Many of the independents continued their earnings winning streak in the fourth quarter of 2005, thanks to strong commodity prices, continued investor interest and an E&P sector that just won't quit. The performance in general wasn't as stellar as in the fourth quarter of 2004, however, as the production numbers for some companies were still recovering from the impact of the 2005 hurricane season and the fallout of divestitures. The independents' return on average capital employed in the fourth quarter was up from one year ago, according to analysts Hannah Mumby and Eoin Coyne with London-based energy analysis firm Evaluate Energy. And normalized net income for the companies in the Evaluate Energy universe has jumped 26%, they add. "Upstream earnings continued to grow this quarter as companies capitalized on high hydrocarbon prices for both liquids and gas," they report. Fred Barrett, chairman and chief executive of Bill Barrett Corp., says the company increased proved reserves and production organically thanks to development and exploration drilling and two high-profile discoveries. "We have grown our undeveloped acreage to more than 1.2 million acres and have 26 distinct exploration projects across the Rockies," he says. The company's $350-million net capital budget for 2006 includes nearly 40 exploration wells and continuing development work, primarily in West Tavaputs and the Williston and Piceance basins. Mark G. Papa, chairman and chief executive of EOG Resources, says EOG increased North American gas production beyond its target while reducing net debt. "Even though we are coming off a higher 2005 production base than we had targeted, we have the confidence to increase our 2006 production growth goals to 10.5%. We expect a disproportionate amount of this 2006 production increase to emanate from our higher-margin gas activities in the U.S. and Canada where we're targeting 16.5% growth." Chesapeake Energy Corp. also reported record proved reserves, production, net income to common shareholders and cash flow growth in the fourth quarter. It pulled off a 12% organic growth rate and 659% reserve replacement at a drilling and acquisition cost of $1.74 per million cubic feet equivalent. Standard & Poor's Ratings Services negative credit ratings for E&P companies dropped from 29 to 18 in the fourth quarter. "The drop further reflects the generally improving credit quality and the ability of companies to finance growth without weakening their financial strength," S&P reports. The independents continued to try to replace reserves and production organically during the fourth quarter in spite of declining well sizes, S&P adds. "As a result, companies were compelled to expand drilling programs and continue M&A activity to acquire reserves and production, or purchase companies with undeveloped resources. The larger/integrated E&P companies faced difficulties in expansion through internal means," says S&P credit analyst Paul B. Harvey. "Into 2006, companies could look to acquisitions to bolster reserves and production, following on the heels of 2005 acquisitions." Petrie Parkman & Co.'s Steve Enger says companies such as Devon Energy Corp., Anadarko Petroleum Corp. and Apache Corp. may not be getting credit where credit is due. While production growth is meager for Devon now, he says, there is visibility for production to pick up as projects in Canada, Brazil and Azerbaijan start to have an effect. As a big cash flow generator, it has the wherewithal to complete its share buyback program and carry itself forward, he adds. Meanwhile, Anadarko's efforts in the deepwater Gulf of Mexico have shown success early on and Apache's still shut-in volumes in the Gulf still have the potential to add company value, he says. "Without the exploration leverage of its peers and in an environment that is less conducive to the heritage 'acquire and exploit' strategy that has served it so well, we rate Apache a notch below Anadarko and Devon," Enger says.