Newfield Crushes 1Q08 Expectations; Guides Higher

In A Nutshell: Bottom line beat due to top line volume based out-performance. Production guidance going up while costs remain in check. Stellar ops update to boot including record production from the Woodford Shale and Monument Butte (not big surprises) and not one but two deepwater discoveries in Gomex and a shallow water discovery off China. Numbers will be coming up.   

A week ago Tuesday in my "Why I'm In What I'm In Now" bullet I wrote on NFX:

• NFX (June calls)
• holding for earnings April 24th.
• I think there is upside surprise potential from their Rockies oil play,
• and potential for more details on the Mancos shale play,
• more good news re Woodford Shale play extended laterals, costs coming down.
• in comments I added that they have not given an update on deepwater drilling in quite some time

The 1Q Numbers: 

• Bottom Line Big Beat: 
• CFPS of $2.45 vs $2.07 expected,
• EPS of $0.87 (ex items) vs $0.73 expected,

• 1Q08 Production Exceeds Top End of Guidance Range:
• It was not a commodity price related beat but what I call a "high quality beat" as (NFX) reported 1Q08 production of 605 MMcfepd vs prior guidance of a range of 538 to 586 MMcfepd. They attributed this to higher than expected production in the Woodford Shale and Deepwater Gulf of Mexico as well as higher than anticipated oil liftings in Malaysia.
• This represents 10% sequential growth vs 4Q's 547 MMcfepd (which will be toward the high end for sequential performance in NFX's peer group this quarter) and, over 20% growth YoY when you factor out divestitures and acquisitions. 

• Operating Costs Came In Better Than Expected. LOE of $1.07 ($0.93 recurring and $0.14 of what you can think of as big project repairs or otherwise non-recurring in nature that NFX terms "major") which is well below guidance range of $1.14 to 1.27 per Mcfe,

• Cash margins: $6.03 per Mcfe. Impressive.

Operations Update:  As usual I won't go through everything in the latest @NFX publication but will hit a few of the high points. 

 

Woodford Shale Production Reaches 187 MMcfepd, up from 175 MMcfepd in early February and up 15% since the end of 2007. They are sticking with the line that 2008 exit rate will be "more than 250 MMcfgpd"....probably closer to 275 to 300. A picture is worth a least several million dollars of market cap:

• NFX will drill > 80% of future wells here with extended laterals (> 3,000 horizontal section),
• Extended lateral type curves beating expectations for a 4.5 Bcfe well,
• $6.7 mm well cost means F&D < $2/ Mcfe.
• With gas selling for nearly $11 this would put before tax IRRs close to 90%. Pretty slick.
• The standard lateral length wells (the other 20%) are seeing nice cost declines as well.

• Moving from an 11 to a 12 rig program, ($10+ gas has that effect on people and good news for (NBR)). This is still a lower rig count than the company utilized in 2007 but they'll get more lateral feet of hole drilled by far as they have significantly reduced the time/cost to drill each horizontal foot in the play even since last year.

• Conducting downspacing pilots - hope to get a little bit more color on these results on the call as they just said the results were in line with expectations on tests on 40, 60, and 80 acre spacing and the 16 pilots have been underway for a little bit of time now. This could lead to a lot more drilling locations on their acreage.

• Increasingly moving to pad drilling (8 of the current 11 rigs are drilling from pads) which cuts costs - looking for a little more detail here too on the call however just looking back in time, costs have come down rapidly in this play while EURs (estimated ultimate recoveries) continue to climb. Given the rapid fall in costs I have only three questions for management:
• how low can efficiencies drive well costs?
• with all the activity in the basin are you seeing rig and service rates bottom? and
• are even longer laterals in your future or dual or tri-laterals?

Monument Butte: Hits new record at 15,000 bopd:

• 2008 exit of 16,000 bopd now expected
• another 1,000 drilling locations remain on 40 acre spacing; 20 acre spacing showing promise (exceeding IP and EUR expectations) and could add 1,000 to 2,500 additional locations.
• Mancos Shale: underlying the 130,000 acres they have at MB, their first well is currently drilling and they are participating in 2 JV wells which are currently testing. This could be the next big shale play to hit the hype parade.

Williston Basin Heating Up: 250,000 acres and everyone can now yell Bakken. They have 10 to 12 wells planned here this year including:

• 2 wells with (WLL) in the Aquarium JV,
• 5 wells in the Lost Bear Prospect about 30 miles to the southwest of the Sanish / Parshall areas where EOG and WLL are drilling the monster (rumored to be 2,000 to 3,000 bopd IP) Bakken wells and
• 5 wells just to the west of Sanish in NFX's operated Westberg Prospect

 

Deepwater Gulf Of Mexico: Two New Discoveries. It's been awhile since NFX has updated anything other than their development program in the deepwater Gomex. Today they announced 2 deepwater discoveries (well, borderline deepwater as they are on the edge of the Shelf): 

• Gladden - Mississippi Canyon Block 800. 80 feet of net oil pay, appraisal well already spud. 47.5% working interest. 
• Anduin West - MC 754. Found 30 feet of net gas and condensate pay.  

