Even with ExxonMobil Corp.’s record profit in the third quarter, slower earnings growth continues to be the theme for most of the largest oil and natural gas producers. Slammed by lower natural gas prices and soaring costs, integrated producers are taking some of the biggest hits to their bottom lines, while the smaller domestic producers, able to pivot more quickly because of their size, are overcoming the obstacles and posting solid production and income. In every earnings announcement last week, it was all about the money — profits, of course — but also the high capital costs.

Speaking to financial analysts last week, ConocoPhillips CEO Jim Mulva said higher prices, including those for mergers and acquisitions, could lead to spending cuts in the major’s 2007 budget. Conoco has budgeted between $15-16 billion for next year.

“We see significant increases in capital costs,” Mulva said. “We’re taking a hard look at our capital spending…” and “in many respects, we don’t like what we see in cost trends.”

Royal Dutch Shell CEO Jeroen van der Veer also talked of the higher costs. “Cost pressure remains a significant challenge for our industry.” The company, he said, is now focusing “on making the right portfolio choices to create long-term shareholder value.”

Irving, TX-based ExxonMobil reported the second-highest quarterly profit ever for a publicly traded U.S. company, with net income of $10.49 billion ($1.77/share), an increase of $570 million (6%) from the same period of 2005. Even with the soaring profits, the top major said higher oil and gas realizations and improved marketing and chemical margins were partly offset by lower refining margins.

Aware of the political pressure to prove it does more than make money for its shareholders, ExxonMobil noted in its earnings release that global production rose 7% to 270,000 boe/d, reflecting its “active efforts to increase world energy supplies.” ExxonMobil also said it spent $5.06 billion, or 15% more, on its worldwide exploration efforts in the quarter. Global gas production increased to 8.16 Bcf/d from 7.72 Bcf/d in 3Q2005.

However, ExxonMobil’s rising output was everywhere but in North America. Gas available for sale in North America fell compared with a year ago, even though 3Q2005 output was down on damage caused by the GOM hurricanes. North American gas available for sale fell slightly to 2.45 Bcf/d in 3Q2006, with 1.58 Bcf/d for sale in the United States and 864 MMcf/d in Canada. In 3Q2005, ExxonMobil had 2.54 Bcf/d available for sale in North America, with 1.61 Bcf/d in the United States and 926 MMcf/d in Canada.

European-based Royal Dutch Shell squeezed out a little more oil and gas production worldwide compared with a year ago, but rising costs pressured earnings, cutting net profit by 34% in 3Q2006. Shell reported profit of $6.9 billion, down from $7.2 billion a year ago. Shell, which announced an ultra-deepwater project in the GOM with Chevron Corp. and BP plc (see related story), posted better-than-expected results in all of its business units, but total costs in the quarter jumped substantially on higher upstream operating costs and increased predevelopment activity. U.S. Henry Hub prices in the quarter averaged $6.05/Mcf, down from $9.50 in 3Q2005.

In the United States, Shell’s gas production available for sale rose slightly to 1.186 Bcf/d from 1.175 Bcf/d in 3Q2005. Worldwide, oil and gas output rose only 1% to 3.25 million boe/d. Total production numbers included gains from Shell’s emerging oil sands projects. Last week, Shell unveiled a $6.8 billion offer to buy out the 22% of shares it doesn’t already own in Shell Canada Ltd., in the hope of further expanding its oil sands efforts in North America (see related news).

Rising oil prices failed to lift London-based BP plc, which reported a 3.6% drop in quarterly earnings Tuesday. The oil major also warned daily oil and natural gas production will be slightly lower for the year. Net profit totaled $6.23 billion (31.4 cents/share), compared with $6.46 billion (30.5 cents) in 3Q2005. Revenue rose just over 4% to $70.73 billion from $67.96 billion. BP’s accounting conforms to international financial reporting standards rather than Generally Accepted Accounting Principles, which are used by U.S.-based companies.

In the quarter, production reached 3.816 million boe/d, flat from 3.824 million boe/d reported in 3Q2005. Quarterly production also fell sequentially from 2Q2006’s 4.018 million boe/d. Among other things, BP shut in 200,000 bbl/d of production from its 450,000 bbl/d Prudhoe Bay field in Alaska after severe pipeline corrosion and a leak were found. Production there currently stands at 400,000 bbl/d, BP said. BP also reiterated a delay in the start-up of its deepwater Gulf of Mexico Thunder Horse platform, which is designed to produce 250,000 bbl/d of oil and 200 MMcf/d of gas. The facility was expected to ramp up this year, but it now will begin operations in mid-2008.

Benefiting from a rise in oil prices and the ramp-up of facilities damaged by hurricanes last year, Chevron Corp. surpassed Wall Street estimates with a 40% jump in third-quarter profit compared with the same period a year ago.

Chevron, based in San Ramon, CA, reported net income of $5.0 billion ($2.29/share), compared with $3.6 billion ($1.64) in 3Q2005. Analysts had expected earnings to average around $2.03/share). The profits offset a decline in revenue, to $54.21 billion from $54.46 billion a year earlier. Chevron’s worldwide production grew 6% to 2.7 million boe/d, about 152,000 boe/d higher than a year ago.

