KCS Energy, Inc. Reports Fourth Quarter and Full Year Results

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Kcs Energy	NYSE:KCS	NYSE	Ordinary Share

K C S Energy (NYSE:KCS)
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Record Production, Cash Flow and Net Income HOUSTON, March 2 /PRNewswire-FirstCall/ -- KCS Energy, Inc. (NYSE:KCS) today announced financial and operating results for the fourth quarter and year ended December 31, 2005. Full year highlights include: * Record 193 wells drilled with a 93% success rate * Record net production of 46.4 BCFE, up 33% * Record oil and gas reserves of 452.3 BCFE, up 38% * Record operating income of $200.7 million, up 90% * Record earnings of $105.9 million, up 5% * Record operating cash flow (a non-GAAP financial measure) of $261.4 million, up 94% Management Comments James W. Christmas, Chairman and Chief Executive Officer, said: "2005 was a truly outstanding year for KCS. The Company's focused drilling program and the contributions of a team of dedicated and talented people in our organization led us to the most successful year in our history. During the year, we drilled 193 wells with a success rate of 93%. Gross production for the year increased 26%, to 50.3 BCFE, while net production, after production payment delivery obligations that do not contribute to cash flow from operating activities, increased 33%, to 46.4 BCFE. "We also increased our oil and gas reserves by 38%, with additions and revisions equating to 379% of our net production. At the same time we added significantly to our acreage position and inventory of drilling locations in our core operating areas to fuel future growth. The PV10 value of our reserves was $1.7 billion at December 31, 2005, compared to $0.8 billion at December 31, 2004. "We not only significantly increased reserves and production for the third straight year, but we also managed to maintain a low cost structure, with unit operating and administrative costs essentially flat with prior years, resulting in enhanced margins to fund our capital program. "In keeping with our growth strategy, we invested 100% of our operating cash flow in our drilling program. While our principle focus continues to be organic growth, we also completed two meaningful acquisitions in 2005 which significantly increased the inventory of potential drilling locations in our core areas of operations, and added to current reserves and production. The acquisitions were funded primarily with the proceeds of issuance of additional senior notes and proceeds from property sales. Capital expenditures for the year totaled $380 million, including $121 million for acquisitions. "As previously announced, we have set an initial 2006 capital budget of $315 million, excluding acquisitions. We are targeting more than 20% net production growth from the drilling program in 2006." Financial and Operational Highlights ($ thousands except per share) 3 Mos. 2005 3 Mos. 2004 Oil and Gas Revenue $117,391 $64,476 Operating Income $70,065 $32,576 Income Before Income Taxes $68,318 $29,300 Income Tax (Expense) Benefit $(27,295) $18,375 Net Income $41,023 $47,675 Diluted Earnings Per Share $0.81 $0.96 Net Production (MMCFE) 12,693 9,571 12 Mos. 2005 12 Mos. 2004 Oil and Gas Revenue $363,701 $218,755 Operating Income $200,679 $105,368 Income Before Income Taxes $172,558 $86,530 Income Tax (Expense) Benefit $(66,698) $13,905 Net Income $105,860 $100,435 Diluted Earnings Per Share $2.11 $2.03 Net Production (MMCFE) 46,376 34,801 Three Months Ended December 31, 2005 vs. 2004 Oil and gas revenue for the fourth quarter of 2005 increased 82% to $117.4 million, compared to $64.5 million for the quarter ended December 31, 2004, due to a 26% increase in oil and natural gas production (33% increase in net production contributing to cash flow) and a 45% increase in average realized prices. Operating cash flow for the quarter, a non-GAAP financial measure, increased 105% to $88.1 million, compared to $43.1 million in the last quarter of 2004. Operating income was $70.1 million, up 115%, and income before income taxes was $68.3 million, up 133%, compared to the fourth quarter of 2004. These record operating results were partially offset by higher income tax expense of $27.3 million, or 40% of pretax income for the fourth quarter of 2005, most of which is deferred to future years, compared to an income tax benefit of $18.4 million for the fourth quarter of 2004. The tax benefit in 2004 was related to the reversal of the remainder of the Company's