Z-Note: Newfield Exploration 2Q07 – Nice Quarter, Hitting On All Cylinders, Guidance Increasing

(NFX) - $47.85 as of 7/25/07. I'll have more in comments after the conference call tomorrow but here's the quick skinny. I'd say we will test the recent highs around $51 given a decent commodity environment.

All in all I can't complain about anything in the quarter. Production was good (above the mid), bottom line beat consensus and they're making great strides in their core areas and in divesting those areas that have been holding them back on the cost side, reserve life, prospectivity, etc...

The Mechanics

Beat EPS Estimates: $0.87 vs $0.79 expectation. Range was $0.64 to $0.96. It wasn't a beat based on price either but on production and costs....a high quality beat.

Production Exceeds Mid Point Of Guidance: 2Q volumes of 780 Mmcfepd) was well above the mid point of guidance of 720 to 800 Mmcfepd). Of course, guidance as usual was wide enough to drive a VLCC through but they did turn in 10% sequential and22%YoY growth!

Operating Costs Much Better Than Expected:

• LOE of $1.03/Mcfe for the non major expense portion was much better than the expectation of roughly $1.25. The major expense came in a bit high but they're in the process of wrapping of damage incurred from the 2005 storms. They expect major expense to drop dramatically going forward. This is very good cost control given that the 2Q06 number came in at $1.01. Lower costs are in the play book to fall after they close the GOM shelf assets.
• G&A a little light of the expected range as well.

Hedges: nice coverage.

Looking Ahead

2007 Production Guidance Is Going Up. "Our production guidance for the full year 2007 is well ahead of our previously provided forecast" ~ Trice, CEO. He's bumping 2007 numbers (before divestitures) and the new low end of the range is above the old high end of the range!

• Old 2007 range: 260-270 Mmcfepd;
• New 2007 range: 279- 291 Mmcfepd

NFX is establishing a 10% pro forma target for 2008 (which is a bit sexier than is usual for these guys!)

The Important Stuff:

NorthSea bids due in early August. Expect a 3Q close. They had another successful test here, Seven Sea which tested 47mmcfepd and it Grove Field is producing another 36 gross now.

Producing fields in Bohai Bay - expect a 4Q close. Great example of "maximize value and sell" management.

Deepwater Gulf of Mexico:

• Wrigley online early July at 40 mmcfepd, on its way to 60 (50%wi)
• Fastball discovery tests at 60 mmcfepd, expect production 1H09, (66%wi)

Onshore U.S. - record production at:

• Stiles Ranch (74mmcfepd; 95-100%wi), 200 locations on 40 acre spacing.
• Val Verde Basin (100+ mmcfepd; 70%wi),
• S. Texas JV hits 82 mmcfepd, 50% wi)
• Woodford Shale at 115 mmcfepd - people may see this as a little less than they were expecting, it was at 110 last quarter. They indicated they'll apply pad drilling here. They just started a 40 acre pilot "Cattle" and are fraccing the 4 wells involved so we should know more on the EURs for the downspacing at the 3Q report.
• Monument Butte - staying very busy and the Stone acquisition gave them additional access to the deeper rights

Malaysia - Abu field - previously announced that it commenced prod in May, currently producing 10,000 bopd (60 mmcfepd) on its way to 15,000 bopd (50%wi). They saw no production from Malaysia due to the timing of liftings (which should be a familiar happening to NFX shareholders who remember Australia). Expect a nice bump to oil volumes for 3Q.

Rockies Acquisition: they plan to actively exploit (SGY)'s former assets.