Papa issues gas warning

EOG’s CEO expects sharply lower gas prices in 2004

Petroleum News

North America has entered an unusual period where both natural gas supply and demand are falling together, resulting in what could be sharply lower gas prices in the event of a warm winter, Mark Papa, EOG Resources’ chief executive officer, said Nov. 4.

“In our opinion, we’re witnessing a unique situation with supply and demand,” Papa said in a conference call, noting that North American gas production continued to decline in the 2003 third quarter, despite an increase in drilling rig utilization this year in both the United States and Canada.

Papa predicted that natural gas volumes would fall by 2 to 3 percent in 2004 compared to 2003, and that total North American gas supply, including liquefied natural gas imports, would be 1.5 billion cubic feet per day, or 2.5 percent lower next year.

He said the majors are showing production declines “more steep than what we predicted,” with exploration and production independents sustaining a relatively flat rate year-over-year.

Although fundamentals are in place for long-term supply constraints, in the short term “we may see some price weakness, if you call $4 to $4.50 gas prices weak,” he said.

Nevertheless, Houston-based independent EOG has placed hedges on its 2004 production to help insulate the company against volatile gas prices, Papa said. For the January-to-October 2004 period, EOG has financial collars covering 40 percent of its North American gas volumes at a $4.77 floor and a $5.40 cap.

Together with Canadian production already locked in, EOG now has about half of its North American gas volumes protected during the first 10 months of next year. Moreover, EOG may seek authorization from its board of directors to increase hedges to cover up to 70 percent of company production, Papa said.

EOG is not on the long list of producers struggling with production growth. Overall, the company is forecasting production to rise 6.5 percent in 2004, 10 percent in 2005 and 7 percent in 2006. In North America alone, EOG is expected to boost gas output 6.5 percent in 2004 over 2003.

However, to lift the growth-minded independent to a higher level, don’t expect EOG to revert to another major acquisition following this year’s $320-million purchase of Husky Energy properties in Canada, the biggest in company history.

Papa said the transaction “was based on not making any substantive acquisitions” for a two or three year period. Moreover, because of the additional production and reserve potential, “this acquisition in Canada really sets us up pretty good for future growth rates,” he said.

The Husky properties, located in the Wintering Hills, Drumheller East and Twining areas of southeast Alberta, increased EOG’s Canadian proved reserves by 33 percent and production by 20 percent.

Papa said that while EOG would continue to look for acquisitions, “don’t look for us to be extremely active in either property acquisitions” or corporate mergers. “It’s doubtful we’re going to participate in the market in terms of swallowing companies smaller than us,” he said.

EOG posted net income for the 2003 third quarter of $114.7 million or 99 cents per share, up considerably from the $26.1 million or 22 cents per share the company earned in the year-ago quarter. Excluding special items, the company made $93 million or 80 cents for the 2003 third quarter.

Natural gas production in the third quarter averaged 644 million cubic feet per day compared to 630 million cubic feet per day for the same period last year. Oil and condensate production was 22,800 barrels per day compared to 23,200 barrels per day in the year-ago period.