valuation allowance against net deferred income tax assets. The Company then resumed recording book income taxes based on statutory rates in 2005. After considering this $45.7 million increase in income tax expense, net income was $41.0 million, or $0.82 per basic share and $0.81 per diluted share, for the fourth quarter of 2005, compared to $47.7 million, or $0.97 per basic share and $0.96 per diluted share for the fourth quarter of 2004. Twelve Months Ended December 31, 2005 vs. 2004 For the year ended December 31, 2005, oil and gas revenue increased 66% to $363.7 million compared to $218.8 million for the year ended December 31, 2004 due to a 26% increase in oil and natural gas production (33% increase in net production contributing to cash flow) and a 32% increase in average realized prices. Operating cash flow for 2005, a non-GAAP financial measure, increased 94% to $261.4 million compared to $134.9 million in 2004. Operating income increased 90% to $200.7 million, compared to $105.4 million in 2004. Income before income taxes increased 99% in 2005, to $172.6 million, compared to $86.5 million in 2004. Income tax expense in 2005 was $66.7 million, or 38.7% of pretax income. This compares to an income tax benefit of $13.9 million in 2004 due to the change in the valuation allowance against net deferred income tax assets. The Company continued to utilize its net operating loss carry forwards and paid only federal alternative minimum tax and state taxes equating, in the aggregate, to approximately 2% of pretax income in 2005. The remainder of the tax expense recorded in 2005 is deferred to future years. Net income in 2005 was $105.9 million, or $2.13 per basic share and $2.11 per diluted share, compared to $100.4 million, or $2.06 per basic share and $2.03 per diluted share for the same period last year. Operations Update KCS drilled 193 oil and gas wells in 2005. Of those, 180 were completed for a 93% success ratio. Sixty-nine percent of the wells were drilled in the Mid-Continent region and 31% in the Gulf Coast region. Success ratios were 98% in the Mid-Continent region and 83% in the Gulf Coast region. The 193 gross wells include 69 wells drilled in the Elm Grove/Caspiana Fields, 29 wells in the O'Connor Ranch Field, 13 wells in the Sawyer Canyon Field and seven wells in the Terryville Field. In the fourth quarter, the Company drilled 41 wells, of which 39 were successfully completed. Overall, KCS averaged a 76% WI in the wells drilled in 2005. The 2006 budget anticipates drilling 215 gross wells. Production Net production in 2005, after considering delivery obligations associated with the production payment sold in 2001, averaged 127 MMCFEPD, an increase of 33% over 2004. During 2005, deliveries under that production payment averaged 10.7 MMCFEPD. Since the final deliveries under the production payment were made in January 2006, KCS now realizes the cash benefit of its full production stream. For the fourth quarter of 2005, net production averaged 138 MMCFEPD. This represents a three percent increase from third quarter production and a 33% increase from fourth quarter production in 2004. For the year, lease operating expenses per MCFE were $0.70 and G&A expenses per MCFE were $0.22 (excluding stock compensation), reflecting excellent cost control by the Company's personnel. Reserves Total proved oil and natural gas reserves at December 31, 2005 (which have been audited by Netherland, Sewell & Associates, Inc.) increased 38% to 452 BCFE, compared to 328 BCFE on December 31, 2004. KCS added 180 BCFE during 2005, sold five BCFE and had negative revisions of four BCFE. Drilling activity accounted for approximately two-thirds of the total additions, or an organic reserve replacement of net production of over 260%. In accordance with SEC requirements, proved reserves were based on year-end 2005 commodity market prices of $10.08 per MMBTU for natural gas and $57.75 per barrel for oil, adjusted by lease for basis differentials. Using these prices, the pre- tax present value of the proved reserves discounted at 10% totaled $1.7 billion, or over twice the December 31, 2004 PV10 value. At year-end, 88% of the reserves were natural gas, 74% were proved developed and approximately 86% were on properties operated by KCS. The Company's reserve life index was 9.8 years at December 31, 2005 based on 2005 net production. Activity Elm Grove / Caspiana Fields, Bossier Parish, Louisiana * 69 Gross wells were drilled in 2005 with an average WI of 90%. * 49 of these wells were drilled