Chevron acknowledged that quarterly profits were higher because a year ago, its refinery in Pascagoula, MS was shuttered because of hurricane damage. Also in 3Q2005, only two months of Unocal’s reserves in the Gulf of Mexico and the Caspian Sea were included in the earnings report. Upstream earnings of $3.5 billion increased about $200 million from 3Q2005, with U.S. profits 5% higher at $1.3 billion. Partially offsetting earnings gains in the United States were lower prices for natural gas, higher operating expenses and an increase in depreciation expense for wells, equipment and facilities.

In the United States, Chevron’s net production of 772,000 boe/d was up 5% from a year ago. Unocal and the restoration of volumes following last year’s storms, offset normal field declines, Chevron said. The net liquids component of U.S. production 2% to 464,000 bbl/d, and gas production increased 10% to 1.8 Bcf/d. Chevron’s 3Q2006 average U.S. natural gas sales prices fell 19% to $5.93/Mcf, while outside the United States, the average gas price of $3.66/Mcf was 17% higher than a year earlier.

Houston-based ConocoPhillips’ upstream results were negatively impacted by planned downtime in some of its exploration areas, as well as the unexpected partial shutdown of the BP-operated Prudhoe Bay field in Alaska. Worldwide, Conoco’s acquisition of Burlington Resources boosted quarterly production to 2.47 million boe/d from 1.52 million boe/d in 3Q2005, but the output was sequentially below 2Q2006’s 2.13 million boe/d. In the United States, Conoco’s gas production jumped to 2.44 Bcf/d from the 1.39 Bcf/d reported in 3Q2005. Average U.S. gas prices in the quarter were $5.98/Mcf, well below the $7.48 in 3Q2005.

Conoco’s quarterly net income reached $3.88 billion ($2.31/share), slightly ahead of the $3.8 billion ($2.68) in 3Q2005. However, Conoco’s quarterly profit dropped significantly from the windfall posted in 2Q2006, when earnings rose 65% from 2Q2005 on higher commodity prices and the Burlington merger. Net income in 3Q2006 was negatively impacted 37 cents/share from new tax legislation in both Alaska and the UK, impairment of some refining assets held for sale, and higher insurance costs.

Houston-based Apache posted record production in the quarter, and CEO G. Steven Farris said the company remains on track to achieve 10-15% output growth this year. However, net profit slumped 6% on falling gas prices, losses from shut-ins and the sale of some overseas assets. Earnings fell to $645.6 million ($1.94/share) from $686 million ($2.05) in 3Q2005. Revenue increased almost 10% to $2.26 billion from $2.06 billion; revenue from oil and gas production rose a modest 1% to $2.07 billion from $2.05 billion.

Global gas production averaged 1.7 Bcf/d, a 35% jump from a year earlier and up 9% from 2Q2006. Gas prices in 3Q2006 averaged $4.83/Mcf, down 26% from a year earlier and 3% lower than in 2Q2006. Oil prices averaged $63.66, up 9% from a year ago but down 1% from 2Q2006.

Recovery from hurricanes Katrina and Rita is progressing, but Apache warned net production of 3,000 bbl/d and 10 MMcf/d will likely remain shut-in at year’s end. Apache expects to recover those volumes during the first half of 2007. In Canada, Apache’s quarterly gas output was flat sequentially from 2Q2006, averaging 422 MMcf/d (gas) and 22,613 bbl/d (oil). However, on a barrel-equivalent basis, output rose 8% from 3Q2005.

Softer gas prices and record storage levels led Calgary-based EnCana to reduce its North American E&P activity. There was no talk about shutting in wells, but the Calgary-based independent released its least capital-efficient rigs and associated services in North America, a move expected to delay the ramp-up of new production. Most of the lost production is from the Jonah field in Wyoming, where production growth is off about 50 MMcf/d more than EnCana originally forecast, and in southern Alberta, where heavy rains hampered field work.

EnCana’s net income in the quarter jumped to $1.36 billion ($1.65/share) from $266 million (30 cents) a year earlier. Sales after royalty payments climbed 31% to $3.92 billion. EnCana’s quarterly realized gas prices, including hedging, averaged $6.57/Mcf, down 5% from $6.90. Excluding hedging, gas prices averaged $5.75/Mcf, down 21% from an average $7.29 in 3Q2005. About 1.2 Bcf/d of expected 2007 gas sales were hedged as of Sept. 30.

In total, EnCana has about 70 rigs running, which is 55 fewer than in 3Q2005. It expects to drill about 3,650 wells this year, 650 fewer than originally forecast. The updated 2006 gas production guidance is a range of 3.36-3.40 Bcf/d, which at the midpoint is 5% higher than in 2005. In 3Q2006, EnCana sold some of its assets to focus on gas fields in North America and on oilsands projects in northern Alberta. Earlier this month, EnCana and ConocoPhillips agreed to jointly spend $10.7 billion to build an oilsands business.

