OGJ200 Quarterly: Rising costs sink second-quarter earnings.

Higher operating expenses took a toll on many of the producers’ earnings, often overshadowing oil and gas production volume gains.

The OGJ200 group consists of the publicly traded, US–based oil and gas producers. This group of firms originally appears in Oil & Gas Journal’s annual special report (OGJ, Sept. 17, 2007, p. 20), which ranks the firms by yearend total assets. To qualify for the list, a company must have operations in the US.

Changes

The group now contains 144 firms, up from 132 in the previous edition of the OGJ200 Quarterly (OGFJ, August 2007, p. 58). The results of nine of the firms do not appear in this edition of the report, as these companies had not filed their 1Q07 results with the US Securities & Exchange Commission by press time.

Three of the OGJ200 companies appear under different names than they did previously.

The San Antonio–based firm previously listed as The Exploration Co. now appears as TXCO Resources Inc. Additionally, Harken Energy Corp. is now HKN Inc., and Panhandle Royalty Co. has changed its name to Panhandle Oil & Gas Inc.

Market conditions

Oil futures prices during 2Q07 were down from the corresponding 2006 quarter, while natural gas futures moved higher. Motor gasoline pump prices also were up from a year earlier.

Averaging $64.80/bbl during 2Q07, the near–month futures price of crude on the New York Mercantile Exchange was down 8% from the second quarter of 2006. And the refiners’ acquisition cost of crude was down 3% from a year earlier, averaging $62.36/bbl in the recent quarter.

Cash refining margins were little changed on the US Gulf Coast and East Coast from a year earlier but varied for US Midwest and West Coast refiners.

The US Midwest cash margin averaged $26.95/bbl during the recent quarter, up 43% from a year earlier. And the US West Coast margin declined 22% to average $28.83/bbl during 2Q07, according to Muse, Stancil & Co.

Self–serve unleaded motor gasoline pump prices in the US averaged $2.98/gal during 2Q07, according to OGJ. This compares to an average of $2.82/gal during the second quarter of 2006.

Meanwhile, average 2Q07 front–month natural gas prices on the NYMEX were $7.663/MMbtu, up 15% from the second quarter of 2006.

Results

Forty of the firms in the compilation reported a net loss for 2Q07. For the 2006 second quarter, 31 firms in this group recorded a loss. Meanwhile, 52 companies in the group reported improved results for 2Q07 from positive second–quarter 2006 earnings.

Ranked No. 4 by assets, Anadarko Petroleum Corp. reported a 20% decline in 2Q07 earnings while posting an 83% increase in revenue from a year earlier.

Anadarko’s 2Q07 sales volumes of oil, gas, and natural gas liquids were up 44% from a year earlier to 52 million boe. But the company reported higher costs and expenses, including a 95% surge in depreciation, depletion, and amortization costs to $706 million for 2Q07. Oil and gas operating costs and expenses climbed to $253 million from $138 million in the second 2006 quarter.

While No. 1 Exxon Mobil Corp. posted a 1% decline in 2Q07 earnings, and No. 2 ConocoPhillips recorded a 94% drop in earnings as compared to the second quarter of 2006, No. 3 Chevron Corp. reported a 24% earnings increase for the recent quarter.

“Earnings and cash flows were strong in the second quarter,” said Chevron chairman and CEO Dave O’Reilly. “Upstream profits increased approximately $400 million, mainly reflecting the absence of charges recorded in the 2006 period for uninsured costs associated with hurricane damages. Downstream earnings improved $300 million on higher margins for refined products.”

With net income of $10.26 billion, ExxonMobil reported that higher refining, marketing, and chemical margins mostly offset lower natural gas realizations during the recent quarter.

ExxonMobil’s non–US gas price realizations in 2Q07 averaged $6/Mcf, down from $6.70/Mcf a year earlier. But the company’s US gas price realization was up 8% to $6.94/Mcf in the recent quarter.

ConocoPhillips’ net income was $301 million in the recent quarter, and revenues were little changed at $47.4 billion, up from $47.1 billion a year ago. Net income for 2Q07 included an after–tax impairment of $4.5 billion in ConocoPhillips’ exploration and production segment related to expropriation of the company’s oil projects in Venezuela.

ConocoPhillips’ 2Q07 refining and marketing segment earnings were $2.4 billion, up from $1.7 billion a year earlier, on higher worldwide refining and marketing margins, a net benefit associated with the company’s asset rationalization efforts, and lower costs associated with turnarounds and hurricane impacts in 2006. These increases were partially offset by lower volumes due to the contribution of assets to the company’s downstream venture with EnCana Corp.