on KCS' original acreage position with average initial production rates of over 2,000 MCFEPD per well. * 20 of these wells were drilled on lands acquired in the April 2005 acquisition or other new acreage, with average initial production rates of over 1,700 MCFEPD per well. * Gross operated field production increased from 45 MMCFEPD at the end of 2004 to over 70 MMCFEPD at year end 2005. * In February 2006, gross operated production rose to over 80 MMCFEPD. * In 2005, KCS initiated a successful recompletion effort, working over wells initially completed in the Lower Cotton Valley formation and commingling them with the Hosston formation. To date, 26 wells have been commingled, with 48 additional workovers planned for 2006. * 75 additional gross wells are anticipated to be drilled in 2006. Terryville Field, Lincoln Parish, Louisiana * Seven wells with an average WI of 83% were drilled in 2005. Six were completed in the Lower Cotton Valley formation and one is awaiting completion. * Average initial production rates were over 1,700 MCFEPD per well. * KCS has acquired a substantial acreage position in the area to allow for future drilling if the productive area proves larger than the area that has been delineated to date. * Two rigs are currently active in the field, with 30 wells planned in 2006. Other Mid-Continent Activity * Thirteen wells with WI ranging from 91% to 100% were drilled in the Sawyer Canyon Field in Sutton County, Texas in 2005 and 25 wells are planned for 2006. * Ten wells with an average WI of 70% were drilled in the Joaquin Field in Shelby County, Texas in 2005 and six wells are budgeted for 2006. * Six wells with an average WI of 27% were drilled in the Talihina Field in Latimer County, Oklahoma in 2005 and 10 wells are planned for 2006. * In the fourth quarter KCS also participated in the following wells: - Thorton #3, Panola Field (WI = 22%): 3,200 MCFEPD IP - Jordan #4, Bear Creek Field (WI = 27%): 2,400 MCFEPD IP - Long Draw 9 #1, Cemetery Field (WI = 19%): 1,750 MCFEPD IP * During February 2006, KCS drilled its first two unconventional Fayetteville shale wells in Van Buren County, Arkansas and is preparing to test them. * The high potential Bowdle 42 #3 well in the Haley Field, Loving County, Texas (WI = 48%) is scheduled to spud within the next 30 days. Gulf Coast Activity * KCS closed on the acquisition of the Magnet Withers Field in Wharton County, Texas in December 2005 and has moved in a drilling rig to commence a five well program. * 29 wells were drilled in the O'Connor Ranch Field in Goliad County, Texas during 2005 with an average WI of 87%. Three wells are budgeted for the field in 2006, with a Wilcox test well currently drilling (100% WI). * In the fourth quarter, KCS participated in the following wells: - K. Jackson #4, Austin Field (WI = 66%): 4,000 MCFEPD IP. - Martin #1, Austin Field (WI = 28%): 4,500 MCFEPD IP. - Hoff #7, Marshall Field (WI = 25%): 1,600 MCFEPD IP. - BOE 16 #11, Pine Grove Field (WI = 22%): Completion pending. * The previously drilled Guerra D-4 well (WI = 24%) at the La Reforma Field produced at an initial rate of 7,600 MCFEPD. * The previously drilled Flores G.U. #1 well (WI = 25%) at the East La Grulla field produced at an initial rate of 3,200 MCFEPD. * A 3D seismic survey in Wayne County, Mississippi (WI = 33%) has recently been completed and three Smackover wells are planned in 2006. * KCS acquired a 19,000 acre position in Madison County, Texas during 2005 and has budgeted for five wells in 2006. * 40 wells are budgeted in the Gulf Coast in 2006 with two rigs currently drilling. Hedging Program The Company's overall hedge position as of December 31, 2005 covered 19.5 BCF and 254.3 MBO for 2006 and 2.3 BCF and 36 MBO for 2007. The Company's hedge positions are summarized in the following table. TYPE HEDGE VOLUME AVG. PRICE 2006 - 1st Quarter: Gas - Swap 53,500 MMBTU/day $8.122 - Collar 20,000 MMBTU/day $8.438/$12.887 - Sold call 10,000 MMBTU/day $8.00 Oil - Swap 456 BOPD $55.17 - Collar 250 BOPD $55.00/$81.00 - 2nd Quarter Gas - Swap 35,604 MMBTU/day $7.345 - Collar 20,000 MMBTU/day $8.375/$11.51 Oil - Swap 453 BOPD $54.73 - Collar 250 BOPD $55.00/$81.00 - 3rd Quarter Gas - Swap 30,217 MMBTU/day $7.355 - Collar 20,000 MMBTU/day $8.375/$11.428 Oil - Swap 439 BOPD $54.16 - Collar 250 BOPD $55.00/$81.00 - 4th Quarter Gas - Swap 20,543 MMBTU/day $6.979 - Collar 5,000 MMBTU/day $9.50/$15.00 Oil - Swap 439 BOPD $53.74 - Collar 250 BOPD $55.00/$81.00 2007 - 1st Quarter Gas - Swap 20,000 MMBTU/day $7.858 Oil - Swap 