/d for the same period a year ago. However, natural gas sales volumes worldwide averaged 740 MMcf/d, up 6% from a year ago. Domestically, gas production stood at 648 MMcf/d, compared with 617 MMcf/d in 2Q2003.

The average natural gas sales price, including the effects of the company’s hedging program, was $4.70/Mcf a 10% increase over the 2003 second quarter. In the United States, Kerr-McGee sold 684 MMcf/d for the quarter, up from 617 MMcf/d in 3Q2003.

Murphy, headquartered in El Dorado, AR, reported second quarter net income was a record $349.9 million ($3.75/share), compared with $79.7 million (86 cents) in 2Q2003. Quarterly profit included income from discontinued operations of $181.8 million ($1.95/share), $166.7 million of which was a net gain on sale of most of its conventional oil and gas assets in Western Canada.

Murphy’s North American natural gas sales volumes from continuing operations increased to 123 MMcf/d from 112 MMcf/d in 2Q2003, mostly because of production from the Medusa and Habanero fields in the Gulf of Mexico (GOM). Exploration expenses were $23.2 million in the second quarter of 2004 compared to $28.1 million in the same period of 2003. Total crude oil and natural gas liquids production from continuing operations was 97,375 bbl/d in the quarter, up from 75,624 bbl/d in 2Q2003, with the net increase also primarily attributed to production at the Medusa and Habanero fields in deepwater Gulf of Mexico, which began production in the fourth quarter of 2003, and higher volumes at the West Patricia field in Malaysia.

Houston-based Anadarko recorded stellar earnings in the quarter, with net income of $405 million ($1.59/share diluted) on revenues of $1.44 billion. For the same period of 2003, net income was $301 million ($1.20/share diluted), on revenues of $1.25 billion.

North American gas production was basically flat compared with a year ago. For the quarter, Anadarko reported average U.S. gas volumes of 1.388 Bcf/d, compared with 1.35 Bcf in 2Q2003. Its gas price was $5.19/Mcf, up from $4.28 a year earlier. In Canada, gas volumes averaged 398 MMcf/d, slightly ahead of 391 MMcf/d in 2Q2003. The gas price was $5.16/Mcf, ahead of last year’s $4.80. Worldwide, Anadarko’s gas volumes totaled 162 Bcf, compared with 158 Bcf in 2Q2003. Average daily volumes were 1.786 Bcf/d, compared with 1.741 Bcf/d in 2Q2003. During the second quarter of 2004, sales volumes totaled 47 MMboe, or 512,000 boe/d, down slightly from 2003 second quarter sales volumes of 48 MMboe, or 527,000 boe/d.

Anadarko trimmed its 2004 production forecast slightly on Friday, citing the impact of higher prices on production-sharing projects in Venezuela and the Gulf of Mexico. It also expects to increase its capital spending to a range of between $2.8-3 billion, primarily to accelerate development of its K2 North field in the Gulf of Mexico.

For the second quarter of 2004, Houston-based Newfield reported net income of $67.4 million ($1.18/share), compared with $53.1 million (95 cents) for the same period a year ago. Revenues in the quarter were $282.7 million, and net cash provided by operating activities was $185.1 million.

Newfield, whose production is centered in the GOM, U.S. onshore Gulf Coast and the Anadarko and Arkoma Basins, reported 2Q production of 56.0 Bcfe, which was flat compared with last year’s 56.2 Bcfe. Natural gas production for the quarter was 47.5 Bcf, a 1% rise from last year’s 46.8 Bcf.

On strong commodity prices, Apache earned $372 million ($1.13/diluted share), an increase of 53% over $243 million (74 cents) recorded for the same period of 2003. The 2Q2004 earnings included two unusual items that together reduced the per-share results by 19 cents: a $48 million after-tax reserve for an arbitration award and the $14 million after-tax impact of the employee share appreciation plan. Apache said it is contesting the arbitration award.

Apache reported a large decline North American production overall. In the United States, Apache’s gas volumes totaled 665,167 Mcf/d, down from 702,109 Mcf in 2Q2003, while in Canada, gas volumes grew to 327,537 Mcf/d from 317,079 Mcf/d a year earlier. Worldwide, gas production averaged 1.25 Bcf/d, up 38 MMcf/d sequentially and a slight increase from 2Q2003.

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