INDEPENDENTS' GROUP POSTS LOSS

Valerie Sanders
Statistics Editor

Robin Buckner Price
Staff Writer

Low oil and gas prices and special charges caused the group of 50 U.S. independent producers Oil & Gas Journal tracks to post a combined loss in first half 1992.

The group logged a net loss of $53 million in the first half compared with net earnings of $354 million in first half 1991, when higher oil prices during the Persian Gulf crisis buoyed earnings in spite of crude oil and natural gas production declines.

The combined loss in the first half follows a 45% drop in the group's earnings in 1991 (OGJ, June 29, p. 23) and compares with the OGJ group of integrated oil companies whose first half 1992 income fell 47% from the prior year (OGJ, Aug. 31, p. 15).

Special charges, generally related to asset writedowns, accounted for most of the almost $560 million in losses posted by about a third of the group. Nerco Oil & Gas Inc., Vancouver, Wash., alone accounted for almost half that total with charges related to an asset writedown of $238 million in the first quarter.

Despite the poor first half performance, the outlook is bright for sharply improved group earnings in the second half, assuming reasonably healthy oil and gas prices and increased production resulting from acquisitions and in response to those prices.

Production changes were relatively small for those reporting 1991 and 1992 first half operating data, while oil and gas prices registered declines for those reporting average prices.

As expected, the group's membership has changed due to companies divesting U.S. upstream assets, and more changes are expected by yearend.

Pacific Enterprises, Los Angeles, is in the process of selling its U.S. oil and gas assets to Hunt Oil Co., Dallas (OGJ, Oct. 19, p. 34), and accounted for the assets as discontinued operations during second quarter 1992. Adobe Resources Corp., New York, merged with Santa Fe Energy Resources Inc., Houston (OGJ, Dec. 16, 1991, p. 32). Hondo Oil & Gas Inc., Roswell, N.M., sold its U.S. assets to Devon Energy Corp., Oklahoma City (OGJ, July 6, p. 36). New to the group is Benton Oil & Gas Co., Oxnard, Calif., CNG Producing Co., Pittsburgh, and Edisto Resources Corp., Dallas.

EARNINGS

A surprising 66% of the group performed worse in first half this year vs. a year ago, and 36% of the group reported net losses for the period.

Total revenues were down not quite 1% to $5.2 billion.

Noble Affiliates Inc., Ardmore, Okla., increased year to year first half net income more than 100%, in part due to an after tax gain of about $18 million from sale of its interest in Natural Gas Clearinghouse in May.

Enron Oil & Gas Co., Houston, in the second quarter listed a 100% increase in net income to $14.6 million, benefiting significantly from a tight gas sands tax credit of about $6.7 million compared with $1 million in second quarter 1991. The company expects the federal income tax credit for tight gas sand volumes combined with a Texas severance tax exemption on tight gas sand revenues to generate an after tax net income contribution of more than $45 million in 1992.

Newcomer Benton's first half 1992 loss stemmed mainly from a second quarter loss of $569,599 compared with net income of $73,859 for second quarter 1991.

Devon Energy Corp.'s first half earnings turnaround was underpinned by increased oil and gas revenues and flat cash expenses, while last year's first half income was hit by a noncash $25 million pretax charge to reduce the carrying value of leases.

SPECIAL CHARGES

Writedowns on the value of oil and gas leases continued to plague the group. Special charges logged in second quarter and first half included:

Enserch Exploration Partners Ltd., Dallas, took a $51 million noncash hit in the first quarter due to the "ceiling test" prescribed by Securities and Exchange Commission for oil and gas producers that follow the full cost method of accounting.
Dekalb Energy Co., Denver, took a $53.3 million noncash, pretax writedown of oil and gas leases. Dekalb also logged a $33.1 million loss on the pending disposal of its U.S. assets, which led to an $80 million loss for the first half of 1992 compared with a $70.89 million loss from operations in the year ago period.
Nerco Oil & Gas said a $4.3 million property abandonment charge affected its second quarter earnings. Nerco's big first quarter charge related to a $238 million ceiling test writedown on the carrying value of oil and gas assets, $44 million in losses stemming from the sale of assets, and $4 million from other unusual items.
Anadarko Petroleum Corp.'s net loss for the half included a $15 million pretax provision charged to second quarter earnings for unsuccessful international exploration that reduced net income by about $10 million.