Oklahoma City-based Chesapeake reported net income of $522.6 million ($1.13/share), well ahead of 3Q2005’s $149.1 million (43 cents). Excluding a $150 million gain from its oil and gas hedges, the independent would have earned 83 cents/share, sharply higher than Wall Street’s estimate of 72 cents. Revenue also climbed to $1.93 billion from $1.08 billion a year earlier.

Chesapeake’s domestic-dominated gas production climbed to 133.8 Bcf from 108.8 in 3Q2005. Daily production averaged 1.597 Bcfe, an increase of 289 MMcfe/d, or 22% above the 1.308 Bcfe/d in 3Q2005. The producer also realized strong gas prices — unlike most of its peers — by increasing its hedges as prices declined, of $8.39/Mcf from $6.64 in 3Q2005. Proved reserves in the quarter set a record of 8.4 Tcfe, and Chesapeake delivered a year-to-date reserve replacement rate of 314% from 1.34 Tcfe of additions at a drilling and acquisition cost of $1.89/Mcfe.

Despite all of the good news, Chesapeake said in statement that its quarterly production “did not meet the company’s expectations primarily because of delays in Fort Worth Barnett Shale well completions caused by a new drilling program that favors utilizing multi-well drilling pads over single well drilling locations. The company believes this new approach will lead to more efficient field development and may ultimately result in greater per well reserve recoveries. However, it also creates a large backlog of uncompleted wells (currently approximately 30 wells), as all drilling from a pad must be completed before completion and production operations may commence.”

With less overhead and a laser focus on finding gas in the Appalachian Basin, Pittsburgh-based CNX reported solid quarterly earnings, and its gas production hit a company record. CNX reported net income of $37.6 million (25 cents/share), up 44% from 3Q2005’s $26.1 million. Gas production rose 15% to 14.4 Bcf, or 156.8 MMcf/d, from 12.5 Bcf, or 135.7 MMcf/d, a year earlier.

The average price realized for CNX’s gas production, including the effects of hedging, was $6.62/Mcf, 11% higher than the $5.95 received a year earlier. Fully loaded unit costs for company production, exclusive of royalties, were $2.85/Mcf, about 5% higher than the $2.71 reported in 3Q2005. Pre-tax unit margins for company production were $3.77, up 16% from $3.24 a year earlier.

Houston-based Pogo reported that net income fell to $33.3 million (58 cents/share) from $473.5 million ($7.89) a year earlier, when results were boosted by a property sale gain. Revenue jumped 28% to $353.7 million from $275.8 million.

Gas production climbed in the quarter, averaging 273.7 MMcf/d, compared with 222.5 MMcf/d a year ago. However, Pogo said production continued to be impacted by the shut-in of more than one-third of its Outer Continental Shelf volumes because of Hurricanes Katrina and Rita. About 8 MMcf/d of Pogo’s net offshore gas production capacity and 3,100 bbl/d of crude oil production are still being postponed. Those curtailments are expected to continue until completion of repairs to gathering and terminaling facilities, as well as joint venture-owned platform facilities, Pogo said. Gas prices fell to an average of $5.81/Mcf in 3Q2006 from $7.95 in 3Q2005.

Independent Newfield Exploration Co., which focuses most of its gas-directed exploration efforts in the United States and offshore in the Gulf of Mexico (GOM), swung to a quarterly net profit of $266 million ($2.06/share), compared with a loss of $0.2 million in 3Q2005. Adjusted for unrealized commodity derivative income and other items, the Houston-based producer earned $115 million (89 cents/share) in 3Q2006, down from $128 million ($1) in 3Q2005. Revenue was off 7.6% from a year ago to $425 million — below Wall Street’s forecast of $472.3 million.

Total oil and gas production rose 6% to 62.6 Bcfe from 59.2 Bcfe a year ago, when it was stung by hurricane damage in the GOM. Newfield’s gas production rose to 51.2 Bcf from 46.8 Bcf, a 9% increase. Average realized gas prices fell 18% to $6.21/Mcf from $7.60/Mcf.

Houston-based Cabot Oil & Gas, 96% weighted to gas, announced record 3Q2006 income, even before recording a $143.6 million after-tax gain from the sale of its GOM and South Louisiana assets, which closed in September. Net income reached $189 million ($3.92/share), while cash flow from operations totaled $86.7 million. After removing the benefit of the asset sale, 3Q2006 net income would have been $45.4 million (94 cents/share), well ahead of 3Q2005’s $33.8 million (69 cents).

Driving Cabot’s positive results was a 12% increase in production during the quarter, along with increased oil price realizations. Each of Cabot’s North American regions contributed to production increases, with the biggest gains from its remaining Gulf Coast operations. Total gas produced was 20.7 Bcf, compared with 18 Bcf in 3Q2006. Total production for the quarter was 23 Bcfe, ahead of 20.5 Bcfe a year earlier. Cabot’s gas price realizations were essentially flat at $6.76/Mcf in 3Q2006, compared with a year ago. Oil prices rose 52% to $69.80/bbl.

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