Cash flow, a non-GAAP measure, was $113.5 million for the third quarter of 2005, up 31 percent from cash flow of $86.8 million in the third quarter of 2004. See the attached table for reconciliations of these non-GAAP financial measures to the corresponding GAAP amounts of cash provided by operating activities of $174.9 million for the third quarter of 2005 and $114.0 million for the same quarter in 2004.
Production Up Five Percent
Total third quarter 2005 production from continuing operations of 6.8 million barrels of oil equivalent (BOE) was five percent above the 6.4 million BOE in the third quarter of 2004, despite the negative impact on production from the Gulf Coast hurricanes and a contract oil field worker strike in Argentina. This increase was driven by a 20 percent increase in oil production with Argentina, Yemen and the U.S. each contributing to this growth. The oil increase was partially offset by a 25 percent decline in gas production from continuing operations, primarily as a result of production shut-in during the quarter due to the hurricanes in the Gulf Coast, anticipated production declines in certain U.S. fields and reduced market demand in Bolivia compared to the prior-year quarter.
Argentina oil production, before the impact of changes in inventories, in the third quarter of 2005 averaged 31,862 net barrels of oil per day (BOPD), which represents an increase of 16 percent over the 27,480 net BOPD produced in the comparable quarter of 2004. The increase over the prior year's quarter is primarily a result of additional production resulting from the company's drilling and workover programs and the company's acquisition of properties in the San Jorge basin during September 2004. Third quarter production for 2005 and 2004 was negatively impacted by contract oil field worker strikes reducing each quarter's production by 2,675 net BOPD and 1,760 net BOPD, respectively. The strike impacting the third quarter of 2005 was quickly resolved with production currently above pre-strike levels.
Oil production in Yemen has continued to increase as a result of the company's ongoing development activities. Production in Yemen for the third quarter of 2005 was 4,685 net BOPD versus 1,886 net BOPD during the third quarter of 2004, before the impact of changes in inventories. The company expects fourth quarter 2005 production to average approximately 5,450 net BOPD (10,450 gross).
U.S. oil production was also higher during the third quarter of 2005, rising five percent over the prior year's third quarter to average 17,824 net BOPD, driven by the December 2004 acquisition of producing properties in the Gulf Coast area of Alabama and 2005 exploitation successes. Partially offsetting these increases, the company estimates the third quarter of 2005 was reduced by 610 net BOPD as a result of certain wells shut-in for part of the quarter due to the impact of hurricanes Katrina and Rita in the Gulf Coast area. The company estimates it still has approximately 950 net BOPD shut-in as a result of damage from hurricane Katrina.
Total net gas production from continuing operations was down 25 percent from the prior year's third quarter. Anticipated lower sales volumes in the domestic market and into Brazil caused Bolivia gas production to decrease 48 percent, or 1,188 MMcf (12,920 Mcf per day). In addition, the company estimates that U.S. gas production for the third quarter of 2005 was reduced by 740 MMcf (8,043 Mcf per day) as a result of the hurricanes in the Gulf Coast. As a result of damage from the hurricanes the company currently has approximately 16,000 net Mcf per day shut-in, most of which is expected to be returned to production by the middle of November 2005. Anticipated natural production declines in certain U.S. fields further contributed to the gas production decrease.
Commodity Prices and Revenues
Including the impact of derivative financial instruments accounted for as hedges, the company's realized price for oil from continuing operations increased 31 percent to an average of $41.82 per barrel in the third quarter of 2005, compared with last year's third quarter average price of $31.99 per barrel. The company's realized price for gas, including the impact of hedges, increased 44 percent to $5.49 per Mcf compared to $3.81 per Mcf in the third quarter of 2004. As a result of the increases in production and oil and gas prices, oil and gas revenues increased 45 percent to $268.1 million for the third quarter of 2005 from $185.5 million in the same quarter of 2004.
Costs and Expenses
Production costs from continuing operations totaled $6.91 per BOE in the third quarter of 2005, which is 30 percent higher than the $5.30 per BOE for the previous year's quarter. Higher labor costs in Argentina and increased lease power and fuel costs in the U.S. contributed to this increase. In addition, during the third quarter of 2005, the company incurred approximately $0.9 million, or $0.13 per BOE, to repair mudslide damage on its properties in Ventura County, California caused by heavy rains earlier in the year.
