Revenues from oil and gas sales rose 187% in the third quarter of 2005 to a record $343.5 million, compared to $119.6 million in the same period of 2004. Third-quarter 2005 cash flow from operations also reached a new all-time high, totaling $217 million versus $87.7 million in the same period of 2004(1).
Including the previously announced $82 million ($0.61 per diluted share after tax) mark-to-market charge associated with the change in fair market value of open oil and gas derivative contracts, net income for the third quarter of 2005 was $64.1 million, or $0.76 per diluted share. This compares to third-quarter 2004 earnings of $39.2 million, or $0.91 per diluted share.
The $82 million pre-tax charge is associated with swaps and collars assumed as part of the Magnum Hunter acquisition which do not qualify for hedge accounting. The total charge includes both non-cash mark-to-market derivative losses as well as cash settlements. Cash payments related to third-quarter settlements totaled $15.6 million. Also during the quarter, Cimarex recorded a charge of $6.5 million, or $0.05 per share after tax, for estimated future litigation settlements.
For the nine month period ended September 30, 2005, Cimarex reported net income of $159.9 million, or $2.63 per diluted share, up from $105.5 million, or $2.47 per diluted share, for the comparable period of 2004.
Oil and gas sales for the first three quarters of 2005 totaled $665.9 million, up from $330.5 million during the corresponding period of 2004. Cash flow from operations for the first nine months of 2005 increased to $450.4 million versus $240.1 million during the comparable period of 2004(1).
The increases in oil and gas revenues, earnings and cash flow are due to higher prices and record production volumes. Natural gas prices averaged $7.88 per thousand cubic feet and oil averaged $59.45 per barrel for this quarter. The increase in production is attributable to the addition of Magnum Hunter operations in June 2005 and continued positive drilling results, partially offset by hurricane related production disruptions in the Gulf of Mexico and Gulf Coast regions.
Production Volumes and Expenses
Cimarex's third-quarter 2005 oil and gas production volumes increased by 102 percent over the same period a year earlier to 445.8 million cubic feet equivalent per day (MMcfe/d). Gas production rose 92 percent to 337.8 MMcf/d and oil volumes increased 145 percent to 18,002 barrels per day. Hurricane and other storm related activity is estimated to have negatively impacted production by 23-28 MMcfe/d.
Third-quarter 2005 costs and expenses directly associated with exploration and production activities (depreciation, depletion and amortization, production expense, transportation and taxes other than income taxes) totaled $148.9 million versus $53.1 million during the third quarter of 2004. The increase in costs and expenses is primarily a result of the Magnum Hunter acquisition. Third-quarter 2005 lifting costs, which are comprised of production and transportation costs, were $1.09 per thousand cubic feet equivalent (Mcfe) versus $0.56 per Mcfe reported during the third quarter 2004. The increase in lifting cost per unit of production is principally a result of the Magnum Hunter acquisition and shut-in production volumes caused by the hurricanes.
Exploration and development (E&D) expenditures during the third quarter of 2005 totaled $192.9 million, up from $58.5 million for the third quarter 2004. In the third quarter of 2005, we participated in drilling 97 gross (51 net) wells, with an overall success rate of 94%.
E&D capital expenditures for the first nine months of 2005 were $426.6 million, up from $208.8 million during the first nine months of 2004. We drilled 300 gross (156 net) wells during the first three quarters of 2005, realizing a success rate of 86%. Including E&D costs incurred by Magnum Hunter prior to the merger, year to date 2005 expenditures incurred by both companies totaled $568 million. The preliminary projection for 2006 E&D spending is in the range of $850-$950 million.
Property Sales/Debt Reduction
During the third quarter Cimarex received net proceeds of $61.3 million from the sale of various royalty interests. Current income taxes payable include $22.6 million related to this sale. Cimarex anticipates overall sales of oil and gas properties in 2005 to total over $90 million. Proved reserves associated with these properties approximates 21 billion cubic feet equivalent and related production is 7.3 MMcfe/d.
Using proceeds from property sales and cash flow in excess of capital investment, long-term debt was reduced by $128 million during the third quarter to $405 million (face value).
Based on anticipated capital spending and numerous other factors related to production volume forecasts including estimates for resumption of production from the Gulf of Mexico disrupted by hurricane activity and incorporating property sales, fourth-quarter 2005 aggregate production is expected to range from 420 to 450 MMcfe/d (76% natural gas).
Approximately 50 MMcfe/d of production is currently shut-in, of which 46 MMcfe/d is from the Gulf of Mexico and 4 MMcfe/d is from wells located in South Louisiana. The timetable to restore full production is dependent on third party infrastructure being repaired and brought back online. Assuming full resumption of shut-in volumes by the end of the first quarter of 2006 and anticipated capital spending, full-year 2006 production is expected to average 485 to 505 MMcfe/d.
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