It's become a matter of "catch as catch can" as oil and gas companies take advantage of record-high energy commodity prices to strengthen their balance sheets and hone their asset portfolios. Success stories abound in both the US and on international fronts, particularly in the exploration and production sector.
Executives from Phillips Petroleum Co. and Apache Corp. were among those touting their company's financial and production gains at Lehman Brothers' energy conference held Sept. 7 in New York City.
Tom Morris, Phillips's senior vice-president and chief financial officer, updated the status of the Bartlesville, Okla.-based firm's joint venture partnerships. Phillips's production grew by 52% this year, Morris noted, due largely to the company's acquisition of ARCO's Alaska North Slope assets. Phillips also increased its ownership holdings of other ANS assets early last month.
Meanwhile, Raymond Plank, Apache chairman and chief executive officer, said that the Houston independent expects to announce record earnings per share this year. Plank said that the company could report earnings as high as $5.50/share, based on commodity strip prices at the end of last month.
Phillips's JVs
While planning to focus sharply on its E&P activities, Phillips has recently forged two partnerships in the midstream and downstream sectors. Its newly formed business model is incomplete, however, as the company continues to seek a partner firm with which to forge a retail marketing and transportation alliance.
Late last year, Phillips and Duke Energy Corp., Charlotte, NC, signed a definitive agreement to merge Duke's gas gathering and processing business, Duke Energy Field Services, with Phillips's gas processing and marketing unit, GPM (OGJ, Jan. 3, 2000, p. 24). The deal was closed Mar. 31, at which time each partner received about $1.2 billion in a cash distribution. Phillips holds about 30% of the venture, Duke about 70%.
On July 1, Phillips closed on its agreement with Chevron Corp., forming a 50-50 chemical JV called Chevron Phillips Chemical Co. (OGJ, Feb. 14, 2000, p. 24).
Presently, Phillips is seeking a JV partner for its retail marketing and transportation business unit. Although not currently in negotiations, Morris was reported by Reuters as saying that the company has a short list of potential contenders for an RM&T partner. Morris was further cited as saying that Phillips would want a partner firm with considerable regional overlap in operations and would likely seek out ownership of at least half of the partnership.
Phillips in Alaska
Early last month, Phillips raised its stake in Alaska's North Slope (ANS) with the formation of a two-part exploration alliance to explore for and develop ANS hydrocarbons with Alberta Energy Co., Calgary, and Chevron unit Chevron USA Inc. The announcement followed just days after Phillips completed its $965 million acquisition of ARCO's businesses in Alaska.
The alliance with AEC and Chevron includes nearly 150,000 acres on the ANS and in the Beaufort Sea and also provides for proportional ownership of seven leases containing 28,504 acres off Prudhoe Bay in the proposed McCovey Unit.
Under the agreement, AEC Oil & Gas will earn a 33.3% interest in the area leases through a farm-out agreement in the initial well. Phillips's exploration and development operator, Phillips Alaska Inc., and Chevron each will hold a 33.3% interest in the proposed unit. The companies plan to file permits to drill the exploration prospect from an ice island this winter.
The second part of the alignment agreement covers 114,262 acres in the Grizzly Gomo prospect area, located south of the Kuparuk River oil field. AEC Oil & Gas will earn a 20% interest in the area, while Phillips Alaska and Chevron each will hold a 40% interest. Prospective exploration drilling could occur in this area in the 2001-02 winter season.
This is Phillips's second closing in its two-part ARCO acquisition, covering certain pipeline interests and marine assets. The first closing, which took place Apr. 26, included ARCO's exploration and production assets in Alaska.
At the time of the first closing, it was announced that the Prudhoe Bay Unit (PBU) equity interests of Phillips, BP, and ExxonMobil Corp. would be realigned, and a single operatorship would be established (OGJ, Apr. 24, 2000, p. 26). Phillips holds a 36% interest. BP is operator of PBU, while Phillips operates the Kuparuk River and Alpine units, the other major fields on the North Slope.
Phillips forecasts its production to continue to increase, rising 17% in 2001, and 3% each in 2002 and 2003.
Apache growth
Apache's Plank, also speaking at the Lehman Brothers conference, said that the company expects strong earnings for the remainder of 2000 and beyond.
Apache's expects that its cash flow for 2000 could exceed $13/share, or nearly double the $6.61/share average of nine comparable E&P firms, which "argue[s] for an earnings-per-share multiple at least as high as that of Apache's competitors," Plank said. "If Apache enjoyed a similar multiple, our share price at yearend would approximate $90," Plank said.
"Given our built-in production growth for next year and indicated prices well above year-2000 levels, Apache's strong financial outlook puts a $100 share price within reach," Plank said.
The earnings growth, assured Plank, was not just attributable to higher oil and gas prices, but also to higher production volumes. "In 1992, the year Apache moved to Houston, and the first full year of production acquired from Amoco for $545 million in 1991, our oil production averaged 33,000 b/d, gas stood at 262 MMcfd, and natural gas liquids were 1,500 b/d," Plank said.
"In 1999, oil averaged 91,000 b/d, gas 656 MMcfd, and natural gas liquids were 3,900 b/d. In the current year... second quarter daily oil production had risen to 112,500 b/d, up 21,500 b/d, gas had risen to 765 MMcfd, and natural gas liquids were at 6,100 b/d.
"As we enter September, I'm told oil is at 123,000 b/d, 7,000 b/d above July, while gas is at 950 MMcfd, up 185 MMcfd from the second quarter. One bcf per day seems just around the corner," Plank said.