Independent producers who took advantage of soaring gas and oilprices put in a blockbuster second quarter, according to thenumerous financial reports released yesterday. “Essentiallyeverybody beat my earnings forecasts,” said Irene Haas, E&Panalyst for Sanders Morris Harris in Houston.

“It’s been a pretty good quarter for the producers,” she said.”Production has tended to exceed my expectations and so haspricing. So far the costs have not escalated yet. We kind of expectthat to happen, but we don’t know when. It’s a natural part of thebusiness cycle. So I think everybody now is in a nice sweet spot.There’s excess cash flow. For example, EOG is going to have moremoney that they have capital exdpenditures signed for, and theyplan to pay down debt and buy back shares and perhaps make somestrategic acquisitions. Marathon, which is an integrated story, isbuying back shares. Santa Fe Snyder had a strong quarter. Thingsare pretty good. It’s probably one of the best quarters in a longtime.”

Despite the excellent financial situation for the E&P group,however, investor interest has declined significantly over the pasttwo weeks. According to Haas, concerns about oil productionincreases and the impact of the mild summer in the Northeast on gasdemand has led to some investor uncertainty.

“I follow roughly 10 E&P stocks. The sector has only gained27% year-to-date and that’s bad because a month ago they were atabout 60% year-to-date gain. Really in the last two weeks my sectorlost a lot of value,” said Haas. “Directionally both crude andnatural gas prices have fallen. I would expect that to level outand find some equilibrium point. This is probably a short-termphenomenon. Today near-month crude is $28, and while that is not ahuge number, historically speaking it’s a great number. Oil above$20/bbl is a good price and natural gas at $3.65/MMBtu is somethingwe haven’t seen in a long time. In fact, I probably feel betterabout gas at this level. More demand will be available.

“It’s going to be a fantastic quarter as long as they have nothedged their upside away, which some producers have,” Haas added.”[Barrett Resources] is the one that kind of hedged a lot of theirupside away” (see Daily GPI, July 5).

Cross Timbers Oil also reported some hedging problems. While itssecond quarter cash flow of $57.7 million, or $1.26 per share, wasup 190% before charges, its earnings after charges were only$800,000. After recording a $15.7 million after-tax loss in thefair value of certain derivatives related to the company’s hedgingactivities and a $200,000 after-tax gain on investment in equitysecurities, earnings available to common stock were significantlyreduced for the quarter. Total revenues for the quarter were $121.7million, an 86% increase. Operating income was $46.5 million, a332% increase.

“The second quarter met all of our expectations, as theacquisition of about one trillion cubic feet of gas reserves duringthe past three years continues to pay big dividends,” stated CrossTimbers Chairman Bob R. Simpson. “For the rest of this year, weexpect continued growth in natural gas production, dramaticallyhigher earnings and cash flow, substantial debt reduction andfurther increases in our stock price.”

The company’s second quarter gas production averaged 331 MMcf/d,a 37% increase from 2Q99. The average gas price for the quarter was$2.72/Mcf, a 50% increase from $1.81/Mcf in 2Q99.

Pioneer Natural Resources was another exception among E&Pcompanies. It reported a second quarter net loss of $16.1 millionor $0.16 per share. Results were negatively impacted by severalnon-cash charges: a $12.3 million extraordinary loss on earlyextinguishment of debt (related to the establishment of a new bankfacility), a $4.8 million loss on the disposition of assets(primarily the sale of an office building in Midland, TX) and a$28.5 million mark-to-market charge (related to derivatives nottreated as hedges). Earnings as adjusted for the above items were$29.5 million or $0.30 per share. The analysts’ consensus earningsestimate was $0.27 per share, so the company actually beatestimates, which typically exclude one-time charges. For the sameperiod last year, Pioneer reported a net loss of $74.6 million or$0.74 per share. Cash flow from operations was $122.2 millioncompared to $89.1 million in 2Q99. Strong cash flow allowed thecompany to reduce long-term debt by $43 million to $1.7 billionwhile growing daily production. Pioneer also repurchased 1.1million shares through July 15 at an average price of $9.97 pershare. Its domestic gas production fell 31% to 230 MMcf/d, whilerealized prices rose 50% to $3.24/MMBtu.

Santa Fe Snyder reported record second quarter net income of $52million or $0.28 per diluted share on revenues of $236 million.This compares to a net loss of $148 million or $1.02 per share onrevenues of $112 million in the second quarter of 1999. The 1999results included $151 million of non-recurring, after-tax chargesrelated to the Snyder merger. Discretionary cash flow for thequarter was a record $158 million or $0.86 per share compared with$57 million or $0.40 per share in the same period of 1999.

“In this period we had the benefit of high commodity prices andstrong additional volumes from the recently acquired deepwater assets,causing us to set continued record volumes, earnings and cash flowlevels,” said CEO James L. Payne. “We are having an excellentperformance this year as we proceed with the proposed merger withDevon Energy” (see Daily GPI, May 30).

The company’s second quarter production increased 35%. Oilproduction rose 29% and gas production increased 41% versus thecomparable period last year. The increase was attributable todeepwater Gulf of Mexico and Rocky Mountain acquisitions, followedby the Snyder merger and continued success with the drill bit.Domestic natural gas production rose 46% to 372 MMcf/d. Commodityprices rose by more than 50% for both oil and natural gas.

EOG Resources reported second quarter 2000 net income availableto common of $74.7 million, or $0.64 per share, compared to asadjusted net income available to common of $8.1 million, or $0.07per share in 2Q99. Discretionary cash flow available to commonincreased 119% to $223 million. EOG said it has exceeded its annual7% North America production growth target and remains on track tomeet the 2000 goal. Production in North America increased 8.4%during the second quarter and 8.3% year to date versus a year ago.The company’s domestic natural gas production was down 1% to 633MMcf/d from 2Q99 production of 642 MMcf/d.

“EOG’s operating earnings for the second quarter are thestrongest in the company’s history,” said CEO Mark G. Papa.”Successful drilling and operating results throughout North Americacombined with record natural gas prices and EOG’s unhedged naturalgas position were key drivers in setting this new record.”

Noble Affiliates announced net income of $36.8 million, or 66cents per share, compared with $9.2 million, or 16 cents per share,in 2Q99. Revenues jumped 40% to $306.6 million. It reported a 56%increase in realized gas prices to $3.34/Mcf and gas production of382.1 MMcf/d.

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