Independents' first-quarter earnings were strong, thanks to higher commodity prices and production for most of the companies. Operating income was up 13.34% year-over-year, on revenues that were 18.25% higher. Oil and condensate production rose 22.06% for the group, and gas output rose 9.01%. Acquisitions played a large role in many of the companies' first-quarter production increases. Devon Energy upped its oil production 127% year-to-year-the most out of the group-driven by its April 2003 merger with Ocean Energy. The company's gas output rose 21.51%. However, earlier-than-expected payout at Zafiro in Equatorial Guinea and Panyu in China-along with operational issues at Boomvang in the Gulf of Mexico-caused Devon to cut its full-year 2004 production growth estimate to 2% to 4% from 4% to 6%, notes Lloyd Byrne, an analyst with Morgan Stanley. David Khani, an analyst with Friedman Billings Ramsey, says investors should focus on two main points concerning Devon: its significant cash and free cash position, and the finding and development (F&D) cost trend, which will decline significantly from the 2003 level of $15 per barrel of oil equivalent during the next several years. "As a result, investors should take relief that there is less pressure on Devon's management to go on a buying spree, and we expect a formal announcement on a stock buyback by its August 2004 conference call," Khani adds. Byrne said improving F&D costs and continued fiscal discipline will be key to closing Devon's valuation discount. Plains Exploration & Production Co. experienced the largest percentage increase in first-quarter gas production-at 905%-thanks to its June 2003 acquisition of gas-weighted producer 3-Tec. Its oil production was down 0.41%. Tom Brown Inc. saw its oil and gas production rise significantly, thanks to its acquisition of Matador Petroleum, which closed June 2003, along with successful drilling results. Oil production rose 60%, and gas production, 52%. Tom Brown's production will soon be boosting the results of another independent-Calgary's EnCana Corp., which recently proposed to buy the Denver-based producer. Chesapeake Energy upped its gas production 39% and oil production 38% in the first quarter, thanks in part to its acquisitions. Michael D. Bodino, an analyst with Sterne, Agee & Leach, notes that Chesapeake completed more than $550 million in acquisitions in the first quarter. He expects full-year 2004 production to be up 24% from 2003. "Chesapeake has not only managed its acquisition growth competently, but also has further strengthened its balance sheet through a series of refinancing and equity offerings," Bodino said. The company has reduced its debt-to-cap ratio to 46%, extended the average maturity of its long-term debt to more than nine years, and reduced its average fixed interest rate to 7.7%, he adds. But acquisitions didn't play a major role in all companies' production increases. Burlington Resources attributed its higher production-up 4.33% for gas and 110% for oil-to higher production from the Williston Basin in the U.S. and from 2003 start-ups of several fields in Algeria, China and elsewhere. "These outstanding results confirm that we are entering what we believe will be a period of sustainable growth for our company," says Bobby S. Shackouls, chairman, president and chief executive of Burlington. "Our North American core properties continue performing strongly, while the major international development programs are ramping up during a very favorable price window." Shackouls says the company's goal is to generate 20% cumulative production growth from 2004 through 2006. Analysts are praising the company for its financial results. Earnings per share were 16 cents above the Wall Street consensus. "We estimate that year-end 2004 net debt-to-cap will decline to 33% from 42% at year-end 2003" Khani says. "As a result, [we] project that the company is positioned to acquire up to $3 billion of debt-financed properties." Not all independents boosted their production. Pogo Producing Co. saw first-quarter gas production fall 1.7% and oil output fall 21% year-over-year as it temporarily shut down production in Thailand to upgrade the Benchamas field facilities. "Normal hydrocarbon production in Thailand has now been restored and is expected to begin building as new wells and platforms are added in 2004 and 2005," says Paul G. Van Wagenen, Pogo chairman and chief executive. The Benchamas field facilities will have a higher throughput capacity thanks to the upgrades. For full-year 2004, Pogo had previously forecast a 6.5% production decline, but now the company is projecting only a 3% decline. Analysts expect that figure to be even smaller, given Pogo's history of conservative projections. "Based primarily on better-than-expected results from the U.S. drilling program, we now expect total production to decline approximately 1.5% in 2004 [this year]," says Rehan Rashid, an analyst with Friedman Billings Ramsey. "In addition, we believe that continued development drilling activity in Thailand, as well as the commencement of production in Hungary, should enable the company to increase total production approximately 7% in 2005." Byrne says Pogo's significant balance sheet capacity and substantial free cash flow profile going forward present an interesting dilemma. "Pogo's management has always proven conservative and savvy in its capital decisions. And considering the 'frothy' nature of recent [M&A] transactions, we don't expect them to be overly aggressive at this juncture," Byrne says. "However, with net debt-to-capital at roughly 12% today, and expected to broach 0% by year-end, the pressure to redeploy capital will certainly increase." Assuming a 50% debt ceiling, Pogo could buy close to 27 million of its own shares-or 43% of the current share count-he said. Another option is an increased payout strategy, possibly a special dividend. -Jodi Wetuski