PRODUCTION, PRICES

Companies reporting production for first half 1992 saw a 7% increase in oil production from the prior year to a total of 533,332 b/d and a 0.9% decline in gas production to 5.6 bcfd.

Prices for those reporting averaged $17.80/bbl for oil, down 9%, and $1.56/Mcf for gas, down 5% from 1991's first half. Eleven of the companies that reported year to year first half production comparisons saw oil production decline, and half of those reporting gas production year to year noted declines.

Apache Corp.'s oil production tripled in the second quarter to 33,036 b/d, while gas production increased 6% to 273 MMcfd. The company saw second quarter 1992 gas prices increase to $1.60/Mcf from $1.52/Mcf in second quarter 1991, and its oil prices during the quarter averaged $18.37/bbl compared with $16.65/bbl a year ago.

Raymond Plank, Apache chairman, said the company's operating personnel continued to exploit leases acquired in mid 1991 through drilling, workovers, and recompletions, which helped bolster the quarter's production. Plank also said Apache's lease operating expense per unit of production declined to $3.49/bbl of oil equivalent in the second quarter, 5% below the yearend 1991 level.

Devon reported increased production for the second quarter and first half, mainly due to increases from its Northeast Blanco Unit coal seam gas project in Northwest New Mexico. First half gas production increased 47% to 79.6 MMcfd, with a total of about 44 MMcfd attributed to Northeast Blanco. Devon said gas production gains of 59% for the second quarter combined with slightly higher prices to yield a 66% increase in gas revenues. Devon's oil production and revenues were down slightly for the second quarter and first half of 1992, mainly due to production declines from normal depletion.

Benton attributed its second quarter loss mainly to continued low natural gas prices and sales. Natural gas prices averaged $1.53/Mcf during the quarter, about 16% lower than the year prior, and the company's gas sales were lower partly because it sold its Colorado wells earlier in the year and partly because of natural declines in its California production.

Benton Pres. A.E. Benton said, "The company is focusing its efforts on its major projects on the Gulf Coast and internationally and is selling nonstrategic assets, which will cause a short term decline in production and revenues."

Enron Oil & Gas increased its natural gas sales volumes 26%, averaging 551 MMcfd in second quarter, on prices that were up 9% to an average $1.35/Mcf. "These results are particularly noteworthy considering that we curtailed sales as much as 15% due to lower than acceptable prices during portions of the quarter," said Forrest E. Hoglund, Enron chairman.

OUTLOOK

Increased gas prices in third quarter and early fourth quarter should help boost earnings in the second half for the independents group.

George P. Mitchell, chairman of Mitchell Energy & Development Corp., Woodlands, Tex., noted his company's energy operations did not receive full benefit in second quarter of recent improvements in natural gas and natural gas liquids prices, a situation echoed by several companies.

"It was a tough quarter," said Ron Nahama, president of Nahama & Weagant Energy Co., Bakersfield, Calif. "But it should not be considered in any way to be indicative of the remainder of the year...Gas prices are back up to over $2/MMBTU, our average net daily gas production rate, including our Benton purchase, is up to 10 11 MMcfd, and production in the third quarter from new wells should improve upon that."

And many of the companies noted acquisitions through the remainder of the year will help bolster production and cash flow.

Charles C. Stephenson Jr., president of Vintage Petroleum Inc., Tulsa, noted, "Oil production was up 40% for the (second) quarter. This increase made a significant impact on oil and gas sales and stemmed from acquisitions made since the second quarter of last year. "The climate for acquisitions remains outstanding with the many properties that are on the market right now. Vintage has the financial and operating capability to take advantage of these opportunities."