North American producers continued to herald record profits in the second quarter last week, but the story continues to be the natural gas growth by U.S.-based independents. Many of the largest independents, including Devon Energy Corp., Pioneer Natural Resources, EOG, Magnum Hunter Resources, Canadian Natural Resources Ltd. and Houston Exploration showed strong gas gains, while Vintage Petroleum Inc.’s 2Q gas numbers were slightly down because of asset sales. Unocal Corp., the final U.S.-based major to report, saw its production numbers drastically down.

El Segundo, CA-based Unocal‘s worldwide oil and gas production averaged 404,000 boe/d, down from 463,000 boe/d in 2Q2003. On the natural gas side, the North American numbers were dismal, with a 26.2% drop in production to 593.7 MMcf/d from 804.8 MMcf/d in 2Q2003. The decline, said Unocal, “was due primarily to the sale of oil and gas producing assets in North America, which accounted for nearly 34,000 boe/d during 2003, natural production declines in North America, and lower contractor’s cost recovery for boe in Asia, which reduced production by about 7,000 boe/d.” Unocal lowered its full-year 2004 oil and gas production estimate to 400,000 boe/d from 425,000 boe/d.

In a statement by the company, Unocal said that in the past, “recent actual production levels have often fallen below Unocal’s estimates,” and the company has therefore decided to adopt a new approach for forecasts. It did not break down oil and natural gas estimates, but estimated them in an oil-equivalent basis.

Unocal said it is changing the way it estimates production because past forecasts “have been affected by factors such as different-than-anticipated declines, project start-up timing, and performance of new projects.” It said the production also is sensitive to constrained markets and/or pipeline capacity, as well as volatile oil price changes.

“Beginning with today’s outlook, Unocal will now offer production forecasts that the company expects will be exceeded by actual production. Accordingly, the production outlook based on the prior methodology is being revised from approximately 425,000 boe/d to approximately 400,000 boe/d for the full-year 2004. This reduced forecast reflects lower volumes in the second half of the year (annualized basis) due to dispositions of producing assets in the U.S. onshore and in Brazil (4,000 boe/d), as well other factors (21,000 boe/d).

Despite the poor gas production results, Unocal reported record preliminary net earnings for the second quarter of $341 million ($1.25/share diluted), which was 93% above 2Q2003’s $177 million (68 cents). The record earnings included several special items in connection with adjusted after-tax earnings. Preliminary adjusted after-tax earnings were $231 million (86 cents/share), compared with Thomson/First Call estimates of 83 cents/share. Adjusted after-tax earnings were $191 million (73 cents/share) in 2Q2003, and $239 million (89 cents) in 1Q2004.

Devon increased its oil and natural gas production 11% in the second quarter, and pulled up North American production in nearly every category on the strength of its merger last year with Ocean Energy (see NGI, March 3, 2003). The largest U.S.-based independent also reported profits up 41% on higher commodity prices.

Oil-equivalent production was 684,000 boe/d, compared with 615,000 boe/d in the same period a year ago. Assuming Devon and Ocean had been merged in 2Q2003, pro forma daily production was up 4% in 2Q2004. Total natural gas production was 223.4 Bcf versus 215.7 Bcf in 2Q2003. Total U.S. gas output was 150.3 Bcf versus 147.8 Bcf. Devon’s U.S. onshore production rose to 120.2 Bcf from 113.7 Bcf, but its U.S. offshore output was down to stand at 30.1 Bcf versus 34.1 Bcf a year earlier. Canadian production rose to 71 Bcf from 66.6 Bcf. Average production in the United States was slightly higher, at 1.65 Bcf/d versus 1.624 Bcf/d, and Canadian output rose to 779.9 MMcf/d from 731.3 MMcf/d.

Net earnings were $502 million ($2.07/share; $2.02 diluted) versus $356 million ($1.67; $1.62 diluted) in 2Q2003. Thomson First Call analysts expected Devon on average to earn $2.01/share.

Houston Exploration, which concentrates its exploration efforts in South Texas, the Rocky Mountains, the Arkoma Basin and offshore in the shallow waters of the Gulf of Mexico, reported gas production rose to 30,138 MMcf from 24,634 MMcf a year earlier. Average daily production was 351 MMcf/d versus 292 MMcf/d in 2Q2003. And the average gas sales price was $5.39/Mcf versus $4.54.

“Crowning our operational achievements during the quarter, we completed a value-building exchange transaction with KeySpan that reduced its majority ownership to approximately 24%, increased the liquidity of our shares and set us on a course for continued independent growth,” said CEO William G. Hargett. “Going forward, we intend to utilize our financial capacity and flexibility to implement our balanced growth strategy, which involves elements of exploration, exploitation and acquisitions.” Houston Exploration’s transaction with KeySpan was completed two months ago (see NGI, May 31).

At Tulsa-based Vintage, organic growth resulted in second quarter production of 6.8 MMboe, up 3.5% sequentially from the first quarter, but a 2% decline from 2Q2003’s 6.9 MMboe. Vintage said the decline was anticipated because of Canadian property sales in late 2003 and a labor strike by contract oil field workers in Argentina that impacted the first six months of 2004.

