Cash flow from operating activities for 2003's fourth quarter was $35.1 million, more than double the fourth quarter 2002 figure of $13.3 million. Discretionary cash flow, which is cash flow from operating activities before changes in working capital and exploration expenditures, also more than doubled, rising to $38.6 million for the fourth quarter 2003 from $15.6 million in the fourth quarter 2002 (see reconciliation of discretionary cash flow schedule in the tables). The Company said its strong quarterly earnings and cash flow were primarily attributable to record high production volumes and continued high commodity prices. Partially offsetting these benefits were higher costs and expenses that were directly related to higher production volumes and an active exploratory drilling program.
For the full year 2003, net income available to common stockholders reached a record $29.7 million, or $0.93 per diluted share, a reversal from the loss of $12.1 million, or $0.44 per diluted share, in 2002. Earnings for 2003 included a one-time after-tax benefit of $2.3 million, or $0.06 per diluted share, related to the cumulative effect of a change in accounting principle as a result of the adoption of Financial Accounting Standards Board Statement No. 143, "Accounting for Asset Retirement Obligations", which became effective January 1, 2003. The 2002 period included a charge of $1.2 million for expenses relating to the rationalization of EPL's organization following the acquisition of Hall-Houston Oil Company.
For the full year 2003, cash flow from operating activities totaled $136.7 million, more than five times the 2002 figure of $25.4 million. Discretionary cash flow increased two and one-half times in 2003, to $150.2 million from $60.0 million in 2002 (see reconciliation of discretionary cash flow schedule in the tables). Significantly higher production volumes and commodity prices were the primary factors leading to sharply improved earnings and cash flow in 2003.
Reserve Replacement and Finding and Development Costs
EPL also announced that it had replaced 130% of 2003 production with new reserves. Extensions and discoveries totaled 9.0 million barrels of oil equivalent (Mmboe) while revisions to previous estimates totaled 1.0 Mmboe. EPL had no acquisitions or divestitures of reserves in 2003. At year-end 2003, proved reserves were 49.8 Mmboe, up 5% from 47.5 Mmboe at year-end 2002. 69% of EPL's reserves at year-end 2003 were classified as proved developed. EPL's proved reserve estimates as of 12/31/03 and 12/31/02 are based upon third party engineering reports prepared by Netherland, Sewell & Associates, Inc. and Ryder Scott Company, L.P.
EPL's finding and development costs in 2003 were $11.19 per barrel of oil equivalent (Boe). Since inception, EPL has averaged 327% annual reserve replacement at a cost of $7.97 per Boe. Drill bit replacement since inception has averaged 134% at $11.57 per Boe, and acquisitions have averaged 173% at $6.10 per Boe.
Richard A. Bachmann, EPL's Founder, Chairman, President and CEO, remarked, "The fourth quarter of 2003 was highlighted with new Company records for production, revenues and discretionary cash flow. The combination of favorable commodity prices, record production and vigilant control of expenses gave us a strong finish to a very strong year. For the full year, we achieved a 23% growth in production purely from our drilling program without any benefit from acquisitions. We also made significant progress in lowering our per-unit operating costs."
Bachmann continued, "Our exploratory program was in high gear in the fourth quarter, and our success in that program throughout the year enabled us to achieve an admirable reserve replacement of 130% at a cost of $11.19 per Boe, which we believe is attractive for a Gulf of Mexico focused producer."
Fourth Quarter 2003 Results
EPL's production for the fourth quarter 2003 averaged 22,609 Boe per day, another new record high for the Company. Production on a Boe basis was up 46% from fourth quarter 2002's production of 15,529 Boe per day which was negatively impacted by tropical storm related downtime. Natural gas production grew 63% to 84.2 million cubic feet per day (Mmcfd) while oil production increased 24% to 8,571 barrels per day (Bopd).
In the fourth quarter of 2003, EPL realized average prices of $4.86 per thousand cubic feet (Mcf) of natural gas and $28.10 per barrel of oil, net of hedging. These prices represent a 29% increase in the average natural gas price and 9% increase in the average oil price from the fourth quarter 2002.
Full Year 2003 Results
Production for 2003 averaged 21,077 Boe per day, a new record high for the Company, and an increase of 23% over 2002 average volumes of 17,173 Boe per day. Natural gas production rose 45% from 2002 levels to average 78.6 Mmcfd in 2003. Oil production declined slightly, averaging 7,978 Bopd in 2003 compared to 8,148 Bopd in 2002.
Net of the impact of hedging, the average realized natural gas price for 2003 was $5.16 per Mcf, a 60% increase from the 2002 average realized natural gas price of $3.23. Oil price realizations rose to $28.02 per barrel for 2003, net of hedging, a 19% increase compared to the 2002 average realized oil price of $23.64.
EPL's expenditures for exploration and development totaled $111.9 million for the full year 2003. The Company recently announced a capital and exploration budget for 2004 of $125 million. EPL expects the risk allocation of the 2004 budget to match its historic allocation, with approximately 60% of the budget earmarked for development and low risk exploitation, 25% for moderate risk exploration, and 15% for higher risk, higher potential exploration. The Company does not budget for acquisitions.
As of year-end 2003, EPL's long-term debt totaled $150.4 million while cash and cash equivalents totaled $104.4 million. Its debt to total capitalization ratio was 36%, excluding the impact of the cash on the balance sheet as of the end of the year. The Company has $59.9 million in unused capacity under its bank credit facility.
2003 Operational Highlights
In 2003 EPL successfully drilled 18 of 23 new wells for a 78% overall success rate. Of the 21 exploratory wells in the program, 17 were successful, an 81% success rate. The Company also successfully completed 28 well workovers and recompletions.
Of EPL's 18 successes, eight were onstream before year-end 2003, five are expected to be online in the first half of 2004, and the remaining five are expected in the second half of 2004. Bachmann added, "In many important respects, 2003 was a landmark year for EPL. We executed the most extensive drilling program in the history of the Company while maintaining our high success rate, continuing the momentum established with our 2002 drilling program. We also reached record highs on nearly every operational and financial metric and have ended the year with over $100 million in cash on our balance sheet. For 2004, we have set equally challenging goals for ourselves. We plan to have an active drilling program that will be better balanced throughout the year while we continue to pursue acquisitions of properties that fit our strategic focus, utilizing our well-positioned balance sheet."
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