Excluding certain items described below and in the attached schedules, the company's adjusted net income for the third quarter 2006 was $20.0 million, or $0.72 per diluted share, versus $1.30 per diluted share in the third quarter 2005 on a comparable basis. Cash from operations before changes in operating assets and liabilities totaled $86.2 million for the quarter compared to $138.9 million reported in the third quarter 2005.
The comparability of the company's third quarter and year-to-date 2006 results to those of the prior year were impacted by the sale of substantially all of the company's Gulf of Mexico assets during the first half of 2006. Adjusted net income and cash from operations before changes in operating assets and liabilities are non-GAAP financial measures that are defined and reconciled to GAAP measures in the attached schedules.
"I am pleased with our overall performance in this, our first full quarter as predominantly an onshore operator," stated William G. Hargett, chairman, president and chief executive officer. "Despite a challenging price environment, our third quarter production growth, coupled with our healthy balance sheet and liquidity position, provides us with a strong platform for growth in 2007."
Third Quarter 2006 Consolidated Results
Daily production for the third quarter 2006 averaged 204 million cubic feet of natural gas equivalent per day (MMcfe/d), compared to 308 MMcfe/d in the third quarter 2005. This 34 percent decline was primarily due to the sale of substantially all of the company's Gulf of Mexico assets during the first half of 2006.
The company's average unhedged natural gas sales price for the third quarter 2006 was $5.85 per thousand cubic feet (Mcf), compared to $8.15 per Mcf in the third quarter 2005. The company's average realized natural gas price for the third quarter 2006 was $5.70 per Mcf, compared to $5.78 per Mcf reported during the third quarter 2005. Crude oil prices averaged $59.86 per barrel for this year's third quarter compared to $54.08 per barrel reported during the comparable 2005 period.
Revenues for the third quarter 2006 totaled $131.3 million, compared to $125.4 million during the third quarter 2005. Total revenues for the third quarter 2006 included $19.9 million of net gains associated with the company's natural gas hedging activities, compared to $108.1 million of net losses in the third quarter 2005. The current period net gains of $19.9 million were comprised of the following:
The company's lease operating, severance tax and transportation expenses for the third quarter 2006 totaled $1.04 per thousand cubic feet of natural gas equivalent (Mcfe) versus $0.89 per Mcfe reported in the third quarter 2005. Total depreciation, depletion and amortization and asset retirement accretion expenses for the quarter were $2.83 per Mcfe compared to $2.61 per Mcfe in the third quarter 2005. Third quarter 2006 net general and administrative expenses were $0.50 per Mcfe compared to $0.36 per Mcfe in the prior year period.
Third Quarter 2006 Onshore Results
The company's onshore production increased by 10 percent during the third quarter 2006, to an average rate of 204 MMcfe/d, compared to 185 MMcfe/d during the third quarter 2005. The company's average unhedged natural gas sales price for its onshore production was $5.86 per Mcf for the third quarter 2006, compared to $7.75 per Mcf in the third quarter 2005. This 24 percent decline in price more than offset the 10 percent increase in production, resulting in a 15 percent decline in onshore oil and gas revenues during the quarter, to $112.5 million, from $132.0 million during the third quarter 2005. Onshore lease operating, severance tax and transportation expenses during the third quarter 2006 totaled $1.03 per Mcfe compared to $0.82 per Mcfe reported in the third quarter 2005.
Strategic Restructuring Plan Update
Since November 2005, Houston Exploration has been implementing a strategic restructuring plan, the primary purpose of which is to improve the company's financial and operating performance by focusing its operations onshore. The following is a recap of the key restructuring milestones achieved to date, along with an update on certain related initiatives:
Recap of Key Milestones
Update on Related Initiatives
As described in the following table, the company has updated its guidance for the fourth quarter and full-year 2006 and for 2007. The estimated financial and operational results do not reflect any decision regarding the ongoing review of strategic alternatives and assume no additional capital spending for potential acquisitions. Other factors that could materially impact the company's actual results are noted below in the forward-looking statements section of this release.
4Q06 2006 2007 Total Onshore Offshore (A) Total Total Capital Spending (in millions) Exploration and development $121 $470 $49 $519 $466 Acquisitions 0 18 21 (B) 39 0 Subtotal $121 $488 $70 $558 $466 Capitalized interest, G&A and other 5 --- --- 26 24 Total $126 $488 $70 $584 $490 Production Total (Bcfe) 20 75 14 89 85 Average daily (MMcfe/d) 215 205 37 242 233 Percent hedged 82% N/A N/A 86% 12% © Unit Costs ($/Mcfe) Lease operating expense 0.64 0.64 1.23 0.73 0.66 Severance tax 0.27 0.28 N/A 0.24 0.30 Transportation 0.15 0.14 0.05 0.13 0.14 DD&A and ARO 2.80 N/A N/A 2.85 2.75 General and administrative, net 0.45 N/A N/A 0.40 0.41 Interest expense, net 0.27 N/A N/A 0.29 0.17 (A) Substantially all of the company's offshore assets were sold during the first half of 2006. (B) Reflects a net profits interest payment to a predecessor owner in certain of the company's offshore Louisiana properties that were sold during the first half of 2006. (C) Based on existing 2007 hedge portfolio of 30,000 MMBtu/d.
The Houston Exploration Company is an independent natural gas and crude oil producer engaged in the exploration, development, exploitation and acquisition of natural gas and crude oil properties. The company's operations are focused in South Texas, the Arkoma Basin, East Texas, and the Rocky Mountains.
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