Spinnaker, Cabot turn profits on lower production

Ray Tyson

Petroleum News Houston Correspondent

Once again, U.S. exploration and production independents have defied gravity and shown that despite producing less oil and gas, money can be made in this business.

Spinnaker Exploration and Cabot Oil & Gas, largely on the strength of commodity prices, each managed to turn a profit in the 2003 fourth quarter, but saw their production decline compared to the same period a year earlier.

In fact, Cabot reported its best fourth quarter ever, posting net income of $19.2 million or 60 cents per share, more than double last year’s net income of $8.7 million or 27 cents per share. Discretionary cash flow also improved between comparable quarters with $71.7 million in 2003 versus $58.1 million in 2002.

Nonetheless, Cabot’s oil and gas production in the 2003 fourth quarter slipped to 21.9 billion cubic of gas equivalent from 22.4 billion cubic feet in the quarter a year earlier. On an annual basis, output decreased to 89 billion cubic feet of equivalent in 2003 from 91.1 billion cubic feet in 2002.

Cabot attributed the annual production decrease primarily to “acceleration of declines” in South Louisiana, where after three years of “very prolific” production from four discoveries, wells began declining and now account for just 25 percent of the company’s Gulf Coast production. That’s also down from 50 percent at the beginning of 2003. Cabot said it was able “to recapture” a portion of the volumes by year-end through it’s drilling program.

Cabot managed to eke out an annual 3.3 percent production increase from its expanded East Coast operations on “a very solid development program.” However, Cabot said it registered production declines in the U.S. West due to lower levels of investment.

And while Cabot replaced 127 percent of its production in 2003, overall reserves at year-end were down slightly from the previous year at 1.24 billion cubic feet of gas equivalent. Cabot attributed that slippage to property sales amounting to 53.4 billion cubic feet of equivalent.

“As has been highlighted many times, opportunities for replacing reserves are getting increasingly more difficult,” Dan Dinges, Cabot’s chief executive officer, said Feb. 17.

Meanwhile, Spinnaker did manage to increase year-end 2003 proved reserves by 3 percent to 333 billion cubic feet of gas equivalent compared to 2002. However, the company reported a nearly 30 percent drop in production to 11.5 billion cubic feet of gas equivalent in the 2003 fourth quarter, compared to 16.3 billion cubic feet in the year-ago period.

Oil and gas output for the recent fourth quarter was essentially flat to the previous quarter, but still “exceeded the company’s expectations” by about 7 percent, Spinnaker said. Moreover, the company anticipates a further sequential production decline in the 2004 first quarter to 11 billion barrels of gas equivalent. Spinnaker attributed the expected drop to the shut-in of company properties in Texas, the result of the re-routing of a third party transmission line that serves the properties.

Despite the dramatic production decrease in the fourth quarter, Spinnaker managed to profit to the tune of $6.5 million or 19 cents per share, but still down from the $12.6 million or 37 cents a share the company earned in the 2002 fourth quarter. Revenues were $49.1 million versus $67 million a year earlier.

“The decrease in revenues was primarily due to lower production, partially offset by higher average natural gas and oil prices,” Spinnaker said, noting that average gas prices in 2003 increased 58 percent and oil prices were up 16 percent compared to 2002.