Third quarter export taxes in Argentina increased from $12.8 million in 2004 to $19.2 million in 2005 primarily as a result of the increased export tax rates announced in August 2004 and higher oil prices.
Production, transportation and storage costs combined with production, ad valorem and export taxes (total lease operating expense) increased to $11.80 per BOE in the third quarter of 2005 from $8.76 per BOE in the year-earlier quarter, primarily attributable to increased production taxes, Argentina export taxes and the impact on per BOE costs due to the production interruptions from the Argentina contract labor strike and the Gulf Coast hurricanes.
Exploration costs of $12.4 million for the third quarter of 2005 related primarily to exploration drilling activities in Yemen. Such costs are recoverable under the company's production sharing contract in Yemen. This compares to exploration costs for the third quarter of 2004 of $12.4 million, which were comprised primarily of dry hole costs in the U.S. and Yemen.
Nine Months Results
Driven by a 14 percent increase in production and significantly higher oil and gas prices, net income for the nine months ended September 30, 2005, was $161.9 million, or $2.40 per diluted share, compared to net income of $83.6 million, or $1.28 per diluted share, for the nine months ended September 30, 2004. Income from 2005 continuing operations of $151.1 million, or $2.24 per diluted share, compares to $80.5 million, or $1.23 per diluted share for the nine months ended September 30, 2004.
The company was required to account for certain oil price swap agreements using mark-to-market accounting during January and February 2005. As a result, the company recorded $41.0 million of derivative losses during the first quarter of 2005. As of September 30, 2005, $21.6 million of these losses had been realized and $19.4 million remained unrealized. Net income for the nine months ended September 30, 2005, was reduced by $11.8 million ($19.4 million pre-tax), or $0.18 per diluted share, related to these unrealized losses. As these oil price swap agreements are settled in future periods, the company will report higher oil revenues in those future periods than would have been reported had the unrealized losses not been recognized in the first quarter of 2005. As of March 1, 2005, the company resumed hedge accounting for all of its derivative financial instruments.
Cash flow, a non-GAAP measure, was $323.6 million for the nine months ended September 30, 2005, up 47 percent compared to $219.7 million for the nine months ended September 30, 2004, reflecting the increase in production and oil and gas prices from the first nine months of 2004. See the attached table for reconciliations of these non-GAAP financial measures to the corresponding GAAP amounts of cash provided by operating activities of $360.2 million for the nine months ended September 30, 2005, and $256.2 million for the nine months ended September 30, 2004.
2005 Targets Updated
Despite the negative impacts on production of a contract oil field worker strike in Argentina and the hurricanes in the Gulf Coast (estimated to be a reduction of approximately 0.7 million BOE over the third and fourth quarters), the company is maintaining its production target for 2005 at the previously announced 27.3 million BOE. The 27.3 million BOE represents an 11 percent increase over the Company's 2004 production level from continuing operations of 24.5 million BOE. The ability to maintain the production estimate stems from positive results in the U.S. development drilling and workover programs, production performance of the wells in Yemen and continued success in the development drilling programs in Argentina.
The company has increased its average NYMEX price assumptions for 2005 to $56.50 per barrel of oil and $8.50 per MMBtu of gas versus the previous assumptions of $55.00 per barrel and $7.00 per MMBtu. The company has adjusted its expected net realized prices for gas production as a percent of NYMEX prices during 2005 to be 67 percent versus the previous target of 70 percent due to the dramatic increase in NYMEX gas prices expected during the fourth quarter and the level of the company's gas production which is sold at prices that do not fluctuate with NYMEX.
After considering the impact of the changes in assumed NYMEX oil and gas prices, realized price assumptions and the other assumptions enumerated in the accompanying table, "Vintage Petroleum, Inc. and Subsidiaries, Revised 2005 Targets," the company is increasing its target for 2005 cash flow (as defined in the attached table) by two percent to $445 million, which is $10 million higher than the previous target of $435 million. Similarly the revised target for 2005 EBITDAX has been raised by four percent, or $24 million, to $610 million from the previous target of $586 million.
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