The third quarter was strong overall for independents, thanks to higher prices and growing production. The companies on the Petroleum Finance Week earnings scoreboard grew their operating income an average of 117.3% on revenues that were 49.9% higher. Gas production grew almost 12% year-over-year, and realized prices were an average 48.7% higher. Oil production rose 13.6%, and price realizations were 6.9% higher. Devon Energy increased its oil production 104.33% and its gas production 27% year-over-year, thanks to its merger with Ocean Energy. Its management is pleased with the results. "The production growth delivered in the third quarter keeps Devon on track to reach the growth targets we outlined at the time of the merger," says J. Larry Nichols, chairman and chief executive officer. While the merger worked wonders for Devon's production, its development projects are helping. The company expects to generate organic production growth of 4% to 6% in 2003, says David Khani, an analyst with Friedman Billings Ramsey. "We believe a transformation is occurring at Devon, with less reliance on acquisitions for reserve growth and more focus on organic reserve replacement," he says. "The recent deepwater Gulf of Mexico discoveries and increasing Barnett Shale opportunities lead us to believe Devon could be replacing [about] 100% of reserves with the drillbit next year. Moreover, we think this can happen at reasonable F&D (finding and development) costs and not the pricey levels seen during the past two years." Pioneer Natural Resources saw gas production jump 67% year over year, and oil production increase 13.5%. The Canyon Express and Falcon projects in the Gulf of Mexico had strong performances. Its Argentine oil-drilling results exceeded expectations while a strengthening economy there boosted gas sales. Lloyd Byrne, an analyst with Morgan Stanley, sees one main challenge ahead for Pioneer. Based on his 2004 commodity-price forecast, Pioneer is faced with the "pleasant dilemma" of finding a use for about $300 million of free cash flow. Debt paydown, a share buyback, the introduction of a common dividend and acquisitions are all possibilities. "However, given the competitive nature of the [U.S.] M&A market, and projected 2003 exit net debt to capital of 46%, options are somewhat limited, in our view," he says. "Management will assess its options in the near future, with an announcement to follow, potentially by year-end." One company with costs seemingly under control is XTO Energy. During the third quarter, combined cash lease operating expenses, severance, gathering, general and administrative, interest and taxes totaled $1.36 per thousand cubic feet of gas equivalent (Mcfe), Credit Lyonnais analyst Brad Beago says, which was in line with estimates. Revenue totaled $4.18 per Mcfe for an impressive cash margin of $2.82 per Mcfe, he adds. Given that the company's finding costs are expected to be around $1 per Mcfe, XTO generates one of the highest cash-on-cash returns in the industry," he says. While keeping costs low, XTO has grown production overall, even though the liquids component of production fell 2.3% year-over-year. "Importantly, by our count, this represents the 13th straight quarter of sequential production growth for XTO, a record unmatched by any other independent that we are aware of," Beago adds.