Energy companies post high-powered earnings

by Adam Wilmoth

The Daily Oklahoman - January 4, 2004

Soaring oil and natural-gas prices may cost consumers more at the pump and on their utility bills, but in Oklahoma, the increase has also led to thousands of new or retained jobs, according to industry and state observers.

Natural-gas prices averaged about $5.50 throughout 2003, up from an average of about $3.50 in the previous two years. The increase has led to millions of dollars in extra profits for both energy companies and the state.

Revenue generated from the gross production tax on oil and natural gas ballooned from $359 million in fiscal year 2002 to $540 million in 2003. Fiscal year 2004, which began July 1, 2003, is projected to see gross production tax revenues of $554 million, according to the Oklahoma Tax Commission.

"Having that extra revenue available is what's been really critical in terms of keeping us from having to enact further budget cuts," said James Wilbanks, director of the Oklahoma Office of State Finance's fiscal and research division. "We had budget cuts at the end of fiscal year 2002 and throughout a large part of fiscal year 2003.

"Without those increases in the gross production tax revenues, those cuts would have been even deeper."

Through the first five months of fiscal year 2004, the state collected $58.9 million more than was budgeted, with $56.4 million of that increase coming from the gross production tax on natural-gas sales.

Most industry observers agree that natural-gas prices have climbed because demand has increased while production has remained constant.

Natural-gas usage has increased in recent years as more natural-gas fired power plants have come online and because the improving economy has led to increased manufacturing use.

Drilling for natural gas improved about 30 percent throughout 2003. However, production stayed flat because much of the remaining fields available to energy companies are smaller, deeper reserves.

Energy policy cited

Oklahoma Corporation Commissioner Bob Anthony blamed the high prices on a federal energy policy he says has created a "perverse and foolish situation. The government has encouraged the use of natural gas through tax and other incentives, but has refused to allow the energy industry to drill for natural gas in abundant reserves on protected lands, he said.

While the situation probably will lead to a continuing increase in natural gas prices, Anthony said, Oklahoma is benefiting from the problem.

"If Oklahoma went to the East Coast, the West Coast, the Rocky Mountains and Alaska and told them not to produce gas because we wanted Oklahoma gas to be more valuable, people would say we were restricting trade and in violation of anti- trust laws," Anthony said. "But with current policy, those state and federal governments are making the restrictions on their own."

Energy companies and their shareholders also saw sizable gains in 2003 as stock prices jumped an average of 47 percent for some parts of the industry. Earnings climbed even higher, with numerous companies posting record profits up sometimes as much as 200 percent from the previous year.

City companies soar

While exploration and production companies saw an average gain of 47 percent on their stock prices, Oklahoma City-based Chesapeake Energy Corp. shot past that mark with an increase of 76 percent to $13.50 a share. Oklahoma City's Devon Energy Corp. posted a gain of 23 percent to $57.15.

"I think the biggest impact on stock price is that investors are starting to come to believe that prices may not collapse," said Brian Jennings, senior vice president corporate finance and development at Devon.

"In the past two years, prices have been strong, but investors have been afraid to invest because they expected prices to come down. What they're seeing now is that prices are likely to remain strong for some time."

Kerr-McGee Corp. of Oklahoma City edged up 5 percent on the year to $47.20.

"We believe our stock is undervalued," said Kerr- McGee spokeswoman Debbie Schramm. "We continue to pay the highest dividend of anyone in our industry. All of our projects are on time and within budget, so we're going to experience the momentum we expect to see in 2004."

Chesapeake's growth on the year created about 250 jobs, and Devon added about 180 jobs. Kerr- McGee, however, eliminated about 250 positions in 2003.

Industry analyst David M. Khani blamed Kerr- McGee's layoffs and lower- than-average stock increase on lingering effects of 2002, in which the company lost money on unsuccessful or underproductive projects.

"I think investors have been very skeptical and have been putting them under a microscope," said Khani, of Friedman, Billings, Ramsey in Arlington, Va. "But I've been watching very carefully, and I think they have clearly made a turn to the positive. They provide much better guidance now and have either met or exceeded their production guidance in the past four quarters."

Good year anticipated

The new year is expected to be another strong year for the energy industry, but there is some disagreement as to whether it will bring as much of a surge in the energy industry as was seen in 2003.

Greg McMichael, energy sector analyst with A.G. Edwards & Sons in Denver, said he expects energy stocks to grow in 2004, but only about 7 percent or 8 percent rather than the 40 percent seen last year.

"I think people are going to be taking some profits," he said. "My guess is we're probably going to see prices in 2004 that are similar to what they were in 2003. So there's not much room for more growth."

Much of the success of the sector in 2004 will be determined by oil and natural- gas prices, but experts disagree about whether prices will go up or down.

"I think it is unlikely that gas prices will continue to move up in 2004," said Tom Price, senior vice president of investor and government relations at Chesapeake. "Our expectation is that we're going to see a lightening up of gas prices as we go into the year."

Others, however, are more bullish.

"The fundamentals are not going to change overnight," said Bruce Bell, chairman of the Mid- Continent Oil and Gas Association of Oklahoma.

"We are going to have to work very hard to supply all the oil and natural-gas needs. As soon as the economy starts to pick up, demand for oil and natural gas worldwide is going to continue to escalate."

© 2004 The Daily Oklahoman

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