Noble Energy Reports Second Quarter 2004 Results



Noble Energy, Inc. (NYSE: NBL) reported second quarter net income of $72.0 million, or $1.24 per share, compared to $29.1 million, or 51 cents per share, reported for the second quarter last year. Second quarter 2004 net income increased 147 percent compared to the same period last year. Discretionary cash flow (non-GAAP measure, see Determination of Discretionary Cash Flow and Reconciliation schedule) was $221.4 million for the second quarter of 2004, the highest in Noble Energy's history and an increase of 39 percent compared to $159.8 million for the second quarter of 2003. Net cash provided by operating activities was $160.7 million for the second quarter of 2004.

On a continuing basis, the company reported net income of $70.6 million, $1.22 per share. Discontinued operations reported net income of $1.4 million, or two cents per share.

Charles D. Davidson, the company's Chairman, President and CEO, said, "Our strong operating and financial performance during the second quarter reflects a trend that began last year, accelerated during the first quarter of this year and will continue for some time. Noble Energy showed improved results across-the-board. Our domestic operations continued to demonstrate solid production growth. On the international side, the Phase 2A condensate expansion in Equatorial Guinea and the ramp up of natural gas sales in Israel both contributed significant production and earnings. And finally, overall unit costs declined compared to last year."

The increase in net income and discretionary cash flow versus the second quarter last year primarily reflected an increase in daily production from continuing operations of 17 percent. Realized crude oil and natural gas prices increased 27 percent and 19 percent, respectively, also contributing to the increase in net income. Higher production volumes and commodity prices combined to increase oil and gas revenues by $87.3 million over the second quarter of 2003.

In May, Noble Energy completed its asset disposition program first announced in July 2003. The sales price for the five packages of properties totaled approximately $130 million before closing adjustments ($115 million after closing adjustments).

Compared to the second quarter 2003, overall production volumes from continuing operations for the second quarter 2004 increased 17 percent to 109,096 barrels of oil equivalent per day (Boepd) from 93,269 Boepd. Domestic operations had a production increase of seven percent, reflecting new domestic crude oil production from the Roaring Fork field (South Timbalier 315/316) in the Gulf of Mexico. International volumes increased 36 percent compared to the second quarter 2003, primarily because of increased condensate volumes resulting from the start-up of Phase 2A in Equatorial Guinea, the start-up of natural gas sales in Israel and increased production in Ecuador.

Second quarter 2004 production volumes from continuing operations increased two percent to 109,096 Boepd from 106,615 Boepd for the first quarter. Domestic production increased one percent, primarily attributable to increased domestic onshore natural gas production. International production increased five percent over the first quarter, primarily because of the continuing ramp up of natural gas volumes in Israel.

On a unit basis, depreciation, depletion and amortization decreased 14 percent to $8.12 per barrel of oil equivalent (BOE) compared to $9.40 per BOE in the second quarter of 2003. Selling, general and administrative expense declined 25 percent to $1.32 per BOE compared to $1.76 per BOE last year. The quarter-over-quarter decrease in unit costs was due to higher production volumes, including production from lower cost fields. Aggregate selling, general and administrative costs also declined due to reduced personnel costs.

Oil and gas unit operations expense for the three months ended June 30, 2004 were $4.95 per BOE compared to $4.18 per BOE for the same period last year. The increase in oil and gas operations expense reflects two factors:

  • Workover costs increased $7.8 million, with most of the incremental expenses occurring in the Main Pass 306 field; and
  • Increased production taxes resulting from higher commodity prices.

    DOMESTIC OPERATIONS

    Continuing domestic operations reported operating income for the second quarter of $68.3 million, an increase of 82 percent compared to $37.6 million for the second quarter last year. Second quarter 2004 domestic production volumes increased to 65,530 Boepd from 61,247 Boepd for the same quarter last year.

    Domestic operations benefited from higher crude oil production and higher realized prices for crude oil and natural gas during the quarter. The average domestic realized crude oil price was $30.98 per barrel (Bbl) compared to $25.66 per Bbl during the second quarter of 2003. The average domestic realized natural gas price was $5.96 per thousand cubic feet (Mcf) compared to $4.67 per Mcf last year.

