MCN Energy Group announced last week it plans to exit theexploration business, and expects to take a second quarter chargeon earnings of $225 million because of low oil and gas prices andthe under-performance of certain exploration properties in theMidcontinent and Gulf Coast regions.
“The energy price issue is an industry-wide phenomenon,” notedMCN Chairman Alfred R. Glancy III. “Full-cost-accounting E&Pcompanies such as ours are being hit particularly hard because theSecurities & Exchange Commission requires oil and gas reservesto be valued at current or contract prices at the end of eachquarter. This ‘ceiling test’ sets a low value on the reserves basedon a temporary plunge in energy prices, rather than reflecting theactual anticipated long-term value of those reserves.”
Glancy said the write-down will allow MCN to finish 1998 “inposition to resume a steady pace of earnings growth.” But becauseof the reorganization and write-down, the company is lowering 1998earnings expectations to 10-15% below last year’s $1.91 per share.”We expect earnings to recover to a range of at least $2 to $2.10per share for 1999, assuming a return to normal weather andcontributions from coal fines tax credits,” said Glancy.
The company recently completed a comprehensive review of itsE&P operations and concluded it should “return to our original,lower-risk strategy,” Glancy said. “We have an attractive inventoryof exploration properties that will require some additionalinvestment as we carefully move out of this higher-risk area. Wewill be divesting these properties because they don’t fit our riskprofile.”
He said the company will continue to focus on production fromthe Antrim shale, coalbed methane holdings and conventionaldevelopment drilling. “These plays provide both quick andconsistent cashflows and earnings.”
Capital investments in the E&P business for each 1998 and1999, however, will be about half of the previous year’s level of$375 million,” he said.
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