Vintage said production in the United States “continues to be significantly ahead of the company’s expectations to date as a result of exploitation successes that more than offset the temporary production interruptions in Argentina.” A lot of its U.S. growth is coming from recompletion activities underway in south central Texas, where net gas production from these lower-risk projects has increased from 6 MMcf/d to 28 MMcf/d since June 2003. For 2Q2004, U.S. gas production reached 7,125 MMcf versus 5,960 MMcf in 2Q2003. Canadian production fell in the quarter to 3,868 MMcf from 4,486 MMcf because of asset sales.

Income tax expenses hurt Dallas-based independent Pioneer Natural Resources‘ bottom line in the quarter, however, its oil and natural gas production numbers were 18% higher to stand at 17.1 MMboe, with average daily oil production at 44,880 bbl/d up from 32,079 bbl/d, and gas production at 721.8 MMcf/d up from 626.1 MMcf/d in 2Q2003.

In the United States, Pioneer’s gas production rose to 558,131 Mcf, compared with 477,607 Mcf a year earlier. However, its Canadian gas production fell to 41,293 Mcf from 45,271 Mcf in 2Q2003.

Pioneer reported net income of $69.7 million (58 cents/share diluted), down from $77.2 million (65 cents/share). The 2Q2004 results include noncash deferred income tax expense of $47.1 million for the quarter. The year-to-year change in deferred income taxes was principally attributed to the company’s reversal of its deferred tax valuation allowance in the United States during 3Q2003. Income before income taxes and cumulative effect of change in accounting principles increased by $41.6 million, or 52%, compared with 2Q2003.

At Houston-based EOG, profit was higher as was production, with 2Q net income at $142.2 million ($1.20/share), compared with $106 million (91 cents). In the second quarter, total company production increased 7.6% over 2Q2003. Production from the United States and Canada rose 6.9% while production from Trinidad increased 11.7%.

“EOG posted solid results for the second quarter, and based on data gathered in the last three months, we continue to be enthusiastic about our position in the non-core area of the Barnett Shale Play in the Fort Worth Basin,” said CEO Mark G. Papa. “In addition, during the second quarter, EOG’s operations across the company once again showed consistent performance.”

Papa said that in addition to the Barnett Shale and South Texas, “we expect strong second half results with production increases coming from the Mid Continent, East Texas and the Rocky Mountains in the U.S. as well as the tie-in of shallow natural gas wells in Canada. In Trinidad, the new ammonia plant is scheduled to begin taking natural gas at full capacity in the third quarter and the first production from the U.K. North Sea should begin this month.”

Last week was busy at Magnum Hunter — it closed a deal that doubled its oil and gas assets in New Mexico, and the producer reported a 457% increase in second quarter net income — $23.2 million (33 cents/share), compared with $4.2 million (6 cents) in 2Q2003. Along with the profit gains, the Irving, TX-based independent, which focuses its exploration in North America, recorded a 3% increase in daily oil and gas production. Adjusted for property sales, Magnum Hunter produced 18.7 Bcfe, or 205.8 MMcfe/d in the quarter, compared with 203.5 MMcfe/d a year earlier. Daily natural gas production also was up to 141,135 Mcf/d from 137,602 Mcfe/d.

Gas production volumes averaged 69% of total production. The company’s average realized gas price, net of hedges, was $5.21/Mcf compared with $3.37 in 2Q2003. The company said volumes were negatively impacted by 5.3 MMcfe/d because of delays in new platform and pipeline construction, offline production during the quarter due to mechanical and weather-related issues and restricted production due to pipeline limitations.

Magnum Hunter also completed the acquisition of oil and natural gas assets in New Mexico from Tom Brown Inc., an EnCana Corp. subsidiary. The properties are located in Lea and Eddy counties in southeast New Mexico, in the general vicinity of its Morrow/Atoka/Strawn drilling program. In addition to the 465 producing oil and gas wells, Magnum Hunter also acquired 44,000 net acres of undeveloped leasehold mineral interests.

A one-time income tax recovery, which inflated financial results in last year’s second quarter, sent Canadian Natural Resources Ltd.’s quarterly earnings this year plunging 51%, but the lower profit did not deter the Calgary-based producer from showing off strong growth in oil and natural gas production.

Some of the oil and gas production gains were driven by asset acquisitions, but Canadian Natural’s quarter also was boosted by a strong winter drilling season, which pulled production up 12% over the same period of 2003. Natural gas production jumped 10% to 1.5 Bcf/d before royalties, while crude and gas liquids jumped 14% to 275,000 bbl/d. Together, production for the quarter stood at 517,000 boe/d.

In North America, gas output increased to average 1,389 MMcf/d, an increase of 13%, or 159 MMcf/d sequentially over 1Q2004, and 9%, or 111 MMcf/d, over 2Q2003. Through acquisitions alone since a year ago, Canadian Natural boosted output by 68 MMcf/d.

On the earnings side, income tax changes in Canada over the past year sent profit down to C$259 million (C97 cents/share), compared with C$525 million (C$1.96) in 2Q2003. Boosting the results in last year’s second quarter was a C$140 million recovery on future income taxes, compared with C$84 million this year. Quarterly revenue was C$1.87 billion, up from C$1.5 billion. Cash flow grew 22% to C$930 million (C$3.47/share) versus C$762 million (C$2.84) in 2Q2003.

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