NFX Reports Solid 3Q09 Results – Pre Call Note

NFX Reports Beats 3Q Street Estimates; Accelerating Rig Activity

A few key takeaways from the quarterly release and @NFX update before we delve into the quarter:

• Production profile continues to get oilier
  
• Increasing Rig Count in high impact plays. Oil plays see rigs added to Bakken (potentially going to 3 rigs from 1 this year) and Monument Butte (1). Natural gas sees an additional rig in the Monster well country of the Granite Wash.
• Still guiding production to top half of prior 2009 growth range of 6 to 10%.
  
• Deepwater will become a more visible driver next year.
• Marcellus to see first NFX operated spud next year.
• Lack of 2010 guidance may not please the street but I'd bet they hint at high single digit production growth (always playing it conservative early) and the pieces are in place to support that if prices cooperate. 

On to the quarter and operational update:

• The 3Q09 Numbers
  
  • Production: 65.5 Bcfe which was in the middle of the guidance range of 62.9 to 70 Bcfe, up 7% YoY, up 1.4% sequentially.
    • Excludes voluntarily curtailed gas volumes of 2.6 Bcfe.
      
    • Oil as a % of production was 35% this past quarter vs 27% in 3Q08. This trend will continue as they accelerate oil focused plays in Monument Butte, the Bakken, and Asia.
  •  Cash Costs Came Just Below The End of Guidance (Again): 
    • Lifting costs were again below guidance at $0.88 per Mcfe vs:
      • Guidance was $0.88 to $0.89
        
    • Production taxes were $0.21/ Mcfe, vs $0.37 to $0.39/Mcfe guidance
    • G&A (the non capitalized portion) were $0.61 (hmmm), with guidance of $0.49 to $0.50/Mcfe.
  • Bottom Line:
    • EPS of $1.58 (ex items) vs $1.34 expected
    • CFPS of $3.42 vs $2.93 expected

• Operating Highlights:
  
  • US Onshore:
    • Granite Wash / Stiles Ranch- tight gas sand stacked pay play
      • Last quarter they announced the 7 initial "monster" wells with an average IP of 22 MMcfpepd
        
      • They also said they would defer further completions due to low gas prices
        
      • The plan to have production from 6 to 8 more of these by early 2010.
        
      • The first 7 wells had 3,500 foot laterals, the new wells are 4,000 footers
        
      • They've added a 4th rig here.
    • Woodford Shale, Oklahoma - Getting Better and Getting Back To Growth
      
      • Will have 8 super extended laterals drilled here by year end (8 to 9,000 feet), they drilled at least one by mid year, don't recall it being a stunner but if they have cracked the code on this think low, low finding costs.
        
      • Recent 5,100 foot lateral well drilled for $2.7 mm in 17 days.
        
      • Production at 308 MM/d gross, up from 240 MM/d at end of 2Q.
        
      • NFX has 28 drilled but not competed wells in the play
    • Willston Basin: Bakken Oil Play:  Didn't say much last quarter, didn't say much this quarter either, hopefully more on call, encouraged by 2 recent wells but not giving data on them.
      • Said they are adding two rigs here but didn't give timing.
        
      • Expect to hear more Bakken well results including comments on one of their TFS wells on the call tomorrow.
        • Trigger well in northern North Dakota - might hear something on the call
    • US – Deepwater Gulf of Mexico:
      • Fastball (VK1003) commenced production on schedule:
        
        • 66% working interest
          
        • Production ramping to about 60 MMcfepd gross.
      • Pyrenees got good results on a sidetrack hinted at on the last call.
      • NFX has 4 more Gomex deepwater projects that will come onstream by the end of 2010.
        
    • Marcellus  - New entry into 140,000 acres, first spud in 2010 so nothing to see here yet.
    • International - Malaysia continues to ramp and they are apparently accelerating activity there again as the previously disclosed program of 3 more wells in 2009 and 2010 and has gone to 6 wells in each year. Costs are the same so I'm wondering if that ones a typo.
       

• Guidance:
  
  • 4Q09 Guidance:  63.3 to 65.5 Bcfe, with them reiterating that they will be in the upper half of their 2009 guidance range of 250 to 260 Bcfe (up 6 to10%)
  • 2010: Not yet given and this may be disappointing  to some (analysts do like to be spoon fed). They may however espouse a range during the call and the pieces are all there to get you to high single digits or low double digits growth.

• Hedges: Largely unchanged from last quarter's report:
  
  • 70% of 2010 gas hedged at over $6.50
    
  • 40% of 2010 oil hedged at over $100.

• Nutshell: Solid beats driven by in line production and another quarter of good cost control.  The wedges of production that are coming together in the form of deepwater, international and onshore U.S. oil and gas will likely set up 10% (+/- 3%) production growth next year but NFX is not yet spilling the beans. On current 2010 estimates, the stock remains relatively cheap at 4.5x CFPS and 5.5x TEV/EBITDA. I continue to hold Calls and Common Stock in NFX.
  

• Conference Call: Thursday, 9:30 EST.