NFX 2Q08 – Another Production Based Beat – Pre Call Note

In A Nutshell: Newfield beat top and bottom line Street expectations due to better than expected production volumes and operating cost discipline. Key plays continue to ramp impressive while finding costs and operating costs per unit are declining. If I had to point to anything on my wish list that I didn't get it was news on their first Bakken wells (we'll get it later this quarter and we should get more color on the call).  Aside from that, annual guidance continues to call for 22 to 26% production growth and the upper end of that range is growing more likely due to increased volumes from the Woodford Shale and Monument Butte plays, and a plethora of onshore U.S. plays as well as rising production in NFX's international division (especially in Malaysia). Street estimates here have risen swiftly in recent weeks and this release should help that trend continue although at a more muted pace as analysts may begin to back off some price deck assumptions for the third quarter. 

The 2Q08 Numbers:

57.6 Bcfe  (633 MMcfepd) vs guidance of 57.0  Bcfe (this was already at the top of the range given on the 1Q call of 53 to 57 Bcfe. 

Production was up 4.5% sequentially and 20% YoY (excluding the impact of acquisitions and divestitures)

Production mix: 76% gas

Realized price in the quarter was $9.47 per Mcfe ($7.95 for natural gas and $85.42 for crude and condensate)

• Operating Costs Were In Line With Expectations; Cash Margins Advanced Smartly.

 

• Bottom Line, Another Big Beat

EPS of $1.06 vs $0.98 Consensus

CFPS of $3.02 (ex cash item, see below) vs $2.60 median estimate and Street high $2.80.

CFPS was above the top end of the range when you back out a one time cash payment to reset their 2009/2010 hedges. Analysts will let them off the hook for this. Excluding the payments gives you the true flavor of the quarter and that’s what analysts want to know, the cash generating run rate that the quarter gave from operations and not the impact of a financial transaction. On this basis, their CFPS was $3.02 which is a record and well above consensus of $2.60 (median) and above the top end of the range of $2.80. In other words, blow out numbers. Again, I’ll have a full piece out close to midnight.

 

3Q Guidance:

Production: 58.9 to 64.9 Bcfe, midpoint would yield 7% sequential growth; the high end yields 13% seq gro.

Costs: guiding unit costs lower as production advances

Full Year Guidance: Stays at 22% to 26% annual growth at 232 to 239 Bcfe (they had just raised it for a second time one month ago) 

Operations Update: Here are the highlights and what I find new from the latest @ NFX 

Woodford Shale Just Keeps Getting Better. Production Climbs To "Over 200 MMcfepd (gross), up from 187 MMcfepd as of the 1Q checkup. This is up more than 20% since the start of the year. They are now officially saying production here with exit the year above 250 MMcfepd and I'd bet we are closer to 275 to 300 on December 31st.

Well Costs Falling. Most recent completed well cost (drilled and fracced) for their extended horizontal lateral wells is running $5.7 mm. Pretty amazing considering the laterals continue to get longer (now averaging over 4,000') and you have more frac stages involved and last quarter these were running $1 mm per well higher. Part of this savings (maybe a third to half of it) comes from 2/3 rds of their rigs operating from pads saving time and therefore money.

Production Boost Looming. In the PR, NFX refers 18 extended lateral wells that are waiting on completion and which should enter service in the next thirty days. Average IP at last check was about 7 MMcfepd on the extended range wells (with many scoring double digit initial rates so this sets up further strong growth exiting the third quarter.  

Program Accelerating. They have 12 rigs in the play now, all of which are engaged in drilling the extended lateral wells.  They have contracted 3 additional rigs to enter the play in early 2009 and will bring the rig count to 17 by 2H09 and 24 rigs in the next 2 to 3 years.

Honing In On Spacing. As good as things have been so far, NFX is still honing in on the most efficient method of developing their 165,000 net acres in the Woodford. They have been drilling a series of pilots on 40, 60, and 80 acre spacing.  They are now thinking, after review the seismic and extended lateral results, that the play will ultimately be developed on 60 acre or tighter spacing. That would mean that they have drilled less than 1/10 th of their potential locations here so far. Wow. 

Reserves To Rise Rapidly. NFX had booked 600 Bcfe in the Woodford as of YE07. Look for them to pass the 1 Tcfe mark in the play by the end of 08 which is what happens when you punch > 100 wells with EURs surpassing 4.5 Bcfe apiece.

Dual Lateral Spud. Results out later this year but this could push economics into the realm of about a $1 / Mcfe.

 

 

Monument Butte: Production Hits Another Record, at 15,600 bopd gross rate (84 MMcfepd ). Production continues to grow swiftly, and projections for a 2008 exit rate have been bumped from 16,000 to 16,500 bopd. NFX commented that demand for their black wax is now in place to take all of 2008 expected volumes and 90% of expected production for 2009. This is a very large resource that is currently relative unbooked for NFX. It was unclear from the @NFX what the status of the first deep Mancos Shale test was. They didn't declare it a dry hole but just said it had been drilled...will get clarity on this on the call. Two other Mancos wells that were completing at the time of the 1Q press release are producing, but apparently uphole and not from the Mancos shale itself.

Williston Basin Update: Not Much To Say Yet. Bakken acreage still at 160,000 net acres, nothing new on the 3 wells drilled to date other than that we should get results during the third quarter. A fourth well has been spud and a Three Forks Sanish test is planned for sometime in the second half.

 

Other of Note:

Malaysia is now producing 34,000 bopd (gross) on its way to 45,000 bopd (gross) by year end. NFX's net share would amount to a little over half of these figures.

Investor Day September 9 in NYC

Conference Call: Thursday at   9:30 EST. Notes from the call will be added to this post Thursday afternoon.