Occidental Petroleum Corp. announced its 2Q07 net income was $1.4 billion, compared with $860 million for the second quarter of 2006. The 2Q07 net income includes $419 million after–tax gains from the sale of non–core assets, and the second quarter 2006 net income includes a $347 million after–tax loss from the write–off of assets and income from the operations of assets written off and held for sale.

Occidental reported that the decline in 2Q07 earnings reflected decreases from lower oil prices; increased depreciation, depletion, and amortization rates; and higher exploration and operating expenses, partially offset by higher production volumes and natural gas prices. The company’s realized price for worldwide crude oil averaged $59.11/bbl during 2Q07, compared with $61.66/bbl for the second quarter of 2006.

Chesapeake Energy Corp. posted a 44% increase in 2Q07 earnings from a year earlier, as production volumes climbed 19%. Quarterly revenues were up 33% from the second 2006 quarter.

Chesapeake’s 2Q07 average daily production of 1.868 bcfe consisted of 1.715 bcf of gas and 25,538 bbl of oil. Based on 2Q07 reported production from continuing operations by other public US natural gas producers, Chesapeake said it believes it has become the largest independent and the third–largest overall producer of US natural gas.

Top 20 firms

Affected by increased operating costs, the top 20 companies as ranked by assets recorded 2Q07 results similar to those of the entire OGJ200 group.

The combined revenue of the top 20 firms increased 2.8% from a year earlier to $255.3 billion, while their net income fell a collective 13.7% to $24 billion.

The capital and exploration expenditures of the top 20 firms climbed 25% to $43 billion for the first 6 months of 2007. And these companies’ combined total assets as of June 30, 2007 were $883 billion, up from $856 billion at year–end 2006.

The top 20 firms had a combined market capitalization of $1.12 trillion at the end of the first half of this year. This is up a bit from the end of the first quarter of 2007.

The OGJ200 also ranks the companies by criteria other than total assets, including capital spending. There are three companies that rank among the top 20 in spending but not by total assets.

Southwestern Energy Co., which was the sixteenth company by spending during the first half of 2007, is ranked at No. 31 by assets. Southwestern Energy’s capital spending was $704.6 million in the first six months of this year.

The eighteenth firm in spending was Questar Corp, ranked No. 23 by assets, and rounding out the top 20 spenders was Cimarex Energy Co., which is ranked No. 24 by assets.

Cimarex Energy reported that its 2Q07 exploration and development expenditures totaled $237 million, down from $282 million in the second quarter of 2006. During the first half of 2007, the company’s spending was $473 million.

In the recent quarter, Cimarex drilled 115 gross (75 net) wells, completing 89% as producers. The Denver–based company projects that its exploration and development capital investment for 2007 will be about $1 billion.

Fast growers

Atlas America Inc. was the fastest–growing company in the OGJ200 group for 2Q07. Ranked No. 33 by assets, Atlas America reported a surge in stockholders’ equity to $357.8 million from $52.5 million following the recent acquisition of DTE Gas & Oil Co. for $1.3 billion.

Atlas funded the acquisition purchase price in part with a new $850 million senior secured credit facility which expires in 2012. The remainder of the purchase price was funded by a private placement of 24 million common and Class D units, generating gross proceeds of $600 million.

The fastest–growing companies are determined primarily by growth in stockholders’ equity. For a company to qualify for this list, it must have reported positive net income for the first quarter of 2007 and for 2Q07, and it must have posted an increase in earnings in the most recent quarter from the first quarter of 2007. Excluded from this list are limited partnerships, subsidiaries, and newly public companies.

Ranked No. 80 by assets, Arena Resources Inc. was the second fastest grower for 2Q07. This Tulsa–based firm saw its stockholders’ equity increase 83% during the recent quarter, as its net income climbed 38% from the second quarter of 2006.

Arena Resources’ revenue climbed 47% to a record $21.6 million for 2Q07 as a result of increases in production volumes, offset by an 11% decrease in realized oil prices. Oil sales volume increased 57%, and gas sales volume increased 75% from a year earlier.

The company’s lease operating expenses including production taxes for the three months ended June 30, 2007, were $9.95/boe, a 9% increase from the prior year.

Arena Resources was on the list of the top 20 fast growers for the previous quarter, too. Also appearing on the list of fast growers for at least the second consecutive quarter are Gulfport Energy Corp., Devon Energy Corp., and Murphy Oil Corp.

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