Discretionary cash flow, which is cash flow from operating activities before changes in working capital and exploration expenditures, also increased, rising 52% to $58.8 million from $38.6 million in the fourth quarter of 2003 (see reconciliation of discretionary cash flow schedule in the tables). Cash flow from operating activities for the fourth quarter of 2004 was $40.2 million, up from $35.1 million in the fourth quarter of 2003.
The Company said its record quarterly revenue and strong quarterly earnings and cash flow were primarily attributable to its efforts in maintaining high production volumes combined with high commodity prices and rigorous control of lease operating costs. Several factors partially offset these benefits, including tropical storm and weather related production downtime, higher depreciation, depletion and amortization expenses and an active exploratory drilling program.
For the full year 2004, net income available to common stockholders reached a record $43.0 million, or $1.20 per diluted share, a 45% increase from last year's record net income available to common stockholders of $29.7 million, or $0.93 per diluted share. 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.
For the full year 2004, discretionary cash flow increased by 37%, reaching $205.1 million in 2004 compared to $150.2 million in 2003 (see reconciliation of discretionary cash flow schedule in the tables). Cash flow from operating activities totaled $165.1 million, a 21% increase from the 2003 figure of $136.7 million. Higher production volumes and continued strength in commodity prices were the primary factors leading to increased earnings and cash flow in 2004.
Reserve Replacement and Finding and Development Costs
At year-end 2004, proved reserves grew to 53.7 million barrels of oil equivalent ("Mmboe"), an increase of 8% from 49.8 Mmboe at year-end 2003. The recent acquisition of south Louisiana properties by EPL closed on January 20, 2005 and its impact is not included in EPL's year-end 2004 reserves. On a barrel of oil equivalent ("Boe") basis, EPL's reserves at year-end 2004 were 46% natural gas and 54% oil, and 78% were classified as proved developed. EPL's proved reserves are based upon third party engineering reports prepared by Netherland, Sewell & Associates, Inc. and Ryder Scott Company, L.P.
In 2004, extensions, discoveries and other additions to EPL's proved reserves totaled 14.4 Mmboe, which is equal to 176% of 2004 production. Revisions to previous estimates, related primarily to disappointing development drilling results, reduced proved reserves by 2.3 Mmboe. Including the impact of these revisions, the Company replaced 148% of 2004 production.
EPL's finding and development costs in 2004 were $15.86 per Boe. In the last three years, EPL has averaged 181% annual reserve replacement at a cost of $12.36 per Boe. For the same three-year period, EPL's reserve replacement through the drill bit and revisions averaged 137% at a cost of $12.29 per Boe, and reserve replacement through acquisitions averaged 44% at a cost of $12.60 per Boe.
Richard A. Bachmann, EPL's Chairman, President and CEO, remarked, "2004 was another record year for EPL, both operationally and financially. While production in the fourth quarter was reduced by storms and other weather-related issues and delays, we were still within our revised guidance for the quarter and finished off the year with record production on an annual basis. Our financial performance followed suit, setting new records for revenue, net income, and discretionary cash flow in 2004."
Bachmann continued, "2004 also marked the Company's best performance yet in our exploration program. Replacing 176% of production with the drill bit represents tremendous value creation for our shareholders. While drilling and oil field service costs continue to rise in response to an increase in industry drilling activity levels, we are continuing to work diligently to efficiently deploy our capital. In the current commodity price environment, we are still a long way from scaling back our activity level."
Fourth Quarter 2004 Production and Prices
Production in the fourth quarter 2004 averaged 22,374 Boe per day. Production levels in the quarter were impacted by tropical storm and weather related downtime along with a two month delay in production start up of the second and third wells at South Timbalier 41. Natural gas production averaged 78.2 million cubic feet ("Mmcf") per day compared to 84.2 Mmcf in the fourth quarter of 2003. Oil production averaged 9,348 barrels ("Bbls") per day, a rise of 9% from the fourth quarter 2003 level of 8,571 Bbls per day. A small amount of production remains shut-in awaiting repair of storm damage. Production was initiated from the second and third wells at South Timbalier 41 in early January 2005, and company-wide production is currently averaging just under 28,000 Boe per day.
In the fourth quarter of 2004, EPL realized average prices of $6.66 per thousand cubic feet ("Mcf") of natural gas and $39.85 per barrel of oil, net of hedging. These prices represent a 37% increase in the average natural gas price and 42% increase in the average oil price from the fourth quarter 2003.
