The 2005 results were impacted by $7.4 million of net non-cash derivative gains and a $35.3 non-cash stock compensation expense. In 2004, a $19.2 million non-cash stock compensation expense was offset by a $5.0 million gain on sale of properties. Excluding these non-cash items, 2005 net income would have been $128.5 million ($0.99 per diluted share) while 2004 net income would have been $51.4 million ($0.47 per diluted share). Net income and diluted earnings per share for the year would have increased 150% and 111%, respectively, after adjusting for these items.
Oil and gas revenues for the year totaled $525 million, 66% higher than the prior year due to higher production and realized prices. Production for the year totaled 87.3 Bcfe, comprised of 63.0 Bcf of gas and 4.0 million barrels of oil and liquids. Production rose in each quarter of the year, and averaged 239 Mmcfe per day. The Company has achieved consecutive production increases in each of the past 12 quarters. Wellhead prices, after adjustment for hedging, averaged $6.02 per mcfe. The average gas price rose 36% to $6.03 per mcf, as the average oil price rose 38% to $38.71 a barrel. Hedging decreased average prices by $1.96 per mcfe. Operating expenses per mcfe increased 17% during the year to $0.76, due to higher oilfield costs and higher workover expenses primarily from hurricane damage. Production taxes per mcfe jumped 24% to $0.36 due to higher commodity prices. General and administrative expenses rose 17% to $0.34 per mcfe due to increased personnel, legal expenses and a $725,000 litigation settlement. Exploration costs increased 39% due to higher incremental seismic expenditures of $10.5 million. Interest expense per mcfe increased 38% due to higher debt balances and interest rates. The non-cash stock compensation expense relating to the appreciation of the Company's stock held in its deferred compensation plan and SARs increased $16.1 million due to a 93% increase in the market price of the stock during the year. On an mcfe basis, depletion, depreciation and amortization increased 1% to $1.46 in 2005.
In the fourth quarter, oil and gas revenues rose 61% to $157 million, due to higher production and realized prices. Production in the quarter rose 16% from the prior-year period, averaging 250 Mmcfe per day, a record high. Realized prices, after hedging, averaged $6.81 per mcfe, a 38% increase. Cash flow from operations before changes in working capital, a non-GAAP measure, increased 67% to a record $110 million. Net income increased 193% to $42.7 million ($0.32 per diluted share). Excluding the non-cash items noted above, earnings for the quarter would have been $41.5 million or $0.31 per diluted share.
As previously reported, the Company replaced 365% of production in 2005. Drilling alone replaced 249% of production. Proved reserves at December 31, 2005 totaled 1.4 Tcfe, including 1.1 Tcf of natural gas and 46.9 million barrels of crude oil and liquids. Reserves increased 231 Bcfe or 20% during the year. The percentage of proved undeveloped reserves declined from 37% to 34% at year-end 2005. Independent petroleum consultants reviewed 84% of the reserves by volume. At year-end, the pretax present value of proved reserves, based on constant prices and costs, discounted at 10% totaled $4.9 billion, a 104% increase for the year. The reserve value was based on year-end benchmark prices of $10.08 per Mmbtu and $61.04 per barrel, compared to $6.18 per Mmbtu and $43.33 a barrel one year earlier. At year-end, reserves were 80% natural gas by volume, and the reserve life index stood at 15 years based on fourth quarter production rates. The Company's all-in finding and development cost averaged $1.46 per mcfe. Drilling expenditures in 2005 totaled $289.7 million. The capital funded the drilling of 841 (594 net) wells and 114 (97 net) recompletions. The Company has set a 2006 capital budget, excluding acquisitions, of $429 million to fund the drilling of 1,065 gross (789 net) wells and 94 gross (58 net) recompletions. Based on current futures prices, the capital budget is anticipated to be funded with approximately 75% of internal cash flow.
The drilling program continued to achieve positive results during the fourth quarter. The Appalachian division achieved a 100% success rate in the drilling of 173 (113 net) development wells in its various tight sand and coal bed methane properties. Coal bed methane production is running 30% above acquisition economics at the Company's Nora and Haysi fields in Virginia. By year-end, four vertical wells had been drilled on the Company's Devonian shale play acreage in Pennsylvania. One of the wells was drilled to 1,000 feet and completed in a shallow tight gas zone. Two of the wells were drilled to a deeper horizon than the shale and successfully tested the deeper horizon. The original shale discovery well was completed in the shale for a peak rate of 800 mcf per day and continues to produce at 200 mcf per day. Based on the encouraging results from the initial shale well, the two deeper wells are in the process of being recompleted to the shale. One rig is drilling in this play and current plans are to drill 10 vertical wells. A second rig recently drilled the first horizontal well in the play and is moving to a second horizontal location. A third horizontal well is also scheduled. To date, the Company has purchased or identified 235,000 acres prospective for shale development in Pennsylvania and Ohio. Also in the Appalachian basin, Range recently announced a joint venture with Fortuna Energy, Inc, a wholly owned subsidiary of Talisman Energy, Inc., to develop deep Trenton Black River targets covering 17,000 acres in southwestern Pennsylvania. The joint venture expects to spud its initial well in the first half of 2006.
In the Texas Panhandle, the Midcontinent division drilled six successful wells during the quarter, with an offset to the Company's prolific Hunton production planned for the first quarter of 2006. In the deep Anadarko basin, the Company is participating in a 23,000 foot Hunton exploratory test that is expected to reach total depth in March. Four additional wells are planned in this play during 2006. In addition, the Company encountered significant pay in a high-rate Watonga/Chickasha discovery well that has led to the identification of 18 additional drill sites, several of which are scheduled for drilling in 2006.
The Permian division drilled 37 wells during the quarter, increasing production at core properties in West Texas and testing Woodbine, Austin Chalk and Sub-Clarksville targets in East Texas. Notably, one Austin Chalk well was completed and is currently producing at a restrained rate of 9 (2.7 net) Mmcfe per day. In New Mexico, a two-rig program successfully drilled eight wells on our Eunice properties, bringing current production to over 12 Mmcfe per day. The Gulf Coast division reached total depth on one significant well during the fourth quarter. Offshore, the West Cameron 295 #3 encountered 115 feet of gas pay, with first production expected early in the second quarter.
Commenting, John H. Pinkerton, the Company's President, said, "We are extremely pleased with the 2005 performance. We were able to increase proved reserves by 20% at an all-in cost of $1.46 per mcfe. Our property base at year-end included 1.4 Tcfe of proved reserves having a 15-year reserve life. Importantly, we expanded our multi-year drilling inventory to over 7,700 projects, and several of our emerging plays are gaining real traction. With our drilling program that includes over 1,000 wells, we are anticipating another year of double digit production growth in 2006. Higher production coupled with the rolling off of our low-price hedges will be the drivers to what we believe will be record results again in 2006."
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