Several of North America’s leading independents last week reported strong natural gas production in 3Q2006, but higher-than-expected operating expenses and lower gas prices pummeled quarterly profit. Gas-weighted Devon Energy Corp., EOG Resources Inc., Pioneer Natural Resources Corp. and Ultra Petroleum Corp. all reported quarterly gas production increases, but all of them also posted earnings declines. Marathon Oil Corp., meanwhile, posted a surge in profit, but its gas volumes fell.

Houston-based Marathon reported worldwide natural gas sales volumes fell to 719 MMcf/d from 807 MMcf/d. In the United States, where more than half of its gas production is located, gas sales fell to 522 MMcf/d from 562 MMcf/d.

Quarterly net income more than doubled from a year earlier to $1.623 billion ($4.52/share) from $770 million ($2.09), which was well ahead of Wall Street expectations of $3.63/share. Adjusted for special items, quarterly profits were $1.544 billion ($4.30/share), versus $797 million ($2.16/share) a year earlier. However, revenue fell to $16.63 billion from $17.15 billion. Total costs and expenses also fell to $13.69 billion from $15.92 billion.

Capital spending rose 38% compared with 3Q2005, and CEO Clarence Cazalot noted the company’s “major projects are progressing on schedule and will start providing profitable growth in 2007.” E&P earnings worldwide rose 53% to $572 million, well ahead of the $373 million reported in 3Q2005. However, in the United States, E&P profit fell to $218 million from $247 million. Marathon’s Integrated Gas segment lost $2 million, versus the $22 million in earned a year ago.

In July, Marathon bought 8,700 net acres of gas-weighted assets in the Piceance Basin of Colorado, and it expects to drill about 700 wells on the leasehold over the next 10 years (see NGI, July 24). Marathon’s principal domestic E&P efforts are concentrated in Alaska, New Mexico, Oklahoma, Texas, Wyoming and the Gulf of Mexico.

Average natural gas prices averaged $5.21/Mcf in 3Q2006, down from $5.52 a year earlier. Average oil prices rose to $62.96 from $50.10, and oil sales were up at 242,000 bbl/d from 157,000 bbl/d in 3Q2005.

The CEO of Oklahoma City-based Devon said high expenses will force a reduction in pricey Canadian exploration and production (E&P) projects in 2007. “We will not invest in low margin projects just to chase production volumes,” CEO J. Larry Nichols told financial analysts. Nichols said the company’s Canadian E&P costs are now the company’s most expensive.

“While the budget is still very much a work in progress, early indications are that we will reduce activity levels in the conventional gas business in Canada,” Nichols said.

Devon’s realized price for natural gas fell 21% to $5.62/Mcf, compared with $7.13/Mcf in 3Q2005. Total quarterly production averaged 602,000 boe/d, 1% higher than the 598,000 boe/d reported in 3Q2005. North American gas production totaled 212 Bcf in the quarter, a rise from 205.8 Bcf. Average daily gas production in the United States was higher at 1,623.8 MMcf/d from 1,485.1 MMcf/d in 3Q2005. Canada’s average daily gas production fell to 662.1 MMcf/d from 725.3 MMcf/d. In the quarter, U.S. gas output rose to 149.4 Bcf, from 136.6 Bcf reported in 3Q2005. Canada contributed 60.9 Bcf in the quarter, down from 66.7 Bcf a year ago.

Lease operating expenses (LOE) increased 20% to $382 million in quarter. Higher ad valorem taxes and repair and maintenance costs, driven by rising oilfield service and supply costs, contributed to the increase. Higher well workover and transportation costs also contributed to the increase in LOE. Production taxes increased 13% to $92 million. General and administrative (G&A) expenses increased 48% to $104 million, mostly on higher employee-related costs.

A dramatic decline in natural gas revenue and sky-high capital expenses slammed the quarterly profit of Houston-based EOG Resources. The independent posted 10.9% production growth from a year ago, but gas revenue slumped 12% and expenses climbed 23%.

After paying preferred dividends, EOG’s net income totaled $297.3 million ($1.21/share), down from $341.9 million ($1.40) in 3Q2005. A $104.7 million ($67.4 million after tax, 28 cents/share) gain on the value of commodity derivatives contracts offset a year-over-year decline in gas sales. Minus the gain, 3Q2006 net income was $276.9 million ($1.12/share). Revenue increased 4% to $968.2 million from $934.4 million a year earlier. Gas revenue fell to $661.9 million, while crude oil, condensate and natural gas liquids revenue posted a 10% jump to $200.7 million. However, expenses were up 23% to $506.6 million.

