The emerging first quarter reports show that overall, oil and natural gas production for many North American independents is setting a record pace. However, analysts looking at the deeper picture believe that while earnings are up and production may hit records, overall domestic production continues a slow slide, and no likely near-term solution is at the ready.

Although decline rates could ease somewhat going forward, analyst Stephen Smith said that the “basic conclusion remains the same: a drilling boom driven by two years of $4-plus prices could not reverse, on a sustained basis, the decline trend in domestic gas production.”

Smith noted that domestic gas production is now in an environment of “chronic shortages.” Other than an “improbable series of freakishly mild winters, we see no quick fix for this solution.” The analyst noted that many of the majors have drawn down “very large gas reservoirs” over the past few years, and are directing an increasing share of their drilling toward regions that “tend to have a much smaller share of total reserves that are produced in the first year.”

J. Marshall Adkins, an energy analyst with Raymond James Energy Group, said that higher commodity prices will prove positive for exploration and production (E&P) companies in the first quarter. “With bidweek natural gas prices averaging roughly $6.50/MMBtu for the first quarter of 2003, this should be the best quarterly earnings performance for E&P companies since the 2001 gas price spike.”

Although it usually provides a pre-quarter production survey, Adkins said Raymond James did not do that for the first quarter because the firm had found “large discrepancies between our forecast survey and the actual reported data,” and “increasing reluctance on the part of the majors and diversified natural gas companies to discuss volume trends in front of quarterly results.” However, he added that with a “$5.40 12-month futures strip, we expect a record year for the sector,” with few surprises.

Here’s a look at four companies that reported results on Tuesday: XTO Energy Inc., Occidental Petroleum, Pogo Producing Co. and McMoRan Exploration Inc.

Fort Worth-based independent XTO Energy Inc. reported record first quarter natural gas production of 591 MMcf/d, a 27% increase from 1Q02’s 464 MMcf/d. Earnings for the quarter were $66.2 million (39 cents per share), compared with first quarter 2002 earnings of $45.1 million (27 cents).

First quarter earnings included the net after-tax effects of a derivative fair value loss of $1.9 million, non-cash incentive compensation of $200,000 and a $1.8 million gain on the cumulative effect of accounting changes. Cash flow from operations, before changes in operating assets and liabilities and exploration expense, was $168.2 million, up 30% from 2002 first quarter comparable cash flow from operations of $129.5 million.

Oil production for the first quarter was 13,394 bbl/d, a 1% increase from 1Q02’s 13,212 bbl/d. During the quarter, natural gas liquids production was 5,182 bbl/d, a 27% increase from the prior year of 4,082 bbl/d. Increased gas production was attributed to development in East Texas as well as the Arkoma and San Juan basins.

“Our measured growth strategy of combining development drilling with long-lived acquisitions continues to drive prosperity for XTO,” stated Bob R. Simpson, chairman and CEO. “With natural gas production steadily increasing, the company is delivering strong economic margins while adhering to our low cost structure. This consistent performance has now led to 12 sequential quarters of production growth.”

At XTO, the average gas price for the first quarter increased 7% to $3.82/Mcf from $3.58 in 1Q02. The first quarter average oil price was $29.42/bbl, a 49% increase from 1Q02’s average price of $19.75. Natural gas liquids prices averaged $23.39/bbl, 117% higher than the 2002 quarter average price of $10.79.

Los Angeles-based Occidental Petroleum Corp. also reported record net income for the first quarter, standing at $325 million (86 cents/share), compared with $25 million (7 cents) a year ago.

In announcing the results, Dr. Ray R. Irani, CEO, said that oil and gas production averaged 532,000 boe, which he said was the highest level for any quarter in the company’s history. “Our core earnings, which were driven by high oil and natural gas prices, hit their highest level in the last six quarters.” Core earnings for the independent were $433 million ($1.14 per share) in the quarter.

During a conference call Tuesday, Irani said that Occidental has made 32 acquisitions in the past three years that have added 139 million boe to reserves, which exceeded 1 billion boe at the end of last year. Occidental also used strong cash flow for the quarter to reduce its debt-to- capital ratio to 41%, from 43% at the end of last year.

Occidental is reducing its debt by buying back capital leases for equipment in its chemicals business. In the first quarter, the company put $45 million toward lease buybacks; it plans to spend another $200 million on buybacks through the year, CFO Steve Chazen said.

