Noble Energy Reports Record Second Quarter 2005 Results
Noble Energy, Inc. (NYSE: NBL) reported second quarter net income of $136.9 million, or $1.87 per basic share, compared to $72.0 million, or $1.24 per basic share, for the second quarter last year. Second quarter 2005 net income increased 90 percent compared to the same period last year. Discretionary cash flow (non-GAAP measure, see Schedule 2 - Determination of Discretionary Cash Flow and Reconciliation) was $329.9 million for the second quarter of 2005, an increase of 49 percent compared to $221.4 million for the second quarter of 2004. Net cash provided by operating activities was $282.0 million for the second quarter of 2005.
Net income was the highest in Noble Energy's history, and discretionary cash flow was the company's highest since Noble Energy began reporting the number in 1999.
The increase in net income and discretionary cash flow versus the second quarter last year primarily reflected higher daily production, which increased 28 percent, and higher realized liquids and natural gas prices, which increased 32 percent and eight percent, respectively. Higher production volumes and commodity prices combined to increase oil and gas revenues by $159.8 million over the second quarter of 2004. Lower pretax exploration expense, which declined $13.4 million compared to last year, also contributed to increased net income.
Charles D. Davidson, the company's Chairman, President and CEO, said, "Our strong second quarter results reflect the integration of Patina Oil & Gas with Noble Energy's operations, effective May 16. The large inventory of high- return, low-risk exploitation opportunities associated with the Patina properties significantly enhances our domestic production base. In addition, the ongoing trend of improving operating and financial performance, which began in early 2004, continued in the second quarter and is expected to continue into the future. The Swordfish development in the deepwater Gulf of Mexico, the first of three important deepwater developments that will contribute new production through 2006, is scheduled to begin producing in the third quarter at 10,000 barrels of oil equivalent per day, net. The Phase 2A and 2B liquids expansion projects in Equatorial Guinea are both complete and exceeding expectations."
Second quarter 2005 production was 139,765 barrels of oil equivalent per day (Boepd), which included 27,344 Boepd from Patina assets. Second quarter results include 45 days of Patina's financial and operating results. Excluding Patina, production increased three percent over the same period last year and seven percent compared to the first quarter of 2005. Domestic production increased 21 percent compared to the second quarter last year. Domestic production excluding Patina decreased, primarily because of natural decline on the Gulf of Mexico shelf, including an anticipated decline at Roaring Fork (South Timbalier 315/316), and the shut-in of production at Main Pass 293/305/306 in the Gulf of Mexico that resulted from damage caused by Hurricane Ivan during the third quarter 2004.
International production was 39 percent above the second quarter last year, primarily because of increases in condensate and natural gas volumes in Equatorial Guinea following the start-up of Phases 2A and 2B. Increased natural gas sales in Israel, where sales commenced in February 2004, also contributed.
On a unit basis, depreciation, depletion and amortization (DD&A) decreased six percent compared to the second quarter of 2004, to $7.61 per barrel of oil equivalent (BOE) from $8.12 per BOE. Lease operating expense (LOE) for the three months ended June 30, 2005 was $3.95 per BOE compared to $4.28 for the same period last year. The declines in unit DD&A and LOE costs reflect increased low-cost international production, the effects of combining Patina's operations with Noble Energy's and lower workover costs. Selling, general and administrative expense increased to $1.95 per BOE from $1.32 per BOE last year, reflecting increased personnel costs and charges related to closing the Patina merger.
For the second quarter, the company's overall income tax rate remained flat with the second quarter of 2004. Deferred taxes increased to 73 percent of income taxes from 36 percent over the same period in 2004. The increase in the proportion of deferred income taxes is primarily due to the Patina acquisition, which resulted in an increase in capital expenditures that are deductible for cash tax purposes. Second quarter deferred income taxes included an adjustment to Noble Energy's first quarter tax provision, which did not include Patina's results. For the full year 2005, Noble Energy now expects deferred taxes to be between 40 and 55 percent of the total income tax provision.
North America operations reported operating income for the second quarter of $139.4 million, an increase of 104 percent compared to $68.3 million for the second quarter last year.