In the United States, EOG’s gas and natural gas liquids production jumped 17% compared with a year ago, driven by continued success in the Barnett Shale play, as well as EOG’s Rocky Mountain and South Texas operating areas. Gas volumes overall rose to 1.34 Bcf from 1.21 Bcf in 3Q2005. However, average gas prices dropped to $5.35/Mcf from $6.77 a year earlier. Oil production also fell to 27,700 bbl/d from 28,000 bbl/d, but prices rose to $67.68 from $61.22/bbl.

“Third quarter operational results reinforce EOG’s established track record of delivering consistent, high rates of organic production growth, while maintaining a very low level of net debt and generating high rates of return on equity and capital employed,” said CEO Mark G. Papa. “EOG’s natural gas production from the Fort Worth basin Barnett Shale averaged 174 MMcf/d in September, far in excess of our original year-end 2006 target of 155 MMcf/d.” He said EOG had completed “several new ‘monster wells’ in both eastern and western Johnson County” in Texas.

In the Rockies, EOG reported a 19% increase over a year ago to its development drilling program in the Uinta basin’s Chapita Wells Unit in northeastern Utah, and the Midcontinent operations reported a 9.5% sequential increase over 2Q2006. In South Texas, EOG holds an 87.5% working interest in the Slator Ranch W2, which was drilled to 9,300 feet in the Lobo formation, and tested at a gross rate of 17 MMcf/d of gas. The W2 is currently producing more than 9 MMcf/d. Also, EOG’s GPCU 25#1 well in Kansas (100% owned) has been flowing to sales at 15 MMcf/d since August.

EOG said its Trinidad gas sales “considerably surpassed contract quantities” in the first six months of 2006, and “slightly exceeded contract amounts in the quarter.” However, EOG warned Trinidad’s 4Q2006 gas sales are expected to be limited to contract levels, and it revised its total 4Q2006 forecast downward by 9%.

Dallas-based Pioneer Natural Resources Co. reported quarterly profit dropped 35% from a year ago, while gas production increased 7%. Net income dropped to $80.8 million (64 cents/share), from $123.6 million (88 cents) in 3Q2005. In 3Q2005, income from discontinued operations boosted results by $62.1 million, compared with $473,000 in 3Q2006. Revenue jumped 9% to $432.6 million, up from $397.9 million.

Production costs averaged $11.36/boe. Exploration and abandonment costs were $44 million, which included $13 million for unsuccessful drilling costs, $27 million for geologic and geophysical expenses including seismic and personnel costs and $4 million for acreage and other costs.

Oil and gas sales from continuing operations averaged 98,525 boe/d. Gas production rose to 332.8 MMcf/d from a year ago. However, average gas prices declined to $6.33/Mcf, down from $7.22 in 3Q2005. Pioneer said its production growth is on track in 2006 to reach 36 million boe, near the high end of a guidance range of 33-37 million boe. Pioneer also increased its 2007 gas hedge position by 91 MMcf/d. The 2007 hedges were added at New York Mercantile Exchange-equivalent prices of more than $9.00/Mcf “in order to protect a portion of the economics associated with the company’s planned 2007 gas drilling program,” the company said.

Pioneer CEO Scott D. Sheffield said he is confident the company will reach a 10% or higher per share growth target in 2007.

Houston-based Ultra Petroleum, with E&P operations concentrated in Wyoming and China, reported earnings of $52.5 million (33 cents/share), down from $60.9 million (38 cents) in 3Q2005. Cash flow was $106.3 million (66 cents/share), essentially unchanged from $108.3 million (67 cents) a year earlier.

Quarterly oil and gas production in Wyoming and overseas jumped 25% from a year ago — a record — to 23.6 Bcfe, up from 18.8 Bcfe in 3Q2005. The total included 20.5 Bcf of gas production in Wyoming, ahead of the 16.1 Bcf produced there in 3Q2005. Including the effects of hedging, average realized gas prices decreased to $5.68/Mcf, down from $6.86 in 3Q2005.

“We continue to be one of the leading companies in delivering organic production growth,” said Ultra CEO Michael D. Watford. “Our third quarter 2006 production increased 25% over year ago numbers and year-to-date production increased 21% over the same period in 2005. We’re delighted with this success in spite of the delays in rig deliveries in Wyoming and facilities installation in Bohai Bay, China.”

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