    Depreciation, depletion and amortization decreased $2.6 million compared to the second quarter of 2003, despite the seven percent production increase, primarily reflecting greater contribution from lower cost production. Reduced salaries and wages contributed to lower selling, general and administrative expense of $1.2 million. On a unit basis, depreciation, depletion and amortization decreased 10 percent to $10.58 per BOE compared to $11.78 per BOE in the second quarter of 2003. Selling, general and administrative expense declined 33 percent to 53 cents per BOE compared to 79 cents per BOE last year.

    Oil and gas operations expense increased $10.8 million to $34.5 million, compared to the second quarter of 2003. The increase in oil and gas operations expense included $7.6 million of incremental workover expense and $3.2 million of higher production taxes and service costs. On a unit basis, oil and gas operations expenses increased 36 percent compared to the second quarter of 2003. Exploration expense increased $11.1 million compared to the second quarter of last year, primarily as a result of dry holes at the Brazos A-39 #1 (Midway) and Ewing Banks 949 #2 (Queen of Hearts).

    Noble Energy's onshore operations were very active during the first half of 2004, drilling 58 wells with 46 successes. The company plans to drill 108 onshore wells in 2004, of which 44 are to be drilled in the Gulf Coast area and 64 are scheduled for the Rocky Mountain and Mid-continent areas.

    In May, Noble Energy announced the acquisition of an additional interest in the Swordfish development project (Viosca Knoll 917, 961 and 962) in the deepwater Gulf of Mexico. The Swordfish acquisition increased Noble Energy's working interest from 10 percent to 60 percent. Swordfish is expected to commence production in the second quarter of 2005 at an initial rate of 11,000 Boepd, net. A rig is currently on location at Swordfish where it is drilling a third well required for field development.

    In April, Noble Energy announced successful results from the Green Canyon 768 #1 exploration well (Ticonderoga) and the acquisition of an additional interest in the Green Canyon 199 discovery well (Lorien). Both Ticonderoga and Lorien are located in the deepwater Gulf of Mexico. Noble Energy is currently drilling an exploration well on Green Canyon 767 (the Conquest prospect), which offsets the Ticonderoga discovery. In addition, an appraisal well at Lorien is planned for August.

    INTERNATIONAL OPERATIONS

    International operations reported operating income for the second quarter of $67.6 million, a 203 percent increase compared to operating income of $22.3 million in the second quarter last year. Second quarter 2004 international production volumes increased to 43,567 Boepd from 32,022 Boepd for the same quarter last year.

    Reflecting increased low cost production volumes, second quarter 2004 depreciation, depletion and amortization declined to $4.10 per BOE from $4.64 per BOE for the same period last year. Oil and gas operating and transportation expense decreased to $4.64 per BOE from $4.98 per BOE as a result of the ramp-up of production in Israel, increased production in China and an increase in the proportion of lower cost production with the commencement of summer maintenance in the North Sea.

    Equatorial Guinea

    Total operating income in Equatorial Guinea, which includes results from field operations and methanol operations, for the second quarter of 2004 was $37.3 million compared to $21.7 million last year. For the second consecutive quarter, operating income from Equatorial Guinea reached a new record high.

    Liquid petroleum gas (LPG), natural gas and condensate sales accounted for $19.7 million, or 53 percent, of operating income from Equatorial Guinea. Second quarter 2004 production volumes averaged 16,355 Boepd, a 20 percent increase over last year. The average realized price for liquids during the second quarter was $34.95 per Bbl compared to $25.28 per Bbl for the same period last year. Natural gas was sold to the methanol operations at a price of 25 cents per Mcf.

    Operating income from methanol operations was a record $17.6 million net to Noble Energy's interest. Methanol operations' results are reported as income from unconsolidated subsidiaries. Included in income from unconsolidated subsidiaries was $4.8 million of nonrecurring other income. Excluding nonrecurring other income, methanol operations still generated record operating income during the second quarter. Second quarter realized methanol prices averaged 64 cents per gallon (Gal) compared to 72 cents per Gal last year. The company's share of methanol sales volumes was 37.4 million Gal, an increase of 26 percent compared to 29.8 million Gal for the second quarter of 2003.

    In April, the company announced that it had signed a Production Sharing Contract (PSC) with the Republic of Equatorial Guinea covering Block "O" offshore Bioko Island. To date, two 3-D seismic surveys have been shot on the block. Noble Energy and its partners have agreed to drill two exploration wells within the first exploration period of three years, with planning underway for the first well to spud in 2005. Under the terms of the PSC, Noble Energy will be the Technical Operator with a 45 percent working interest.

