The “steep” natural gas declines in the third quarter of 2001 are “unlikely” to be part of a trend, and so far have not been repeated in fourth quarter reports, according to Lehman Brothers latest exploration and production update. The analyst found that “early returns” from 45 of the largest producers “lead us to estimate that wellhead gas production fell 0.1-0.5%” compared to the third quarter. The analyst also expects a production decline this year to fall between 1.5-2.5%, and import growth and storage to “meet demand growth” in 2002.

Of the majors and independents reporting last week, earnings were down in the third quarter but production, as noted by analysts, was up. Those reporting last week included ChevronTexaco, Marathon, Unocal, EOG Resources Inc., Anadarko Petroleum Corp. and Apache Corp. Their earnings are briefly detailed below.

Lehman noted that 16 companies produce about one-third of U.S. gas, and so far have reported a drop in fourth quarter gas production of .69% versus the third quarter. However, Lehman’s larger, 45-company sample, which accounts for about 70% of U.S. production, probably will show a .1-.4% production decline.

The analyst also found that storage “will likely be 1.3-1.6 Tcf at the end of winter — well above historic averages of below 1 Tcf.” Because of this amount of storage, “we estimate a 50% chance that Gulf Coast gas prices will fall below $1.75/MMBtu over the next four-six weeks.” Also, “high storage levels could lead to a $2.50/MMBtu ceiling price for natural gas over the next six-12 months.” In the near term, Lehman also said E&P share prices may fall as much as 15-20%, with a discount to recovery to $3.25-$3.50/MMBtu.

Regarding natural gas liquids production, the analyst said that when NGLs are produced, the reported natural gas volumes are negatively impacted by “shrinkage,” and because of this, “an increase in NGL production will lead to lower reported ‘dry’ gas volumes.”

For 2002, Lehman said a “key element in our forecast is an attempt to rationalize the unusually steep production decline in the third quarter.” Because third quarter 2001 volumes were 1.07% lower than its model forecast “no doubt owing to the drilling of a lot of short-lived production over the prior year,” it appears that the lower gas prices in the past few months have “reduced the incentives to drill high-rate wells.” As a result, Lehman’s production model assumes that shallower production decline rates will be “experienced over the next several quarters.”

Companies followed by Lehman analysts that are showing the largest year-over-year drop in production include Murphy Oil, down 23%; Nuevo Energy, down 18%; Unocal, down 16%; Forest Oil, down 13%; Equitable, down 13%; Stone Energy, down 13%; and ChevronTexaco, down 11%. Those with the largest quarter-to-quarter drop included National Fuel Gas, down 20%; Ocean Energy, down 12%; and Unocal, down 10%.

Here is a brief synopsis of producers’ earnings and production levels reported last week:

ChevronTexaco: This newly merged major now based in San Francisco reported a preliminary net loss of $2.522 billion, or $2.36 per share (diluted) for fourth quarter 2001, compared with fourth quarter 2000 net income of $2.039 billion, or $1.92 per share (diluted). Excluding net charges for special and merger-related items, fourth quarter 2001 operating earnings were $498 million or $0.47 per share (diluted), compared with $2.293 billion or $2.15 per share a year earlier.

Marathon: This Houston-based producer reported fourth quarter 2001 net income, adjusted for special items and losses related to the separation from the USX Corp., of $98 million or $.32 per diluted share, compared to adjusted net income of $386 million, or $1.25 per diluted share, in the fourth quarter of 2000. Income for Marathon’s reportable segments was $360 million in fourth quarter 2001 and $3.4 billion for full year 2001, compared with $723 million and $2.8 billion in the same periods of 2000. Marathon’s domestic upstream income was down, standing at $112 million in fourth quarter 2001 and $1.1 billion for the year, compared to $330 million and $1.1 billion in the same periods of 2000. For more detail, visit Marathon’s web site at www.marathon.com.

Unocal: The El Segundo, CA-based producer reported adjusted after-tax earnings from continuing operations (excluding special items) in the fourth quarter were $58 million, or 24 cents per share (diluted), in line with consensus estimates of Thomson/ First Call analysts, who estimated 23 cents per share. In the fourth quarter 2000, Unocal had adjusted after-tax earnings from continuing operations of $261 million, or $1.04 per share (diluted). Including special items, Unocal reported a preliminary unaudited net loss of $29 million, or 12 cents per share (diluted), for the fourth quarter. This compares with net earnings in the same period a year ago of $173 million, or 70 cents per share (diluted). See more detail on Unocal’s earnings on its web site at www.unocal.com.

EOG Resources Inc.: The past came back to haunt Houston-based EOG Resources Inc. in the fourth quarter, after it was snagged with a $19.2 million charge related to former parent Enron Corp. EOG reported a net loss of $27.6 million, or 24 cents a share, compared with net income of $158.7 million, or $1.33 a share, for the fourth quarter of 2000. The charges related just to Enron cost EOG 11 cents a share, estimated at $12.3 million after taxes. EOG also reported charges of $2.7 million ($1.7 million after tax, or 2 cents) on mark-to-market gains for commodity transactions, of which $34.3 million ($22 million after tax or 19 cents) was cash realized in the final quarter. Despite the drop in the final quarter, EOG still posted a 4.3% per share increase in production. For more complete information, visit the web site at www.eogresources.com.

Anadarko Petroleum Corp.: The leading domestic independent restated its third quarter earnings last week to include a $1.1 billion charge (see related story), then reported fourth quarter net income of $108 million, or 41 cents per share, compared with net income of $454 million, or $1.75 per share. In mid-January, the company said it expected earnings per share of about 25 cents, and announced then that it would cut its capital spending to about $2 billion this year, down from its $3 billion budget a year ago. For the full year 2001, Anadarko reported a net loss of $188 million, or 75 cents per share (diluted), compared with earnings of $796 million, or $4.16 per share (diluted) for 2000. However, total natural gas, crude oil and natural gas liquids (NGLs) sales volumes for 2001 were 199 MMboe, compared with 112 MMboe BOE for 2000, a 78% increase. The increase, it said, was due in part to its acquisitions of United Pacific Resources in 2000 and Berkley Petroleum Corp. last year, as well as increased production from the company’s operations in Alaska, the Gulf of Mexico, East Texas and Canada. On a per-share basis, 2001 sales volumes increased about 30%. Visit the web site at www.anadarko.com.

Apache Corp.: This Houston-based independent reported fourth quarter net income of $74 million, or 53 cents per diluted common share, compared with net income of $252 million, or $1.78 per common share, in the year-earlier quarter. Revenues also fell in the final quarter, dropping 27% to $529.1 million from $730.8 million for 2000. Apache’s per-share results for prior periods also were restated to account for the stock dividend. Record production fueled its full-year earnings of $704 million, up from $693 million in 2000. Adjusted for a 10% stock dividend at yearend, Apache earned $4.97 per diluted common share, compared with $5.16 per share in 2000. Apache recorded its largest percentage production increase in a decade, as output climbed 32% to 344,130 boe/d in 2001. As a result, Apache’s cash from operations climbed to $1.9 billion, or $13.54 per basic common share, despite a 16% decline in oil prices. Year-end reserves totaled 1.27 billion boe, the 16th consecutive increase and a 17% increase from year-end 2000, and Apache replaced 314% of its production. For more information, visit the web site at www.apache.com.

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