Both discoveries will be developed utilizing existing third party infrastructure and first volumes are expected from both at the tail end of 2009. Don't have a predrill EUR but I'm sure someone will ask on the call. As to rate, we're not talking big kahuna here but they'll be very economic. 

China - New Oil Discovery. I think this is on Block 22/27 (possibly since renamed) in shallow waters of the Pearl River Mouth Basin. NFX operates and hit 60 feet of pay in the first of a series of structure feature tests planned here. NFX has 100% but the Chinese National Oil Co (CNOOC) has the right to take a 51% stake. There have been some size discoveries in this neighborhood. 

 

Guidance Going In The Right Direction

• 2008 Volume Guidance Goes To A Range of 612 to 639 MMcfepd or 18 to 23% growth. The prior growth guidance equated to 13 to 21% YoY growth. 

• 2Q08 Volume Guidance: 582 to 628 MMcfepd which straddles the first quarter's actual production of 605 MMcfepd. 

• LOE to stay in check, which is part of what tanked (XTO) who also bumped guidance on Wednesday morning. (2Q08 expecting all in LOE of $1.04 to $1.12 /Mcfe)

2Q and Full Year Estimates Will Be Coming Up. Given the beat in the 1Q alone, CFPS would have to rise above the current $9.11 estimate for 2008. 2Q CFPS estimates are only slightly higher than 1Q were at $2.13 despite what is obviously going to be a much higher price environment than 1Q, especially on the natural gas side (NFX is roughly three-quarters gas production oriented at present). Add in the extra production growth and continued operating discipline and you could get a scenario where CFPS rises by $1+ and the stock is trading nearly a multiple lower than where analysts currently have it on a forward basis.

 

 

NFX (1Q Call Wrap), (added following the conference call): These are notes from the conference call and a conversation with management last night which should be read in conjunction with Wednesday night's 1Q08 note.

 

Favorite Quote Watch: Regarding the Woodford Shale: They've had several recent wells among the extended laterals that have had initial production over 7 MMcfgpd and "a number of wells that have IP'd well north of 10 million per day." NFX went on to point out that its the 100th day and the 150th day that really matter and not the IP and that the recent are performing well above the 4.5 Bcfe type curve well....I'll say!

Other Notable on the Woodford Shale:

• Dual Lateral Spud mid to late July:
• cost about $10 million-ish to drill 2 extended laterals. That compares to the recent $6.7 mm for a single horizontal extended lateral well.
• If we assume they achieve the "better than 4.5 Bcfe type curve" in each lateral that's close to (or perhaps better than 10 Bcfe per well.
• Which yields finding costs approaching and perhaps even below $1 / Mcfe. That's easily trip digit before tax IRR here and the Street cannot ignore this.
• Recall half the Street rates NFX as HOLD and that numbers are coming up quarter after quarter after quarter. 

Other interesting data from the call: 

• Mancos shale test results in next few weeks in Monument Butte. This could be a company mover as this underlies acreage already held by production. They can ramp it up or down as gas prices dictate, not risking capital to acquire leases. 82,000 net acres here.
• Well Design:
• Not just a Mancos Shale Play - Wasatch, Mesa Verde, Blackhawk as well (bailout zones) all in a 16,000 foot vertical well for $4 to $5 million.
• The shale here is 2,000 feet thick so you get the same bang for your buck as you would from a horizontal running along the shale as you do drilling the much cheaper vertical well through it.
• Targets middle Mancos to reduce costs
• 1st vertical well drilling, 2 to 3 planned for this year
• (HAL) is a partner in this well (they alluded to this before with some "logs we've never heard of" talk and they think they can learn things here with (HAL) involved that they may apply elsewhere.
• Frac - smaller fracs, more stages.
• Well cost of $4 to 5

• Bakken test data coming soon; 160,000 net acres here.
• Management alluding to more plays coming soon, can’t talk about yet
• The two GOMEX discoveries in the were each 5 to 10 mm barrel (lower end of the expected range). In late 2009 these should come on at rates of 30 to 40 MMcfepd each gross.
• China discovery - EUR of about 10 mm barrels.
• Stepout South Texas Sarita  B-94, a 7,000 foot stepout to the south, boosts the play size. Spudding first of two high impact exploration wells here next week.

Notes from Deutsche Bank Conference:

• Woodford > 200 MMcfepd over as of May 2008
• Monument Butte = 15,000 bopd "   "