Friday, August 06, 2010


Newfield Exploration Company is an independent oil and gas company engaged in the exploration, development and acquisition of natural gas and crude oil properties. The Company’s domestic areas of operation include the Anadarko and Arkoma Basins of the Mid-Continent, the Rocky Mountains, onshore Texas and the Gulf of Mexico. Internationally, the Company is active in Malaysia and China. During the year ended December 31, 2007, the Company had proved reserves of 2.5 trillion cubic feet equivalents (Tcfe). Those reserves were 73% natural gas and 63% proved developed. The company has operations primarily in four regions.
Mid-Continent: The Company’s single largest investment area is the Woodford Shale play, located in the Arkoma Basin of southeast Oklahoma. Its activities in drilling led to the leasing of approximately 165,000 net acres. The Company has drilled more than 100 vertical wells and 160 horizontal wells to delineate its acreage position. The Woodford formation is a shale interval that varies in thickness from 100–200 feet throughout its acreage. During 2007, its production was 165 millions of cubic feet equivalent per day (MMcfe/d) gross. The field has thousands of drilling locations. In 2008, the company is going to drill pilots with 40 acre and 80 acre spacing.
Monument Butte: The Company’s Monument Butte oil field is located in the Uinta Basin of northeastern Utah. During 2007, the field had more than 1,100 producing oil wells and gross daily production was nearly 14,000 barrels of oil per day (BOPD).
Green River Basin: The Company has acquired interests in 8,000 gross acres (4,000 net acres) in the southeastern portion of the anticline. During 2007, the Company reached an agreement to assume operatorship of its activities in Pinedale. Approximately 13% of the reserves in its 2007, Rocky Mountain acquisition were located in the Jonah field, where Company has identified more than 40 development locations on 10- and 5-acre well spacing.
Williston Basin: Approximately 20% of the reserves associated with its 2007, Rockies acquisition were located in the Williston Basin. The Company has an interest in approximately 150,000 net acres. The Company’s net production is more than 3,200 BOPD and has benefited from a recent well re-fracture program and new drilling in the Elm Coulee field, a mature Bakken play.

Growth Catalysts
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Woodford Shale: Woodford Shale is an unconventional natural gas play. It is NFX’s single largest investment in the last 2 years. It is quite similar to Barnett Shale (TX) but has more silica which means more brittle ground and more efficient drilling. Since 2003, the company has drilled 100 horizontal and 160 vertical wells in the region. For 2008 NFX plans to spend $460 million to drill about 100 horizontal wells. More than half the wells will have lateral completions in excess of 3000 feet. Longer laterals help to improve per unit finding and development costs. This has allowed NFX to reduce cost/ lateral foot by 38% since 2007.    
 At the same time NFX has been increasing production at the Woodford Shale. Company is producing 200MMcf/d in the region which is up from 165MMcf/d at the end of 2007. The company anticipates that by year end 2008, the Woodford will produce 250MMcf/d as the company ramps up its rig count in the play. The increased production and lower development costs for the wells should result in higher ROIC. Woodford Shale has estimated 2.1 to 4.2 potential reserve opportunity.


Asset base shift: As part of changes to their asset base NFX has shifted to ‘Resource’ plays that cover expansive areas, provide multi year inventories of drilling opportunities and have sustainable lower risk growth profiles. It also sold its shallow water Gulf of Mexico assets in 2007. NFX now has deepwater operations in GoM. The company therefore has longer lived assets and has been able to improve its ROIC. The longer life of its assets has also resulted in better Reserve Replacement Percentage for the company.

 
Competitive Dynamics
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Visible growth ahead: Production is expected to increase from all of NFX’s assets. Its steady pipeline of production opportunities has caused NFX to raise its production guidance twice in FY08 and it now expects 25% organic growth in FY08. This production growth is sector leading. 


Focus on organic growth: NFX has been actively exploring and developing new assets. Growth through acquisitions is getting more and more expensive and risky. Its strategy of growth though ‘Drill bit’ vs ‘Acquire and exploit’ should therefore increase profitability. Newfield has managed to increase its production from all its assets through increased drilling activities. This gives them a competitive advantage against companies that seek to acquire potent assets as such assets are more expensive now and there is always a risk of wrongly estimating the reserves there.

1st mover advantage in Woodford Shale: NFX was the first in Woodford and it leased the best acreage for an all in cost today of about $550 per acre and drilled the most wells. NFX is at a great point in the development of this play. It has nearly all of our acreage covered by 3D seismic, substantially all of its acreage is held by production and it has thousands of wells to drill that will ultimately take production to multiples of the 250 million cubic feet a day that it will be operating by the end of this year.


Risks
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Commodity price correction: NFX’s revenues, profit and future growth depend substantially on prevailing oil and gas prices. Oil and gas prices have corrected in recent weeks due to the slowing economy and strengthening USD.