North America operations benefited from higher production and higher realized prices during the quarter. Second quarter 2005 North America production volumes increased to 79,218 Boepd from 65,530 Boepd for the same quarter last year. The average North America realized crude oil price was $41.70 per barrel (Bbl) compared to $31.68 per Bbl during the second quarter of 2004. The average North America realized natural gas price was $6.78 per thousand cubic feet (Mcf) compared to $6.01 per Mcf last year.
Second quarter 2005 unit DD&A declined 16 cents, to $10.42 per BOE from $10.58 per BOE for the second quarter of 2004. Over the same period, unit LOE declined 26 cents, to $4.58 per BOE from $4.84 per BOE. The declines in unit DD&A and LOE reflect the addition of lower-cost Patina production to Noble Energy's operations and reduced contributions from certain higher-cost Gulf of Mexico properties. Production and ad valorem taxes for the second quarter 2005 were $1.79 per BOE compared to 94 cents last year. The increase in production and ad valorem taxes resulted from the addition of Patina production, which has proportionately more production subject to such taxes.
Upon completion of the acquisition of Patina, Noble Energy's North America operations were 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.
Excluding Patina, Noble Energy's onshore operations were active during the second quarter, drilling 80 wells with 71 successes. The company plans to drill nearly 350 onshore wells in 2005, of which 57 are to be drilled in the Gulf Coast area, and the remaining wells are planned for the Rocky Mountain and Mid-continent areas.
Operations were also active on Patina's assets during the second quarter, running 14 drilling rigs (four in the Rocky Mountains and 10 in the Mid- continent) and 37 workover rigs (23 in the Rocky Mountains and 14 in the Mid- continent). Planned projects for Patina properties from the merger date through the end of 2005 include approximately 270 new drills, of which 150 are planned for the Mid-continent region and 120 are planned for the Rocky Mountain region. The company also plans to complete approximately 360 refrac and recompletion projects during this period, primarily in the Wattenberg field.
The primary focus of Noble Energy's Gulf of Mexico operations remains the deepwater. The Swordfish development is scheduled to commence production in the third quarter of 2005 at 10,000 Boepd, net. A successful appraisal well was drilled on the Lorien block, with production scheduled to start early in the second quarter of 2006. A third deepwater development, Ticonderoga, is expected to commence production mid-year 2006. In addition, Noble Energy is participating in two exploration wells, an offset to Ticonderoga called Conquest (Green Canyon 767) and another well called Little Burn (Green Canyon 238). The company plans to drill one or two additional deepwater exploration prospects during the second half of 2005.
International operations reported operating income for the second quarter of $126.3 million, an increase of 87 percent compared to operating income of $67.6 million in the second quarter last year. Second quarter 2005 international production volumes increased to 60,547 Boepd from 43,567 Boepd for the same quarter last year.
Reflecting increased low-cost production volumes in Equatorial Guinea, Israel and China, second quarter 2005 unit DD&A and LOE declined significantly. Unit DD&A declined to $3.61 per BOE in the second quarter 2005 from $4.10 per BOE for the same period last year. Unit LOE decreased to $3.14 per BOE from $3.48 per BOE over the same period.
Total operating income in Equatorial Guinea, which includes results from field operations and methanol operations, for the second quarter of 2005 more than doubled to $75.0 million, compared to $37.3 million last year. Operating income from Equatorial Guinea was the company's highest ever. Equatorial Guinea has now reported seven consecutive quarters of increasing operating income.
Upstream operations, including liquid petroleum gas (LPG), natural gas and condensate sales, generated increased operating income for the fourth consecutive quarter. Upstream operations reported record operating income of $63.5 million, 85 percent of the total from Equatorial Guinea. Second quarter 2005 sales volumes averaged 32,318 Boepd, nearly double last year's 16,355 Boepd. The average realized price for liquids during the second quarter was $43.36 per Bbl compared to $34.95 per Bbl for the same period last year.
