The results for second quarter 2004 included a tax benefit of $5.3 million ($0.04 per share) from a reduction in the corporate tax rate in Alberta, Canada and a previously disclosed $14.6 million ($9.4 million after tax, or $0.08 per share) loss on the mark-to-market of financial commodity price transactions. During the quarter, the net cash outflow from the settlement of financial commodity price transactions was $35.9 million ($23.2 million after tax, or $0.20 per share). Consistent with some analysts' practice of matching realizations to settlement months and excluding the Canadian tax benefit, adjusted non-GAAP net income available to common for the quarter was $123.1 million, or $1.04 per share. Similarly, EOG's second quarter 2003 results included a $15.8 million ($10.2 million after tax, or $0.09 per share) loss on the mark-to-market of financial commodity price transactions and net cash outflow from the settlement of financial commodity price transactions of $11.2 million ($7.2 million after tax, or $0.06 per share). Reflecting these items, second quarter 2003 adjusted non-GAAP net income available to common was $109.0 million, or $0.94 per share. (Please refer to the table below for the reconciliation of net income available to common to adjusted non-GAAP net income available to common.)
In the second quarter, total company production increased 7.6 percent versus the second quarter last year. Production from the United States and Canada rose 6.9 percent while production from Trinidad increased 11.7 percent.
"EOG posted solid results for the second quarter, and based on data gathered in the last three months, we continue to be enthusiastic about our position in the non-core area of the Barnett Shale Play in the Fort Worth Basin. In addition, during the second quarter, EOG's operations across the company once again showed consistent performance," said Mark G. Papa, Chairman and Chief Executive Officer.
Through an ongoing focus on leasing activity in the Barnett Shale Play, the company has increased its holdings to 258,000 net acres. Although this acreage position is held primarily in six counties, all drilling activity to date has been centered in Johnson County. To date, EOG has drilled and completed 15 horizontal wells. An additional five wells have been drilled and are waiting on completion. Production is currently limited by pipeline constraints, which are expected to be resolved by year-end.
In South Texas, EOG continues to report excellent results in all geologic plays, with recent success in the Frio and Roleta Formations. The Brooks #3 well was recently completed in the Frio Formation and tested 10 million cubic feet per day (MMcfd) and 840 barrels of condensate per day. EOG has a 59 percent working interest in this well. Also in the Frio Formation, EOG has a 100 percent working interest in the Ponderosa Ranch #1 well in Matagorda County, which encountered 75 feet of pay and is expected to produce 10 MMcfd when sales commence in September. In the Roleta Formation, EOG also has a 100 percent working interest in the Slator Ranch H-3 well, which currently is flowing to sales at a rate of 10 MMcfd.
"In addition to the Barnett Shale and South Texas, we expect strong second half results with production increases coming from the Mid Continent, East Texas and the Rocky Mountains in the U.S. as well as the tie-in of shallow natural gas wells in Canada. In Trinidad, the new ammonia plant is scheduled to begin taking natural gas at full capacity in the third quarter and the first production from the U.K. North Sea should begin this month," said Papa.
Commissioning started ahead of schedule in July on Trinidad's Nitrogen (2000) Unlimited Ammonia Plant with full plant productivity scheduled during August. Under a 15-year contract, EOG will initially supply approximately 45 MMcfd, net, of natural gas to the plant from the U(a) Block. This will increase the company's current natural gas production in Trinidad by 28 percent.
The first production of at least 20 MMcfd, net, from the Valkyrie well, EOG's first discovery to come on-line in the U.K. North Sea, is expected during August. Additional natural gas production of over 20 MMcfd, net, is scheduled from the Arthur #1 well in November. EOG entered the North Sea during 2002 through drilling ventures with major oil companies.
At June 30, 2004, EOG's total debt outstanding was approximately $1,086 million and cash on the balance sheet was $68 million. The company's debt-to-total capitalization ratio at June 30 was 30.5 percent, down from 33.3 percent at December 31, 2003. Factoring in recent commodity prices, expected production and capital expenditure levels, EOG's debt-to-total capitalization ratio at year-end is projected to be less than 30 percent.
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