Strong commodity prices and higher global production made the second quarter a bright one for independent producers. Year-over-year operating income was 203.1% higher for the quarter for 21 companies, on revenues that were up 40.9%. Gas production was up 7.1%, and realized prices were up 45.9%. Oil production was 4.7% higher, and realized prices were up 10.5%. Acquisitions, of course, accounted for a portion of the production increase. But some of the independents proved that growth through the drillbit is still possible. Chesapeake Energy Corp. experienced the biggest revenue increase of the group-121.1%-on the back of strong production-up 55.8% for gas and 50% for oil, compared with the second quarter of last year. Sequentially, Chesapeake's total production rose 10.5 billion cubic feet equivalent (Bcfe) from the first quarter. Southwest Securities analyst John Gerdes estimates that Chesapeake's organic growth accounted for 5.4 Bcfe of that figure. "Only 0.8 Bcfe of growth is associated with the Oxley Petroleum acquisition [in June] and 3.9 Bcfe is associated with the El Paso and Vintage [asset] acquisitions that took place in late March," he says. In the quarter, Chesapeake participated in 259 gross wells (106 net), with a 79% success rate, Gerdes says. It spent $179 million in capital in the quarter, 87% of which was used in the Midcontinent. Some $120 million went to drilling. The company utilized 35 rigs in the second quarter and plans to utilize 40 to 44 rigs in the third and fourth quarters. It has a 2,000-well drilling inventory with an increasing backlog, he adds. Chesapeake reports second-quarter production of 67 Bcfe was replaced by 201 Bcfe of new proved reserves, which included 112 Bcfe from drilling and revisions and 96 Bcfe from acquisitions. That was partially offset by 7 Bcfe of divestitures. Morgan Stanley analyst David Donnelly notes that while Chesapeake was raising production, it was lowering its costs. He estimates its full-cycle costs were 4.1% below expectations and down 5.1% from the first quarter. Pioneer Natural Resources Co. experienced the largest increase in gas production, 82.8% year-over-year. And it didn't rely on acquisitions to do it-its last major deal was March 31, when it acquired from Mariner Energy an additional 25% working interest in the Falcon Field and related projects in the deepwater Gulf of Mexico, bringing its interest to 100%. Rather, it is reaping the rewards of a multi-year portfolio transformation that allowed it to use its legacy assets in North America as a cash-flow platform and venture out into higher-risk, higher-impact projects. The effect of these projects is expected to be felt in years to come. "In addition to the strong growth profile we have established from the projects currently under development, we have many projects in earlier phases that offer upside impact in 2004 and beyond," says Scott D. Sheffield, chairman and chief executive officer. Wells being drilled on the Gulf of Mexico shelf, in the Falcon corridor in the deepwater Gulf and in Tunisia could further increase production in 2004. Development drilling is planned in late 2003 or early 2004 on discoveries in Gabon and the Ozona Deep and Triton fields in the Gulf of Mexico. Pioneer also is determining the potential for commercial development of oil in Alaska and gas in South Africa. Perhaps looking for more exposure to higher risk/higher return plays in the coming months is EOG Resources, Morgan's LloydByrne says. "Within the past several years, EOG has resisted the big acquisition, resisted jumping head-long into the international arena, and resisted higher-risk deepwater exploration. However, looking forward, the potential change or surprise to the market is that EOG is layering in some higher-risk, higher-return ventures, providing a new potential leg to the story." One of those ventures is in Trinidad, where two exploration wells are to be drilled in the second half, each with 150- to 250 Bcfe in potential. Assuming a cost of $0.50 per Mcf for development and a $1.35-per-Mcf gas price, Byrne estimates a present value of roughly $3 a share to EOG's equity value. "Trinidad [itself] is clearly not a surprise. The market generally understands that substantial natural gas resources exist in the region. We believe though that the surprise to the market is that the consuming market is developing at a faster rate than originally expected-LNG commitments are absorbing previous excess supply," Byrne said. (For more on this, see "Trinidad and Tobago" and "LNG Imports" in this issue.) In the deepwater Gulf of