Many of the independents on the fourth-quarter Oil and Gas Investor This Week scoreboard reported healthy gains in production, compared with the same period last year, from a mixed bag of acquisition and exploration efforts.

Most also reported increases in their year-end proved reserves, while the cost of growth via the drillbit grew. JP Morgan analyst Joe Allman estimates proved developed reserve finding and development costs rose from $2.11 per thousand cubic feet equivalent in 2005 to about $3.81 in 2006.

"Our analysis suggests that the E&Ps as a whole are struggling to return their cost of capital in the current environment," Allman says. "To earn adequate returns-at least a 20% pre-tax rate of return-the average E&P requires $8-plus gas prices and/or lower costs. We expect costs to decrease because of excess onshore rig and pressure-pumping capacity, and drilling activity to slow if gas futures go below $7."

The names in the year-over-year production-growth winners' circle include Petrohawk Energy Corp., Anadarko Petroleum Corp., Stone Energy Corp., Newfield Exploration Co. and Ultra Petroleum Corp.

Coker & Palmer analyst Michael D. Bodino says, "Overall, 2006 was a milestone year for Petrohawk, as the company successfully integrated the KCS merger and embarked on the transformation from an acquisition to a reserve-conversion story. With the integration of KCS and the divestment of noncore assets, Petrohawk's cost structure has improved markedly. From a lifting-cost perspective, the company's costs have declined from $1.04 to $0.60 (per Mcf) year over year."

Bodino expects Petrohawk's organic growth to ramp up this year, driven primarily by development drilling at Elm Grove Field in North Louisiana. The company plans to continue evaluating 20-acre downspacing at Elm Grove, which could add up to 750 additional locations in its inventory, he adds.

Allman says Anadarko's stock will likely benefit from a turnaround in rates of return and its 2007 asset-sales program, production at Independence Hub in the Gulf of Mexico, and well news from the Gulf and other areas.

Meanwhile, Newfield is still working to get back in Wall Street's good graces, after weather-related issues caused it to miss production targets for several quarters. (For more on this, see "Dear Wall Street" in this issue.) Calyon Securities Inc. analyst Carin Dehne Kiley has an Add and $50 target on Newfield shares.

"Newfield reported recurring fourth-quarter earnings per share below both our estimate and the Street consensus due to lower-than-anticipated realized commodity prices, higher per-unit lease operating expense, higher per-unit depreciation, depletion and amortization expense, and a higher tax rate," she says. The company's production was as expected.

"Although NFX reported that it was experiencing start-up delays at several of its major development projects, the company did not provide any new guidance for full-year 2007. Guidance for the first quarter suggests lower international oil volumes than we had originally estimated, and it appears that two Gulf shelf projects have slipped another month, while one project is expected to come online a month earlier."

Lloyd Byrne, an analyst with Morgan Stanley, lowered his rating on Newfield shares to Equal Weight. "We're increasingly concerned about their intermediate-term outlook and believe there is better risk/reward elsewhere within the peer group," he says.

As for Ultra, its earnings and cash flow per share missed the mark, Bodino says. "Lighter-than-expected production, combined with higher-than-anticipated expenses, contributed to this shortfall."

However, the company remains quite conservative from a reserve-booking standpoint, he adds. "With nearly 10 trillion cubic feet equivalent of 3P (proved, probable and possible) reserves and more than 26 years of drilling inventory, the company is well positioned to manage reserve bookings for the foreseeable future."

Independents that reported noteworthy decreases in production growth year over year include The Houston Exploration Co., Forest Oil Corp. and Plains Exploration & Production. But all sold some assets during 2006. And, currently, Forest plans to buy Houston Exploration. (For more on this, see "Tax-Advantaged Trust" in this issue.)

Morgan Stanley analyst Eric Pipa says Forest is getting closer to turning the corner to becoming a more stable, predictable producer. "[But] while we are encouraged by the ongoing cost containment, the company's all-in costs remain above those of the other onshore gas names in our universe that it is beginning to operationally resemble...We see upside potential for Forest shares during the next 12 months but see better risk-reward opportunities elsewhere in the group."

In its core operations, Forest continues to post solid results in the Buffalo Wallow, Katy and Wild River areas, Pipa adds. The company also drilled its first Barnett shale well in Hill County, Texas. It is producing some 2.1 million cubic feet equivalent per day.

Meanwhile, Houston Exploration, after several quarters of languishing production and earnings and very public investor criticism, is to be acquired by Forest for $1.5 billion plus debt. Closing is expected during the second quarter.

Plains E&P's lower fourth-quarter production was due in part to hefty asset sales during the third quarter onshore California and in West Texas for $865 million. Plains also has divested interests in two deepwater Gulf discoveries, Big Foot and Caesar, and one deepwater exploration prospect, Big Foot North, to Statoil for $700 million.

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