Year Ended Fourth Quarter December 31, (Millions of dollars, except per-share amounts) 2004 2003 2004 2003 Net Income $133.8 $50.3 $404.0 $218.6 Loss from Discontinued Operations - .2 - .3 Change in Accounting Principle (FAS 143) - - - 34.7 Income from Continuing Operations 133.8 50.5 404.0 253.6 Add Other Items(1) 33.7 36.4 218.9 150.3 Adjusted After-Tax Income $167.5 $86.9 $622.9 $403.9 Diluted Earnings Per Share Net Income $.86 $.50 $3.11 $2.17 Discontinued Operations - - - - Change in Accounting Principle - - - .31 Continuing Operations $.86 $.50 $3.11 $2.48 Adjusted After-Tax Income $1.07 $.86 $4.71 $3.84 (1) Items included in "Other Items" are listed in the tables as "Other Information, Net of Income Taxes."
Adjusted after-tax income and the related measure per diluted share exclude items that management deems to not be reflective of the company's core operations. These measures are non-GAAP financial measures. Management believes that these measures provide valuable insight into the company's core earnings from operations and enable investors and analysts to better compare core operating results with those of other companies by eliminating items that may be unique to the company. Other companies may define these items differently, and the company cannot assure that adjusted after-tax income is comparable with similarly titled amounts for other companies.
Kerr-McGee also announced that it replaced 280% of its production of 114.3 million barrels of oil equivalent (BOE). The company achieved record production for the second consecutive quarter, with 2004 fourth-quarter daily production averaging 372,100 BOE, an increase of 41% from the 2003 fourth quarter. Production for the year averaged 312,200 BOE per day, an increase of approximately 15% from the prior year.
"In 2004, we continued to successfully implement our strategy of expanding our company's depth and balance, growing our core areas where we have expertise, cost and technological advantages," said Luke R. Corbett, Kerr- McGee chairman and chief executive officer. "With the strategic acquisition of Westport and the start of production at Red Hawk in the Gulf of Mexico and in Bohai Bay, China, we achieved record production for the second consecutive quarter and replaced 280% of our worldwide 2004 production. We also enhanced our portfolio of high-potential prospects through acreage additions in core areas and proven hydrocarbon basins worldwide. We continued to exercise financial discipline, reducing the company's debt to capital ratio to 41% at year end.
"We expect to achieve record production in 2005, with volumes projected to increase in the range of 13% to 18% versus 2004," said Corbett. "We're confident we also will grow our reserves as we execute our 2005 capital and exploratory program, which includes identified low-risk exploitation opportunities in the Rockies, appraisals of 2004 discoveries in Alaska, Brazil and China, and a high-potential exploratory program. We have confirmed rigs for our aggressive onshore and offshore drilling programs and expect to move more of our large inventory of probable and possible resources into the proved reserve category throughout the year."
Exploration and Production and Chemical Operating Profit
Fourth-quarter 2004 operating profit was $338.2 million, compared with $208.5 million for the 2003 period. Exploration and production operating profit was $330.5 million, compared with $234.7 million in the 2003 fourth quarter. The increase was due to higher oil and gas sales volumes and prices, partially offset by higher operating and exploration costs. The higher sales volumes primarily were due to the acquisition of Westport Resources Corp. late in the second quarter of 2004, and the start of production at Red Hawk in the Gulf of Mexico, and Bohai Bay, China, in the 2004 third quarter and Gunnison late in the 2003 fourth quarter. Chemical operating profit was $7.7 million for the 2004 fourth quarter, compared with an operating loss of $26.2 million for the 2003 period. The improvement primarily was due to plant shutdown and work force reduction costs in the 2003 period and higher pigment sales volumes and prices in the 2004 fourth quarter.
"After three years of depressed market conditions in the titanium dioxide pigment industry, we are seeing visible signs of recovery and improved results in our Chemical business," said Corbett.
Interest Expense and Debt
Interest expense for the 2004 fourth quarter was $64.3 million, an increase of $4.1 million from the prior-year period, due to higher average debt balances in the 2004 fourth quarter as a result of the Westport acquisition. Total debt at Dec. 31, 2004, was $3.7 billion, compared with $3.9 billion at Sept. 30, 2004. The company's debt to capital ratio finished the year at 41%, compared with 58% at the end of 2003.
Oil and Gas Volumes and Prices
Kerr-McGee's daily oil production for the fourth quarter of 2004 averaged 184,700 barrels, up 32% from the prior-year period. This increase related primarily to the start of production in China in the 2004 third quarter, the Westport acquisition late in the second quarter of 2004 and increasing production from deepwater Gulf of Mexico fields. The average sales price for oil for the 2004 fourth quarter, including the effects of the company's hedging program, was $28.99 per barrel, up from $25.86 per barrel for the 2003 fourth quarter.
Fourth-quarter daily sales of natural gas averaged 1.125 billion cubic feet, compared with 742 million cubic feet for the 2003 quarter, an increase of 51%. The increase was due to start of production at Red Hawk in the third quarter, the Westport acquisition and increasing production from deepwater Gulf of Mexico fields. The average sales price for the 2004 fourth quarter, including the effects of the company's hedging program, was $5.25 per thousand cubic feet, a 24% increase from the 2003 fourth quarter.
Sales and Capital Expenditures
Sales from continuing operations totaled approximately $1.6 billion for the 2004 fourth quarter, compared with approximately $1.0 billion for the 2003 fourth quarter.
Capital expenditures for the fourth quarter of 2004 were $462.3 million, compared with $249.5 million for the 2003 fourth quarter.
The company grew proved oil and natural gas reserves by nearly 20% to 1.2 billion BOE at year-end 2004, and increased the percent of its proved developed reserves by approximately 30%. Proved developed reserves now represent 65% of total reserves. Year-end reserves were 57% natural gas and 43% crude oil and liquids. Approximately 77% were located in the United States, 20% in the United Kingdom sector of the North Sea and 3% in Bohai Bay, China. In 2004, the company instituted a third-party review of its procedures and methods for estimating proved reserves. Netherland, Sewell & Associates, Inc. (NSAI) was engaged to provide this service. A letter outlining the results of their review has been filed as an 8-K with the U.S. Securities and Exchange Commission (SEC).
The information disclosed in this release is preliminary and may change prior to filing of the company's annual report on Form 10-K with the SEC due to circumstances that may be in existence at Dec. 31, 2004, but are not yet known at the date of this release.
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