Mexico, Tuscany, a project generated by EOG and operated by Devon Energy Corp. is set to spud within a month. Gross reserve potential is 215 million BOE, 81 million of which is net to EOG. This is likely the highest-risk play EOG will take on in the near-term, Byrne says. "Given EOG's rifle-shot approach to the Gulf of Mexico, [this] will likely be viewed as a one-off by the market, in our view," he adds. Three other prospects EOG will tackle in the second half are onshore the U.S., Byrne says. Management is openly discussing only one of these plays, the Barnett Shale in North Texas. The potential value of the Barnett Shale play is nearly $1.1 billion. "The key is whether the horizontal [drilling] strategy works, and/or whether it works as well as it has for Devon, as EOG's acreage position is outside the core fairway," he says. Vintage Petroleum Inc. experienced an $8.7-million loss in the quarter driven by non-cash charges of $41.6 million ($24.3 million after tax) related primarily to the sale of properties in Canada. Excluding such major items, the company earned $17.7 million, which was flat compared with a $17.3-million gain in the year-earlier quarter. Vintage's production was down for the quarter-22% for gas and 18.7% for oil. The company attributes this to U.S. property divestitures in June 2002 and March 2003, natural production declines and the effects of substantially curtailed capital expenditures in 2002, which were cut in favor of reducing debt. "The plan to restrict capital spending in 2002, in addition to the impact from asset sales, has temporarily affected our oil and gas volumes. However, it has also had the desired effect of strengthening our balance sheet and positions us for future growth," says S. Craig George, CEO. Besides the company's $107 million of cash on hand, it has nearly $300 million of availability under its bank revolving credit facility. "With this liquidity and our commitment to maintain a healthy balance sheet, we are actively pursuing acquisition opportunities in our return to production growth, while adding to our portfolio of projects with upside potential." Growth may be hard to come by this year, however. Due to weaker-than-anticipated market conditions in Bolivia, non-strategic property sales in Canada and the expectation that higher royalty rates in Canada will continue, Vintage reduced its full-year 2003 production target 3%. Burlington Resources Inc.'s second-quarter oil production was down 25.7%, and its gas production was down 2.5% year-over-year. However, adjusting the figures for asset sales in 2002, overall production rose 7%, the company reports. It sees progress going forward. "The MLN Field in Algeria started up on schedule and we are looking forward to achieving production from offshore China later this year and from the Rivers Fields in the East Irish Sea early next year," says Bobby S. Shackouls, chairman, president and CEO. During 2004, the company expects to achieve the higher end of its previously stated goal of annual volume growth of 3% to 8%. Gerdes lauds Burlington for taking a temporary hit to production in the quest for a tighter portfolio. "The efficient rationalization and greater concentration of the company's asset base in the past two years is evident in a 4% reduction in per-unit controllable cash expenses since 2001," he says. "During this same period, the E&P industry, overall, has experienced at least 10% inflation in per-unit controllable cash expenses." Larry Busnardo at Petrie Parkman & Co. deemed Forest Oil Corp.'s second-quarter earnings a disappointment, and lowered his price target to $24 a share from $30. The company's earnings per share of $0.48 were below his expectations of $0.57. The earnings came in under Petrie's expectations mainly because of lower-than-expected production and higher general and administrative costs, Busnardo says. "On a more positive note, lease operating expense continued a downward trend for the third consecutive quarter as the company has continued to take a disciplined approach to reducing cash costs, not only on company-operated properties but also on the nonoperated side." Forest's management is lowering full-year 2003 production guidance by about 5% because of the Redoubt Shoal Field in Alaska. Operational and performance issues have plagued the field since production began in December, and production from the field is anticipated to average 3,000 to 4,000 barrels a day this year versus an initial projection of 7,000 to 8,000 barrels a day. Ultimately, he says, a year-end proved reserve revision could be possible. -Jodi Wetuski