    Israel

    Natural gas sales commenced from the Mari-B field in Israel on February 18, 2004. Second quarter operating income was $7.8 million. Oil and gas operations expense averaged 42 cents per Mcf, and depreciation, depletion and amortization averaged 55 cents per Mcf. Unit costs are expected to decline as natural gas production increases.

    Natural gas production net to Noble Energy averaged 47.8 million cubic feet per day (MMcfpd) for the second quarter and continued to increase throughout July. Natural gas sales volumes will be dependent upon seasonal demand, with fourth quarter volumes expected to decline from the third quarter as a result of reduced electricity demand. Ultimate gross production under the IEC contract is planned to average 170 MMcfpd (70 MMcfpd net). Noble Energy has a 47 percent working interest in this project.

    North Sea

    In the North Sea, operating income for the second quarter of 2004 increased nearly six fold to $13.2 million compared to $2.4 million last year. The quarter-over-quarter improvement reflects higher realized crude oil and natural gas prices, as well as lower exploration and depreciation, depletion and amortization expenses.

    Other International

    Other international, which includes operating results from Argentina, China and Ecuador, reported operating income of $9.2 million for the second quarter 2004, nearly triple the reported operating income of $3.3 million last year. The increase in operating income primarily reflects increased power production and electricity income in Ecuador, combined with higher crude oil sales and prices in China.

    Noble Energy's Machala power plant contributed $1.3 million of operating income during the second quarter 2004 compared to a $0.9 million loss for the same period last year. During the quarter, 168,815 megawatts (MW) were produced at an average sales price of 7.0 cents per kilowatt hour (Kwh). For the second quarter 2003, the company produced 111,666 MW at an average sales price of 8.3 cents per Kwh. For the second quarter 2004, Noble Energy produced 20.1 MMcfpd of natural gas from the Amistad field.

    In South Bohai Bay offshore China, production from the Cheng Dao Xi (CDX) field was 3,706 barrels of oil per day (Bopd) compared to 3,600 for the same period last year. China had operating income of $5.5 million during the second quarter compared to operating income of $3.9 million for the second quarter of 2003. Noble Energy has a 57 percent working interest in CDX.

    Outlook

    Production -- the range of expected average barrels of oil equivalent production from continuing operations in 2004 remains 13 percent to 18 percent over the average for the full year 2003 of 92,116 Boepd. Noble Energy's production profile will be impacted by several factors, including:

  • The timing of the production increases in Israel and Phase 2A in Equatorial Guinea during 2004;
  • Seasonal variations in rainfall in Ecuador that affect the company's natural gas-to-power project; and
  • Potential weather-related shut-ins in the U.S. Gulf of Mexico and Gulf Coast areas.


  • Major international projects scheduled to contribute incremental production this year include:

  • Initial natural gas sales offshore Israel. Production is projected to continue to increase during the third quarter of 2004 and range between 50 MMcfpd and 80 MMcfpd, net to Noble Energy, during the second half of the year; and
  • Phase 2A condensate expansion in Equatorial Guinea, which began during November 2003.


  • Costs and expenses -- compared to the full year 2003, costs and expenses may vary as follows:

  • Exploration expense is still expected to range from $130 million to $140 million;
  • Selling, general and administrative expense is still expected to range from $1.30 per BOE to $1.50 per BOE;
  • Oil and gas operations expense is still expected to range from $4.35 per BOE to $4.65 per BOE;
  • Depreciation, depletion and amortization is now expected to range from $7.50 per BOE to $8.00 per BOE; and
  • The effective tax rate is still expected to range from 36 percent to 44 percent. Of the total book taxes planned for 2004, 20 percent to 40 percent are expected to be deferred.


  • The above estimates do not include the impact of Noble Energy's possible asset purchases or sales, if any.

    Capital Expenditures -- Noble Energy expects 2004 capital expenditures to be approximately $750 million compared to the $600 million announced in May of this year. The $150 million expected increase in the capital budget is associated with deepwater expenditures for the Swordfish acquisition and development, as well as the accelerated appraisal and development of the Ticonderoga discovery, including the test of the Conquest prospect offsetting Ticonderoga.
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