Houston-based Pogo Producing Co. said its first quarter income rose to $88.477 million ($1.45) on revenues of $310.8 million, compared to 1Q02 net income of $9.03 million (17 cents), on revenues of $142.9 million. Discretionary cash flow soared 129% in the first quarter of 2003 to $195.3 million, from $85.3 million a year earlier.

“Our highly successful 2002 drilling program is continuing in 2003, yielding record crude oil and natural gas production,” said Pogo CEO Paul G. Van Wagenen. “Excellent energy prices have also contributed to the very positive first quarter results. During the quarter, Pogo drilled 56 gross wells, 55 of which are successful producers. Some 23 additional wells were being drilled in Pogo’s various divisions as the first quarter ended. Pogo’s drilling pace is undeniably brisk, but the success rate cannot be criticized.”

In the first quarter of 2003, Pogo produced a daily average of 67,602 bbl of liquid hydrocarbons, including crude oil, condensate and plant products, a 43% increase from 47,175 bbl/d a year earlier. Meanwhile, Pogo produced 304.8 MMcf/d in the quarter, a 15% increase from 264.0 MMcf/d a year ago. When calculated on an energy-equivalent basis, Pogo’s first quarter 2003 equivalent daily production of all hydrocarbons averaged 118,394 boe/d, a 30% increase from 91,175 boe/d produced during the first quarter one year ago.

Natural gas prices averaged $4.63/Mcf in the quarter, up from $2.67 a year ago. Average oil and condensate prices received by Pogo in the first quarter of 2003 rose to $32.14/bbl, up from $20.04 in the same quarter of last year.

Pogo plans to drill 82 wells in the Permian Basin in 2003. Already, 28 wells have been drilled, 27 successfully, and 13 others were in progress as the quarter ended. Seven shallower Lower Fort Union formation wells were drilled during the first quarter in the Madden Field in central Wyoming, where Pogo owns interests of about 11%, and three other wells are currently being drilled. The deep Bighorn 9-4 well to the Madison formation reached total depth in March, and testing is ongoing; early indications show natural gas pay thickness of about 240 feet.

Meanwhile, New Orleans-based McMoRan Exploration Co. reported earnings down from a year ago because of exploratory losses. It had net income of $18.4 million ($1.13/share), compared with $24.0 million ($1.51) for 1Q02. The net loss from continuing oil and gas operations totaled $2.2 million during the quarter, which includes $1.0 million of non-productive exploratory well costs associated with the Garden Banks Block 228 (Cyprus prospect) well. In 1Q02, net income of $24.0 million included a gain of $29.2 million ($1.83), associated with the sale of certain interests in three oil and gas properties in February 2002.

McMoRan’s current exploration acreage position consists of approximately 365,000 gross acres, including approximately 100,000 gross acres in the program. Over the past two years, McMoRan’s exploration team has undertaken an intensive process to evaluate its substantial acreage position from a technical standpoint and this evaluation has resulted in the identification of over 20 prospects, including deep exploration targets for natural gas accumulations in the shallow waters of the Gulf of Mexico near existing production infrastructure. McMoRan is currently evaluating financing alternatives to provide funding for these prospects either through industry farm-outs or other financing.

“We are highly enthusiastic about the shallow-water, deep-gas discoveries at JB Mountain and Mound Point and the potential for a significant deep hydrocarbon complex in the OCS 310 and Louisiana State Lease 340 area, where over 6 Tcfe of natural gas has been produced in the shallow reservoirs,” said McMoRan CEO James R. Moffett.

McMoRan’s revenues totaled $4.8 million in the quarter, compared with $13.6 million a year ago. First quarter production averaged 8 MMcfe/d. The first quarter’s production rates were affected by remedial activities at two properties and premature depletion of a producing zone at a third property. McMoRan expects its average net production rates for the remainder of 2003 to approximate 7 MMcfe/d.

McMoRan’s revenues in the first quarter of 2003 benefited from higher average realizations averaging $6.55/Mcf in 2003 and $2.43/Mcf in 2002; for oil, excluding Main Pass, $34.68/bbl in 2003 and $20.82/bbl in 2002; and for oil from Main Pass, $24.09/bbl in 2003 and $18.05/bbl in 2002.

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