A number of exceptional charges offset production gains by Royal Dutch/Shell Group in the third quarter, and despite a double-digit earnings gain, the Anglo-Dutch energy giant fell short of Wall Street’s 41% increase in earnings expectations. Production gains proved no problem for independent Apache Corp., which reported a 34% hike overall and a 19% jump in natural gas production, while Marathon Oil Corp.’s profit tripled, enhanced by stellar exploration performance.

Shell, the world’s third largest publicly traded oil and gas producer behind BP and Exxon Mobil Corp., reported its net income rose 16% to $2.6 billion, compared with $2.24 billion in 3Q02. Analysts had forecast quarterly earnings to jump much higher, to $3.16 billion. Shell measures its profit on an adjusted current costs of supplies basis, which removes the fluctuating value of oil inventory. The third quarter charges totaled $330 million.

Shell’s “numbers aren’t as bad as they look at first glance, but they’re still below expectations,” said Citigroup Smith Barney analyst Jonathan Wright. With the special charges added into the figures, Wright said Shell’s unit earnings still were 3-4% below expectations.

Shell also warned it will probably miss its year-end oil and gas production target of 4.1 MMboe/d by 1% because of asset sales and a change in the terms of a major production contract. In addition, Shell said it may fall short as much as 2% on a 2004 target of 13%-15% for return on average capital employed, or ROACE, because of accounting changes and currency fluctuations. ROACE is a key measurement of how efficiently a company uses its money.

Most of Shell’s $239 million in third quarter special charges came from the impact of a declining power market for InterGen, its power generation business, in both the United States and Brazil, it said. Shell co-owns the InterGen power company with Bechtel Group in the United States. Net income at Shell’s gas and power unit dropped 49% to $65 million on an adjusted basis from $127 million. The earnings, said Shell, also reflected strong market demand for liquefied natural gas (LNG) and continued high LNG prices.

“The power market is depressed; that is the essence of why we took an impairment,” said Judy Boynton, Shell’s CFO, during a conference call. She said Shell is working to improve its generation business to either prepare for a market upturn or to eventually sell the business.

Meanwhile, Shell’s exploration and production operations reported a 22% earnings hike to $2.06 billion, reflecting significantly higher commodity prices, which were partly offset by lower production volumes. Production averaged 3.9 MMboe/d in the quarter, which was below analysts’ expectations.

“Volume performance in the upstream is disappointing, and operating profit still looks a little light,” said Commerzbank Securities said in a note. “Not as big a miss as it looks but still a miss,” it added.

Houston-based super independent Apache reported a 34% jump in oil and gas production during the third quarter, producing 449,034 boe/d. The numbers were 5% higher than in the second quarter. Natural gas production averaged 1.26 Bcf/d, up 19% from 1.06 Bcf/d in 3Q02. Natural gas liquids (NGL) production averaged 9,686 bbl/d, up from 8,081 bbl/d last year. Oil production rose 51% to 228,698 bbl/d, compared with 151,143 bbl/d in 3Q02.

Apache reported earnings of $276 million ($1.69/diluted share), compared with $145 million (95 cents) in 3Q02. Absent the impact of non-cash foreign currency fluctuations on deferred taxes, Apache would have earned $1.81 per share. Cash was a record $730 million, up 81% from the year-earlier period and a 14% sequential increase.

“Since the beginning of the year, Apache’s production has increased by one-third, largely as a result of strategic acquisitions in the North Sea and the Gulf of Mexico, but also as a result of our very successful drilling program,” said CEO G. Steven Farris. “Exploration success in Egypt and Australia has added future production potential in both of those core areas.” Even with the acquisitions, Apache still ended the period with a debt-to-capitalization ratio of 28.5%, he said.

At Houston-based Marathon, CEO Clarence P. Cazalot Jr. attributed its upbeat third quarter to the “strong exploration performance of five discoveries,” which he said “underscores our commitment to achieve profitable growth in existing and new core areas.” Marathon’s 3Q exploration program was marked by discoveries in Angola, Equatorial Guinea, the Gulf of Mexico and Norway, and year-to-date, Marathon has announced eight discoveries out of 12 significant exploratory wells.

Marathon reported quarterly net income of $281 million (90 cents/share), compared with $87 million (28 cents) in 3Q02. A year ago, Marathon had net income adjusted for special items that totaled $149 million (48 cents).

In the United States, Marathon’s net natural gas production for the quarter was 704.4 MMcf/d, down from 709.6 MMcf/d in 3Q02. However, U.S. gas volumes for the quarter made a huge jump, totaling 718 Mcf/d, compared with 3Q02’s reported 494.2 Mcf/d. Canadian gas volumes also were higher for the quarter, with a reported 319.5 Mcf/d, compared with 316.3 Mcf/d a year ago.

Marathon also reported progress in selling off non-core assets during the quarter. To date, Marathon’s total 2003 non-core asset sales are nearing $1 billion. Taking into consideration the acquisitions and dispositions made to date, but excluding the impact of any additional sales, Marathon estimates its fourth quarter production will average approximately 375,000 boe/d. Full-year production now is forecast to average 390,000 boe/d, a reduction from July’s forecast of 395,000 boe/d.

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