Operating income from methanol operations was $11.4 million net to Noble Energy's interest, compared to $17.6 million for the second quarter of 2004. Methanol operations' results are reported as income from unconsolidated subsidiaries. Second quarter realized methanol prices averaged 79 cents per gallon (Gal) compared to 64 cents per Gal last year. The decline in operating income from methanol operations was due to several factors, including:
* Second quarter 2004 results included $4.8 million of nonrecurring other income. * Expiration of the company's tax holiday at year-end 2004. Going forward, the income tax rate on methanol operations will be 25 percent. * A temporary decline in the company's share of methanol sales volumes to 33.0 million Gal compared to 37.4 million Gal for the second quarter of 2004. The sales decline was the result of normal inventory variations and the timing of sales. * A temporary increase in tanker chartering costs to transport produced methanol in excess of the company's currently leased tankering capacity, reflected in cost of goods manufactured. North Sea
In the North Sea, second quarter 2005 operating income increased to $21.5 million, compared to $13.2 million last year. The quarter-over-quarter improvement reflects lower costs and higher commodity prices. Overall expenses declined $5.1 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 $3.2 million compared to the second quarter last year. The average realized price for liquids during the second quarter was $50.43 per Bbl, compared to $36.75 per Bbl for the same period last year. The average realized price for natural gas was $5.31 per Mcf, compared to $3.99 per Mcf last year.
Second quarter 2005 operating income was $11.0 million, compared to $7.8 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. LOE and DD&A averaged 38 cents per Mcf and 48 cents per Mcf, respectively.
Natural gas production, net to Noble Energy, averaged 60.7 million cubic feet per day (MMcfpd) for the second quarter compared to 47.8 MMcfpd last year. The company's current production rates are limited to volumes under contract with the Israel Electric Corporation and constrained by the timing of completion of government-owned infrastructure. As pipeline infrastructure is completed in late 2005 and in 2006, Noble Energy expects production to exceed the average contract volume of 170 MMcfpd (70 MMcfpd, net). Noble Energy has a 47 percent working interest in this project.
Argentina, China and Ecuador
Second quarter 2005 operating income from Argentina, China and Ecuador increased 104 percent to $18.8 million, compared to $9.2 million for the second quarter last year.
Noble Energy's Machala power plant contributed $5.1 million of operating income during the second quarter 2005, compared to $1.3 million for the same period last year. The quarter-to-quarter increase reflects lower DD&A and higher power prices. For the quarter, 135,113 megawatt-hours (Mwh) were produced at an average sales price of 10.8 cents per kilowatt-hour. For the second quarter 2005, Noble Energy produced 16.3 MMcfpd of natural gas from the Amistad field.
In China, second quarter operating income was a record high $14.3 million, up 160 percent compared to $5.5 million for the second quarter of 2004. Net production in China increased 33 percent versus the second quarter last year, averaging 4,920 barrels of oil per day. Net production in Argentina averaged 3,122 Boepd for the second quarter.
The following estimates for 2005 include the impact of Noble Energy's acquisition of Patina Oil & Gas Corporation, effective May 16, 2005. The company estimates 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 nearly 42 percent compared to the full year 2004, with average production of approximately 150,000 Boepd. Noble Energy's production profile may be impacted by several factors, including:
* Seasonal variations in electricity demand and the timing of infrastructure development in Israel; * Seasonal variations in rainfall in Ecuador that affect the company's natural gas-to-power project; and * Potential weather-related shut-ins in the U.S. Gulf of Mexico and Gulf Coast areas.
Full year 2005 costs and expenses are expected to fall within the following ranges:
* Exploration expense is expected to range from $155 million to $170 million. * SG&A expense is expected to range from $1.65 per BOE to $1.80 per BOE. * Oil and gas LOE is expected to range from $3.80 per BOE to $3.95 per BOE. * DD&A expense is expected to range from $7.50 per BOE to $8.00 per BOE. * An effective tax rate of 35 to 40 percent is expected. Of the total book taxes planned for 2005, 40 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 LOE and unit SG&A costs have been slightly adjusted
from prior guidance to reflect increasing pressure on personnel, rig and
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