Z-Note: Newfield 3Q Results Rock – Pre CC Notes

(NFX) - $52.27 as of 10/24/07. I’ll have more in comments after the conference call tomorrow but here’s the quick and dirty...

In A Nutshell: Wow.

The Mechanics

Beat Estimates: Reported CFPS of $2.23 vs $2.21 expectation. Earnings beat by a penny at $0.76 (after backing out the non-cash derivatives mark to market loss).

Production Once Again Exceeds Mid Point Of Guidance: 3Q volumes were 61.1 Bcfe (664 Mmcfepd) which was well above the mid point of guidance of 57.5 to 63.8 Bcfe. Things will get a bit more confusing from here on out due to the divestitures but they made no mention of the 10% pro forma volume growth number announced last quarter which means they are sticking to it (see below).

Operating Costs Much Better Than Expected:

  • Lease Operating Expense Continues to Fall. On a per unit basis, LOE fell to $0.87 / Mcfe from $1.03/Mcfe in the prior quarter. The impact of shelving the GOMex shelf can readily be seen here and was much better than the company's guidance provided in the 2Q PR of $1.00 to $1.11 per Mcfe.
  • Going forward production taxes are expected to offset some but not all of the lower LOE as a greater percentage of the company's remaining assets are onshore and subject to severance taxes + plus you've got good growth in Malaysia which will pay some healthy rates (see below).

2008 Production Guidance: Last quarter, NFX established a 10% pro forma target for 2008. They left that unchanged but it's obvious there is room for further growth in 2008 based upon better than expected results from several areas of the company's onshore operating regions which will layer on top of developments that are close to completion in the deepwater GOMex and Malaysia. 

The Important Stuff:

Woodford Production Jumped: After "only" eaking out a 5 Mmcfgpd increase from 1Q07 to 2Q07 to a level of 115 Mmcfgpd, Woodford Shale gross production took a giant leap forward to 150 Mmcfgpd. At last notice (September) production was listed here as 130 mm/d+ so this is indeed a nice bump.

nfx-woodford-prod-102407.jpgclick to expand to see Woodford Gross Production Growth

They are encouraged by the results from six pilots that contain 80 and in some cases 40 acre patterns, some of which were drilled from single and some from common pads (quick to drill which cuts costs and allows for their innovative fraccing technique which again cuts costs). They gave a headsup to expect some IPs on the 40 acre spacing in the next few weeks. Now, if that were me and I didn't have good reason to believe people would like those IPs I might have left them off for a surprise interim @NFX statement. I think the mention speaks volumes.

I'd also add that this is the first time they've put it in detailed writing just how much drilling these wells from a common pad saves you. They estimate $530,000 per well which is highly significant as the wells have been costing in the range of $5.5 million to drill and complete for an EUR of between 3.0 and 3.4 Bcfe. Assuming an 80% net revenue interest that gets you to an onstream cost of just under $2 per Mcfe. Pretty slick. Also, there may be potential for that EUR to continue to edge up a bit. Some of their competitors have announced several wells close to 4 Bcf lately.


Deepwater Gulf of Mexico:

  • Wrigley: The third party platform that handles volumes from this recent tie in had some mechanical issues that are being solved but which held production back to 35 Mmcfepd during the quarter which means another 25 Mmcfepd that people thought was on was actually not but soon will be. 

Other Notable Onshore U.S. - record production aside from the aforementioned Woodford:

  • Stiles Ranch (78 Mmcfepd; 95-100%wi), 200 locations on 40 acre spacing. 20 acres take on new appeal with actual drilling. Management originally modeled future 20 acre wells here with IPs of 50 bopd. But now that they've actually drilled almost 50 on 20 acre spacing they're seeing IPs averaging "as much as 160 bopd". Woo-Hoo! These are cheap and management figures that the increased IP is translating into a 50% increase in recoverable reserves. Double Woo-Hoo!! That's like waking up in the morning, checking the old wallet and finding half again as much money in there without lifting a finger. They think they've got > 1,000 drillable 20s.
  • I  left out a ton of stuff but this isn't a First Call note you know and I don't get paid by the letter anymore. Suffice it to say their pump in primed in S and E Texas, the Rockies, and the deepwater GOMex (3 to 4 wells in '08) for a busy drilling schedule next year. I'll have more details after the call if warranted.

Newfield Is Adding Big Production Wedges Via Development Projects That Are Close To Completion: 

Malaysia - The Party's Just Getting Started

  • Abu Field - previously announced that it commenced production in May, currently producing 13,000 bopd (60 mmcfepd), up from 10,000 at the end of the second quarter and is on its way to 15,000 bopd (50% working interest).
  • Puteri Field - look for an additional 6-8,000 bopd (36 to 48,000 Mcfepd) gross when production commences in early 2008.
  • East Belumut  / Chermingat Fields - expected to add 15,000 bopd (90 Mmcfepd) gross by 2Q08

To sum up you're looking at a tripling of Malaysian production in 2008 vs 2007 levels.

The stock trades at discount to its peers which seems unjustified given it's rapidly expanded drilling inventory, double digit growth profile, strong management with proven acquire/discovery and exploit track record, reduced operating costs and streamlined operations base, low debt level, strong gas hedge position, and expanding reserve life.


Conference Call at 9:30 EST, Thursday. I'll have more in comments during the call on the site and later in a follow up. 


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