Newfield Exploration – Growing Through The Drill Bit

Newfield Exploration (NFX), $42.33. Near Term Price Target: $50

First, let me start by saying this is not an option recommendation but simply a quick review of a company I really like. This is by no means a comprehensive report (no model attached) but is instead focused on a few areas of operations which could propel the stock and for which I don't see them getting as much credit as I think they soon will.

Background. Over the last five years, Newfield has completely transformed itself from sprinter to marathoner. Once a company operating largely under the "running to stand still" environment that is the high decline rate treadmill of the Gulf of Mexico, Newfield has reshaped itself into a lower risk, lower cost, longer reserve life, somewhat oilier E&P while achieving a better (in my opinion) more predictable path to growth.

After taking a beating in the Gulf of Mexico from the 2005 huricane season, Newfield is moving ahead with new developments there, in the North Sea, and has become the dominant player in what will likely be the next little brother equivalent of the Barnett Shale, the Woodford Shale in Oklahoma (I think the Woodford is probably worth $24 + to the shares by itself).

The company is run by an exceptionally strong management team and this strength is exhibited in a disciplined approach to their business, a solid bance sheet, and a deep prospect inventory.

As far as near catalysts go, the company should have plenty to say about three high impact developments later this month (April 2007): Grove in the UK North Sea; Wrigley in the Deepwater Gulf of Mexico; and the Abu Field in Malaysia, as well as their recent performance in the Woodford they continue to hone their drilling and completion techniques. While Newfield continues to hit on all cylinders it is their participation in the Woodford that peaked my interest.

Reserves

Reserve Growth: Primarily through the drill bit. Newfield expects to organically add 600 Bcfe to reserves this year just as it did last year.

Reserve Life Growth: Way back in 2003, 41% of Newfield's reserves were on the Gulf of Mexico Shelf. As of year end 2006 the Gulf of Mexico, now including deepwater reserves accounted for only 15% of reserves.

Reserve Potential - Good Inventory. The following table is from Newfield's April Howard Weil Presentation. By the company's estimate, reserve potential in the core plays ranges from 4,800 to 9,100 Bcfe. Contrast that with year end 2006 reserves of just under 2,300 Bcfe. These projects bring with them a significant prospect inventory, a majority of which is onshore, low risk, and long reserve life in nature.

click to expand

Production Profile

Annual Production Growth:

The flattening in production growth was partly the result of the flattening Newfield took in the Gulf during the 2005 hurricane season. After a lot of work the company is just now getting back to where it was before the storms and will go higher with production from Wrigley (see Gulf of Mexico section below). The 1Q07 estimates from the company are nothing to write home about and are, as usual, wide enough to drive a VLCC through however the bar is set low enough that there is the slightest chance of an upside surprise. However, that's not at all what I'm about with this piece.

More Recent Quarterly Production With 1Q07 Estimates:

Some of Newfield's Areas of Operation

United States

Mid-continent

Woodford Shale or the Waccawh play (Eastern Oklahoma, Western Arkoma Basin) With ~ 400,000 gross acres Newfield has booked about 250 Bcf here to date. Current thinking is unbooked of 3 to 6 Tcf. The target is the lowest of four zones in the play, the Woodford shale. Aside from the Woodford, the acreage has three uphole zones: a limestone, a sandstone, and another shale that could potentiallly be completed following Woodford depletion.

Newfield is the most active in play with a 12-15 rig program for 2007 and a plan to spud 150 wells. (IPAA Edit: 16 rigs (13 drill, 3 spud rigs) as of April 2007). Gross production now (April 2007) is at 110 mmcfepd (gross) up from 100 in March and 80 in February (and nothing in 2003). Early in 2006, NFX had tentatively planned to drill only 50 wells in 2007 but success attracts capex and well, there you have it.

• NFX was early getting into this play, a good idea if you don't want to acquire your way into the now costly Barnett and Fayetteville shale plays. As of March 2007, NFX had spud 40% of the Woodford wells drilled to date (76/189) and has an interest in 58% of the wells drilled there so far.

• At 15 rigs they have 40% of the rigs running there and nearly 3x the next big gas players in the play (DVN) and (CHK).

Newfield leads operators in the Woodford

click to enlarge

• At 80 acre spacing NFX has nearly 1,300 potential locations giving it over 8 years of drilling at current rates. The acreage has the potential to be downspaced to 40 acres.

• Reserves per horizontal well: ~3.0 Bcf (2.4 at 80% NRI) - and climbing (longer laterals and increased frac density along those laterals). Most recent wells are coming in with estimated reserve recoveries > 3 Bcf. I would bet that as they continue to hone their practices there this year, the reserves per well figure will rise. The following low case gives you an idea of the play's worth to the company, valuing the reserves at $1 per Mcfe.