Full Year 2004 Production and Prices
EPL achieved record high annual production of 22,346 Boe per day in 2004, a 6% increase from the 2003 average of 21,077 Boe per day. Natural gas production rose 4% from 2003 levels to average 82.1 Mmcf per day in 2004. Oil production rose 9%, averaging 8,663 Bbls per day in 2004 compared to 7,978 Bbls per day in 2003.
Net of the impact of hedging, the average realized natural gas price for 2004 was $6.11 per Mcf, an 18% increase from the 2003 average realized natural gas price of $5.16. Oil price realizations rose to $35.01 per barrel for 2004, net of hedging, a 25% increase compared to the 2003 average realized oil price of $28.02.
Expenditures for exploration and development totaled $192.1 million for the full year 2004. For 2005, the Company has set a capital budget of $240 million, which includes anticipated spending on the recently acquired south Louisiana properties. EPL expects the risk allocation of the 2005 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.
At year end 2004, EPL's long-term debt totaled $150.2 million while cash and cash equivalents totaled $93.5 million. Its debt to total capitalization ratio was 32%, excluding the impact of the cash on the balance sheet as of the end of the year. Pro forma for the Company's acquisition that closed on January 20, 2005, total debt stood at $210.2 million, cash stood at $12.5 million, and the debt to capitalization ratio was 40%.
2004 Operational Highlights
In 2004 EPL successfully drilled 20 of 25 exploratory wells for an 80% exploratory success rate. The Company also drilled 6 development wells of which 4 were successful and completed 17 well workovers and recompletions successfully. A table summarizing the 2004 exploratory drilling program follows.
Water Well EPL Well Depth Depth Working Block / Prospect Number (ft.) (ft.) Result Interest ---------------------------------------------------------------------- High Island 55L #5 45 8,109 Oil 35% South Timbalier 180 #A-7 160 10,627 Gas 100% East Bay - Peregrine (South Pass 27) #98 ST 40 10,840 Oil and Gas 100% Eugene Island 277 #A-3 160 14,510 Oil and Gas 50% East Cameron 161 #A-3 86 7,900 Gas 100% West White Lake #1 8 18,500 Dry 50% South Timbalier 41 #2 60 16,450 Oil and Gas 60% High Island 56L #1 45 8,220 Gas 35% Eugene Island 242 #J-4 156 6,615 Gas 100% High Island A 6 #5 60 12,400 Gas 17% East Buck Point #1 8 17,200 Dry 25% East Bay - Pinnacle (South Pass 27) #92 26 11,000 Oil and Gas 100% East Cameron 43 #1 46 13,300 Dry 44% West Cameron 204 #1 55 10,075 Dry 50% Matagorda Island 640 #1 104 8,300 Gas 50% South Timbalier 46 #2 70 17,850 Gas 100% South Timbalier 41 #A-2 68 17,300 Oil and Gas 60% Matagorda Island 639 #1 110 8,500 Gas 50% Vermilion 73 #1 25 11,000 Dry 50% North Padre Island 913 #1 155 8,300 Gas 50% Galveston 227 #1 50 9,250 Gas 50% South Marsh Island 192 #A-2 402 13,364 Oil and Gas 17% Eugene Island 277 #4 160 11,613 Gas 50% South Marsh Island 109 #A-4 189 10,668 Gas 27% South Timbalier 41 #4 70 17,400 Oil and Gas 60%
Of the 2004 exploratory successes, 8 were onstream before year-end 2004, 4 are expected to be online in the first half of 2005, and the remaining 8 are expected in the second half of 2005.
Bachmann added, "Once again we maintained an 80% success rate in our drilling program in 2004. We are particularly pleased with our consistent track record over the last several years in reinvesting our growing cash flow into successful new exploration projects. That repeatability has been the key to our growth, and we believe we have the prospect portfolio and generating capacity to sustain that success rate into the future."
Bachmann continued, "Even though 2004 ended up as the best and busiest year in EPL's history, we believe that 2005 holds even greater potential to grow and transform the Company. We will continue to focus on the U. S. Gulf Coast, both offshore and onshore. We believe that the Shelf holds tremendous potential, as evidenced by our South Timbalier 41 field discovery. In our new core area in south Louisiana, we have already drilled two successful wells and we have rigs on three additional locations. For 2005, we expect to drill more wells offshore than we did in 2004, and our south Louisiana drilling program will be incremental to our organic growth offshore."
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