Discretionary cash flow (see Determination of Discretionary Cash Flow and Reconciliation schedule) for the third quarter 2005 increased 131 percent to $436.6 million, compared to $189.1 million for the same period last year. Net cash provided by operating activities was $440.3 million for the third quarter of 2005.
The increase in net income and discretionary cash flow versus the third quarter last year primarily reflected higher daily production and realized prices. Daily production increased 61 percent. Realized natural gas prices for the third quarter 2005 were $5.65 per thousand cubic feet (Mcf), 25 percent above last year's $4.51 per Mcf. Realized crude oil prices were $47.58 per barrel (Bbl), an increase of 34 percent compared to $35.62 per Bbl for the third quarter 2004. Higher production volumes and commodity prices combined to increase oil and gas revenues by $312.8 million over the third quarter of 2004. Capital expenditures totaled $265.8 million during the third quarter of 2005.
Charles D. Davidson, the company's Chairman, President and CEO, said, "Noble Energy continued its trend of stable and consistent growth during the third quarter, despite the impact of two large hurricanes. This was our first full quarter with Patina Oil and Gas integrated into Noble Energy's operations, and our improved operating and financial performance reflects the potential of the combined businesses. Patina's long-lived assets not only added to Noble Energy's domestic production base, they also provided stability while our Gulf of Mexico and Gulf Coast production was impacted by hurricanes Katrina and Rita. Our international operations also continued to ramp up with new production in Equatorial Guinea and Israel. Organic growth will continue to drive our performance as our deepwater Swordfish development has begun producing and is expected to reach 10,000 barrels of oil equivalent per day, net to Noble Energy, during the fourth quarter. Two additional deepwater developments of similar size, Lorien and Ticonderoga, are scheduled to commence production during the second and third quarters of next year, respectively."
Third quarter 2005 production was 168,666 barrels of oil equivalent per day (Boepd). Domestic production was reduced by approximately 7,600 Boepd due to hurricanes Katrina and Rita. International production was 55 percent above the third quarter last year, primarily because of increases in condensate and natural gas volumes in Equatorial Guinea following the completion of two liquids expansion projects.
North America reported operating income for the third quarter of $150.9 million, an increase of 99 percent compared to operating income from continuing operations of $75.7 million for the same period last year.
Operations benefited from higher production and higher realized prices during the quarter. Third quarter 2005 production increased to 99,440 Boepd from 59,884 Boepd for the same quarter last year. The average realized crude oil price was $49.49 per Bbl compared to $31.61 per Bbl during the third quarter of 2004. The average realized natural gas price was $7.12 per Mcf compared to $5.89 per Mcf last year.
Higher production and commodity prices were offset by increased third quarter exploration expense, which was up $51.7 million compared to the same period last year. The increase resulted from higher dry hole expense in the Gulf Coast region and offshore Gulf of Mexico.
Noble Energy's North America operations are divided into three regions: the Rocky Mountain, Mid-continent and Southern regions. The Rocky Mountain region includes the DJ (Wattenberg), San Juan, Wind River, and Piceance basins, as well as the Niobrara, Bowdoin and Siberia Ridge fields. The Mid-continent region includes Illinois, Kansas, Oklahoma and the Texas Panhandle. The Southern region includes the Gulf Coast onshore, West and East Texas, North Louisiana and the Gulf of Mexico.
During the third quarter, the company had 24 drilling rigs running onshore (ten in the Rocky Mountains, ten in the Mid-continent and four in the Gulf Coast) and 47 workover rigs (26 in the Rocky Mountains and 21 in the Mid-continent). Noble Energy plans to drill nearly 643 onshore wells in 2005, of which 53 are to be drilled in the Gulf Coast, 415 are planned for the Rocky Mountains and 175 for the Mid-continent.
Noble Energy continues to experience strong growth in the deepwater Gulf of Mexico, where the company has three significant developments underway. The first of three wells at the company's Swordfish development began production in October. The remaining two wells are expected to begin production during the month of November as additional third party facilities come back on line. At Lorien, production is still expected to begin early in the second quarter of 2006. Ticonderoga is expected to commence production mid-year 2006.
International operations reported operating income for the third quarter of $161.8 million, an increase of 114 percent compared to operating income of $75.7 million in the third quarter last year. Third quarter 2005 international production volumes increased to 69,226 Boepd from 44,583 Boepd for the same quarter last year.
Total operating income in Equatorial Guinea, which includes results from field operations and methanol operations, for the third quarter of 2005 was up nearly threefold to $100.3 million compared to $37.6 million last year. Operating income from Equatorial Guinea was the company's highest ever. Equatorial Guinea has now reported eight consecutive quarters of increasing operating income.
Upstream operations, including liquid petroleum gas (LPG), natural gas and condensate sales, generated increased operating income for the fifth consecutive quarter. Upstream operations reported record operating income of $84.1 million, 84 percent of the total from Equatorial Guinea. Third quarter 2005 sales volumes averaged 36,415 Boepd, more than double last year's 16,134 Boepd. The average realized price for liquids during the third quarter was $43.57 per Bbl compared to $41.00 per Bbl for the same period last year.