• And Some Massive Wells (at least for a shale). NFX has commented about several wells coming in with IPs of 10,000 Mcfgpd with a best well of 17,000 Mcfgpd.

Woodford compares favorably to other Shales on an Average Maximum Rate Basis:

Newfield's Woodford Production Growth Expectations: These are Newfield's estimate of production from the play under a base and accelerated drilling case. In 4Q06 Newfield had total production of about 737 MMcfepd so you can quickly see how this play becomes yet another company changing event for them while continuing to extend reserve life.

Mountain Front Wash (W. Ok), aka Stiles/Britt Ranch Field.

• Bought EEX back in 2002 and it brought this field then producing 2.5 MMcfepd.

• NFX drilled 62 wells here between 2004 and 2006 and grew production to 65 MMcfepd.

• Plan to maintain a 4-5 rig program in the Wash this year drilling 35-40 wells mostly in the core of the play.

• and will have another 180 locations after the 2007 program if they move to downspacing to 40 acre infills.

Rockies

Uinta Basin- NFX holds a 100% WI in the Monument Butte Field of the Uinta Basin, Utah. 321,000 gross acres and a plethora of drilling locations. Low cost oil play where Newfield plans to drill 200 wells in 2007.

• 40 acre wells, 160 planned for 2007, initial production of 50-60 Bopd, well cost $660K, 500+ locations, 200-400 Bcfe total net potential.
• 20 acre infill program, 40 wells planned for 2007, IP 100-110 Bopd, well cost $870K,
• 1000+ locs, 300-600 bcfe net potential over the entire acreage position.

Onshore Gulf Coast - South Texas

Lots of opportunities, not going to go into this now.
Gulf of Mexico - shelf and deepwater.

After being lashed by the 2005 hurricane seasoon Newfield has only recently gotten production back close to pre Katrina levels. (no critique intended). The deepwater Wrigley field should push Gulf of Mexico production back up to 250+ MMcfepd this year.

Shelf - 14 developments underway (as of February 2007) that will add a cumulative 85,000 Mcfepd. Of course you're fighting declines of 25-30% here and you've got to ask yourself why (NFX) doesn't package this up and sell it while prices are still pretty high. Probably has something to do with their high success rate here and shallow water experience.
Deepwater Development Plans:

• Rigel 80 MMcfepd gross, NFX 25% WI, came online in early March 2007.

• Wrigley - Tested rate: 62,000 Mcfepd in January, tieback to Cognac platform, expected to be online 2Q07, 50% WI.

• PowerPlay - (Garden Banks 258/302), discovered in 2006, 35% with Anadarko operating, sub-sea tie back to the Baldpate facility is planned with first production expected in late 2008.

• Fast Ball (VK1003), 67% WI, drilling development well now; production expected late 2008.

Near Term Deepwater Exploration - Nothing in wildly deep water, all near infrastructure.

• Nemo (MC29), 25%, planned 2Q07 spud, 65 Bcfe shallow bailout target with a deeper exploratory shot.
• Gladden (MC800), 60% WI, 1H07 spud, smallish tie back (40 -70 Bcfe target).
• Jacobs (MC73), 100% - probably sell this down a bit before drilling around mid 2007, another smallish tie back.

International

Offshore China - Bohai Bay

• Block 05/06 - 12% interest - two fields with production. 11,000 bopd gross production. (Edit for April 2007 IPAA: Bumped this number to > 12,000 bopd gross from CFD 12-1, 12-2).

• Acquired seismic over 2 blocks in the Pearl River Mouth Basin in 2006.

Offshore Malaysia - Three offshore blocks, 2 shallow water, 1 deepwater.

• PM318 50% working interst -
  • P/NL  online -  production at year end 7,000 bopd gross (3,500 net)
  • Abu Field - onstream late 2Q.
  • Puteri- discovered in 2005.

• PM 323 60% WI and operate
• • expect first oil mid 2008
  • 4 undeveloped discoveries
  • Developing the East Belumut and Chermingat fields

• Block 2C (deepwater) 40% and operate.

Offshore UK - North Sea - this will get fleshed out more in subsequent updates.

• Grove - Liceance Area 49/10a - 85% WI and operate, probably a 2Q onstream event.

• 168,000 acres in UK - plan for 2007 - 3 exploratory shots this year.
  • Aubrun Prospect with in the "West Sole" JV with BP
  • Seven Seas Prospect

Hedges : very nice set of collars and swap 07 to 08

Peer comps get added this weekend.