100 BOPD $63.85 - 2nd Quarter Gas - Swap 5,000 MMBTU/day $7.47 Oil - Swap 99 BOPD $63.85 - 3rd Quarter Oil - Swap 98 BOPD $63.85 - 4th Quarter 98 BOPD $63.85 2006 Guidance 2005 2006 Actual Guidance Production (BCFE) Working Interest 50.3 55.3-57.3 Production Payment (3.9) (.3) Net Production 46.4 55-57 LOE ($/MCFE) .70 .73-.77 Production and Other Taxes (% Revenue) 6 % 6 % G&A ($/MCFE) * .22 .22-.26 DD&A rate on oil and gas properties ($/MCFE) 1.85 2.05-2.25 Interest Expense ($MM) 18.6 21-24 Income Taxes ** 38.7 % 38.5 % Capital Expenditures, Exclusive of Acquisitions ($MM) 259 315 * Excludes stock compensation. ** 94% Deferred in 2005 and 65-70% deferred in 2006. Non-GAAP Financial Measures This press release includes certain non-GAAP financial measures which are explained in greater detail and reconciled to the most directly comparable GAAP measure in the attached financial table under the heading "Non-GAAP Financial Measures". Definitions The following abbreviations are utilized herein: Net Production - Production after considering delivery obligations associated with the Production Payment sold in February 2001 WI - Working Interest BOPD - Barrels of Oil Per Day BCF - Billion Cubic Feet of Natural Gas BCFE - Billion Cubic Feet of Natural Gas Equivalent G&A - General and Administrative Expenses IP - Initial rate of production MBO -Thousand Barrels of Oil MCF - Thousand Cubic Feet of Natural Gas MCFE - Thousand Cubic Feet of Natural Gas Equivalent MCFEPD - Thousand Cubic Feet of Natural Gas Equivalent Per Day $MM - Million Dollars MMCFEPD - Million Cubic Feet of Natural Gas Equivalent Per Day MMBTU - Million British Thermal Units PV10 - Pre-tax present value of estimated future net revenues associated from oil and gas reserves, computed by applying year-end prices to estimated future production from the reserves, deducting estimated future expenditures, and applying a discount factor of 10%. This press release contains forward-looking statements that involve a number of risks and uncertainties. Among the important factors that could cause actual results to differ materially from those indicated by such forward-looking statements are delays and difficulties in developing currently owned properties, the failure of exploratory drilling to result in commercial wells, delays due to the limited availability of drilling equipment and personnel, fluctuation in oil and gas prices, general economic conditions and the risk factors detailed from time to time in the Company's periodic reports and registration statements filed with the Securities and Exchange Commission. KCS is an independent energy company engaged in the acquisition, exploration, development and production of natural gas and crude oil with operations in the Mid-Continent and Gulf Coast regions. For more information on KCS Energy, Inc., please visit the Company's web site at http://www.kcsenergy.com/ KCS Energy, Inc. Condensed Income Statements Three Months Ended For the Year Ended (Amounts in Thousands December 31, December 31, Except Per Share Data) 2005 2004 2005 2004 Oil and natural gas revenue $117,391 $64,476 $363,701 $218,755 Other, net 1,150 201 955 (345) Total revenue and other 118,541 64,677 364,656 218,410 Operating costs and expenses Lease operating expenses 10,135 7,225 35,399 28,600 Production and other taxes 7,293 4,039 21,357 14,208 General and administrative expenses including stock compensation 2,925 3,153 13,493 11,896 Accretion of asset retirement obligation 241 257 964 1,029 Depreciation, depletion and amortization 27,882 17,427 92,764 57,309 Total operating costs and expenses 48,476 32,101 163,977 113,042 Operating income 70,065 32,576 200,679 105,368 Gain (loss) on mark-to- market derivatives, net 3,318 244 (9,679) (1,121) Interest and other income 55 4 149 317 Redemption premium on early extinguishment of debt - - - (3,698) Interest expense (5,120) (3,524) (18,591) (14,336) Income before income taxes 68,318 29,300 172,558 86,530 Federal and state income tax expense(benefit) 27,295 (18,375) 66,698 (13,905) Net income $41,023 $47,675 $105,860 $100,435 Earnings per share of common stock - basic $0.82 $0.97 $2.13 $2.06 Earnings per share of common stock - diluted $0.81 $0.96 $2.11 $2.03 Average shares outstanding for computation of earnings per share Basic 49,911 48,977 49,656 48,868 Diluted 50,579 49,669 50,248 49,520 KCS Energy, Inc. Condensed Statements of Cash Flow For the Year Ended December 31, 2005 2004 Net income $105,860 $100,435 DD&A 92,764 57,309 Amortization of deferred revenue (16,149) (21,370) Deferred income tax expense (benefit) 63,399 (14,905) Other adjustments and non-cash charges and credits, net 15,573 13,394 261,447 134,863 Changes in operating assets and liabilities (22,357) (797) Net cash provided by operating activities 239,090 134,066 Cash flow from investing activities: Investment in oil and gas properties, net (368,096) (155,406) Proceeds from the sale of oil and gas properties 11,156 867 Other, net (2,236) (525) Net cash used in investing activities (359,176) (155,064) Cash flow from financing activities: Net increase in debt 116,125 33,000 Other, net 2,131 (7,567) Net cash provided by financing activities 118,256 25,433 Increase (decrease) in cash and cash equivalents $(1,830) $4,435 Non-GAAP Financial Measures KCS reports its financial results in accordance with generally accepted accounting principles. However, on occasion the Company also presents certain non-GAAP financial measures, such as operating cash flow. Operating cash flow is net income adjusted for depreciation, depletion and amortization, amortization of deferred revenue, non-cash losses on derivative instruments, deferred income taxes, accretion of asset retirement obligation, stock compensation and other non-cash charges and credits, net. While operating cash flow should not be considered in isolation or as a substitute for net income, operating income, net cash provided by operating activities or other income or cash flow data prepared in accordance with generally accepted accounting principles or as an indication of the Company's financial performance or liquidity under GAAP, it is presented because the Company believes that it provides useful information to investors with respect to its ability to meet future debt service, capital expenditure commitments and working capital requirements. Operating cash flow as presented herein may not be comparable to similarly titled measures of other companies. The following table reconciles net income to operating cash flow for the periods presented. Three Months Ended For the Year Ended December 31, December 31, 2005 2004 2005 2004 (In thousands) Net income $ 41,023 47,675 $ 105,860 100,435 Depreciation, depletion and amortization 27,882 17,427 92,764 57,309 Amortization of deferred revenue (3,489) (4,873) (16,149) (21,370) Non-cash losses on derivative instruments (3,713) (193) 10,689 4,540 Deferred income taxes 25,746 (18,374) 63,399 (14,905) Accretion of asset retirement obligation 241 257 964 1,029 Stock compensation 77 576 2,391 2,621 Other non-cash charges and credits, net 379 589 1,529 5,204 Operating cash flow $ 88,146 $ 43,084 $ 261,447 $ 134,863 The following table reconciles operating cash flow to net cash provided by operating activities, its most directly comparable GAAP financial measure, for the periods presented. Three Months Ended For the Year Ended December 31, December 31, 2005 2004 2005 2004 (In thousands) Operating cash flow $88,146 $43,084 $261,447 $134,863 Trade accounts receivable (11,626) (8,030) (40,046) (11,414) Accounts payable and accrued liabilities 9,522 6,149 17,685 13,005 Accrued interest (4,910) (3,118) 1,790 (1,982) Other, net 114 668 (1,786) (406) Net cash provided by operating activities $81,246 $38,753 $239,090 $134,066 KCS Energy, Inc. Supplemental Data Three Months Ended For the Year Ended December 31, December 31, 2005 2004 2005 2004 Production: Gas (MMcf) 12,016 9,194 44,112 33,905 Oil (Mbbl) 215 204 835 795 Natural gas liquids (Mbbl) 38 55 191 216 Total (MMcfe) 13,536 10,747 50,270 39,971 Dedicated to Production Payment (MMcfe) (843) (1,176) (3,894) (5,170) Net Production (MMcfe) 12,693 9,571 46,376 34,801 Average realized prices (a) Gas (per Mcf) $8.91 $6.11 $7.35 $5.61 Oil (per bbl) $40.24 $34.42 $41.01 $30.53 Natural gas liquids (per bbl) $45.08 $23.58 $28.45 $19.07 Total (per Mcfe) $8.67 $6.00 $7.23 $5.47 Notes: (a) The average realized prices reported above include the non-cash effects of volumes delivered under the Production Payment as well as the unwinding of various derivative contracts terminated in 2001. These items do not generate cash to fund the Company's operations. Excluding these items, the average realized price per Mcfe was $9.17 and $7.61 for the three and twelve months ended December 31, 2005 compared to $6.41 and $5.85 for the three and twelve months ended December 31, 2004. DATASOURCE: KCS Energy, Inc. CONTACT: James W. Christmas, Chairman and CEO, +1-713-877-8006 Web site: http://www.kcsenergy.com/

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