Operating income from methanol operations was $16.2 million net to Noble Energy's interest compared to $13.6 million for the third quarter of 2004. Methanol operations' results are reported as income from unconsolidated subsidiaries. Third quarter realized methanol prices averaged 75 cents per gallon (Gal) compared to 74 cents per Gal last year.
In October, Noble Energy announced successful results from its offshore "Belinda" exploration well on Block "O." The well, located in 250 feet of water and approximately 20 miles east of Bioko Island, was drilled to a total depth of 10,360 feet. Test results were encouraging, with condensate-rich natural gas producing at rates up to 24 million cubic feet per day (MMcfpd) and over 1,225 barrels per day (Bpd) of condensate. Flow rates were limited by surface test equipment. With the installation of cooling and processing facilities, condensate yields can be increased. Additional appraisal work will be performed to determine the areal extent and commerciality of the Belinda discovery. The company is currently reviewing options for a multi-well exploration and appraisal program, which could begin in 2006. Noble Energy is the technical operator of Block "O" with a 45 percent participating interest.
In the North Sea, third quarter 2005 operating income increased to $24.0 million compared to $15.0 million last year. The quarter-over-quarter improvement reflects lower costs and higher commodity prices. Overall expenses declined $3.5 million, driven by lower DD&A and exploration expense. Higher commodity prices offset lower production volumes resulting from natural field decline, generating a revenue increase of $5.5 million compared to the third quarter last year. The average realized price for liquids during the third quarter was $59.71 per Bbl compared to $43.46 per Bbl for the same period last year. The average realized price for natural gas was $5.14 per Mcf compared to $4.29 per Mcf last year.
Third quarter 2005 operating income was $14.4 million compared to $14.2 million for the same period last year. Natural gas sales in Israel commenced during February 2004 and ramped up through the second quarter of last year. Oil and gas operations expense and DD&A averaged 28 cents per Mcf and 42 cents per Mcf, respectively.
Natural gas production, net to Noble Energy, averaged 81.9 MMcfpd for the third quarter compared to 71.6 MMcfpd last year. The average realized natural gas price during the third quarter 2005 declined to $2.57 per Mcf compared to $2.78 per Mcf for the same period last year.
Argentina, China and Ecuador
Third quarter 2005 operating income from Argentina, China and Ecuador increased 160 percent to $23.1 million compared to $8.9 million for the second quarter last year.
Noble Energy's Machala power plant contributed $2.1 million of operating income during the third quarter 2005 compared to a loss of $1.1 million for the same period last year. The quarter-to-quarter improvement reflects increased power generation and higher electricity prices. For the quarter, 221,840 megawatt-hours were produced at an average sales price of 8.5 cents per kilowatt-hour. For the third quarter 2005, Noble Energy produced 24.5 MMcfpd of natural gas from the Amistad field.
In China, third quarter operating income was a record high $19.2 million, up 243 percent compared to $5.6 million for the third quarter of 2004. Net production in China increased 60 percent versus the third quarter last year, averaging 5,446 barrels of oil per day. Net production in Argentina averaged 2,770 Boepd for the third quarter.
The following estimates for 2005 include the impact of Noble Energy's acquisition of Patina Oil & Gas Corporation, effective May 16, 2005, as well as the impacts of hurricanes Katrina and Rita. The company has budgeted capital expenditures of $987 million for 2005. Approximately 25 percent of the 2005 capital budget has been allocated for exploration opportunities and approximately 75 percent to production, development and other projects. Domestic spending is budgeted at approximately $764 million, international expenditures are budgeted at approximately $208 million and corporate spending is budgeted at approximately $15 million.
Average BOE production in 2005, including Patina, is expected to increase approximately 36 percent compared to the full year 2004, with average production ranging from 145,000 Boepd to 146,000 Boepd. Fourth quarter production is expected to range from 165,000 Boepd to 170,000 Boepd. Noble Energy's production may be impacted by several factors in the fourth quarter, including:
* Potential additional weather-related shut-ins in the U.S. Gulf of Mexico and Gulf Coast areas. * Timing of the ramp-up of the Swordfish deepwater development. * The rate at which third party processing facilities and pipelines return to operations.
Full year 2005 costs and expenses are expected to fall within the following ranges:
* Exploration expense is expected to range from $160 million to $180 million. * Selling, general and administrative (SG&A) expense is expected to range from $1.75 per BOE to $1.85 per BOE. * Oil and gas operations expense is expected to range from $4.00 per BOE to $4.20 per BOE. * DD&A expense is expected to range from $7.50 per BOE to $7.75 per BOE. * An effective tax rate of 35 percent to 40 percent is expected. Of the total book taxes planned for 2005, 45 percent to 55 percent are expected to be deferred. Estimated taxes for 2005 include the effects of repatriating cash from overseas operations in the third quarter.
The ranges for unit oil and gas operations, unit SG&A and exploration costs have been slightly adjusted from prior guidance to reflect increasing pressure on personnel, rig and service costs.
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