Newfield Exploration Company Q4 2008 Earnings Call Transcript

Newfield Exploration Company (NFX)

Q4 2008 Earnings Call Transcript

February 6, 2009 9:00 am ET

Executives

David Trice – Chairman & CEO

Lee Boothby – President

Terry Rathert – SVP & CFO

George Dunn – VP, Mid-Continent

Gary Packer – VP, Rocky Mountains

Analysts

Michael Jacobs – Tudor, Pickering, Holt

David Kistler – Simmons & Company

Joe Allman – J.P. Morgan

Brian Singer – Goldman Sachs

Gil Yang – Citi

Shannon Nome – Deutsche Bank

Chris Bray [ph] – Jefferies & Company

Fletch John [ph] – Bandida Capital [ph]

Presentation

Operator

Good day everyone and welcome to the Newfield Exploration's fourth quarter and full year 2008 conference call. Just as a reminder, today's call is being recorded. And before we get started, one housekeeping matter.

Our discussion with you today will contain forward-looking statements such as estimated production and timing, drilling and development plans, expected cost reductions and planned capital expenditures. Although we believe that the expectations reflected in these statements are reasonable, they are based upon assumptions and anticipated results that are subject to numerous uncertainties and risks. Please see Newfield's most recent annual report on Form 10-K and quarterly report on Form 10-Q for a discussion of factors that may cause actual results to vary.

In addition, reconciliations of non-GAAP financial measures to GAAP financial measures together with Newfield's earnings release and other applicable disclosures are available on the Investor Relations page of Newfield's website at www.newfield.com.

At this time for opening remarks and introductions, I would like to turn the call over to the Chairman and Chief Executive Officer, Mr. David Trice. Please go ahead, sir.

David Trice

Thank you very much operator. Good morning and welcome to our 2008 earnings conference call. Let me open today's call with a few comments on the succession plan that we announced last evening. First, I want to congratulate Lee on his election as President at yesterday's Board of Directors meeting. And I want to congratulate Lee and Gary on their new leadership positions, which they are expected to assume at our annual meeting on May 7.

I've worked with our board on succession planning for the past several years, and I can assure you that this is a process they take very seriously. This new executive team has the full support of the Board of Directors and most definitely from me, and I'm a significant shareholder. This is the right team to lead Newfield into its third decade.

I'm retiring because I believe in term limits and I wish our politicians in Washington did as well. I've had the privilege to service as Newfield’s President for 10 years and as CEO for the past nine years. I hoped to retire last May just after my 60th birthday. The following day of Schaible’s death, I put my plans on hold until the board was confident in our succession plan.

I do plan to remain as chairman if our stockholders elect me to the board at the annual meeting in May. In any event, I will be available to assist this executive team in any way that I might. I am proud of our accomplishments during the past nine years. We have come a long way.

Lee and Gary have been on the road a great deal over the past year and I hope that most of you have had the opportunity to have a one-on-one or direct meeting with them. If not, I'm sure you'll be seeing it – a lot of them in the coming months.

Lee is most known for his vision and passion in this business. He took the reins in Tulsa in 2002 after running our Australian office from down under. He helped to conceive, find, improve, lease, and capture the Woodford Shale Play. He made great accomplishments in Tulsa and has been in Houston for nearly a year and a half now. Lee has been instrumental in shaping our good results of 2008 through his daily operational management and capital allocation decisions.

With a background as a reservoir engineer and an MBA from Rice, he is well equipped to lead us operationally and financially. The state of Newfield today is better than it has ever been. We had a great year in 2008 even after the collapse in commodity prices. We grew reserves by 18% and production by 24%. We are diversified and have multiple options to grow. We have never wavered on our promise to keep a strong balance sheet. We have an enviable hedge position that will allow us to preserve liquidity, maintain our strong balance sheet, and carry out a significant work program in 2009 that builds for the future.

Our people are second to none and I'm proud of the fact that we grow our own leaders at Newfield. So with that let me turn the call over to our new president. Lee.

Lee Boothby

Thanks David, and good morning everyone. I appreciate the kind words today. Today's call will be brief and I want to focus it entirely on the operational advances we have made in Woodford in 2008, how we have lowered our cost, and most importantly improved our returns. From this you will get a clear path of where we are headed in 2009 and beyond.

Before I do that, let me reiterate our top corporate priorities in 2009. Number one, we will live within our cash flow. Our hedges mark-to-market in market is worth over $1 billion today. We added even more positions in late ‘09 and early 2010 and all the details are in our @NFX Publication on our website.

We have reduced our original spending plans by 30% and capital budgets set at $1.45 billion. About $200 million of this year's program is for Gulf of Mexico developments that are going to drive growth in 2010, 2011, and 2012. We estimate we can maintain production with about $900 million in spending. We have the flexibility to further reduce spending should conditions warrant. But we are also investing today for our future.

And our production is expected to grow 6% to 10% in 2009, and we are confident that we can have similar growth again within cash flow in 2010.

Number two, preserve liquidity. We have a strong balance sheet and intend to keep it that way. We have more than $600 million of borrowing capacity remaining under our $1.25 billion facility. Our spending this year is front-end loaded due to the timing of exploration projects and development spending. In our @NFX Publication, we have provided a spending summary by quarter for the year.

Number three, we will fund our best projects and making some tough choices on deferring others or even leaving some behind. We will work diligently to improve upon our capital efficiencies.

Four, we will focus on and build for our future. We've a portfolio that will carry us into our third decade in a new venture’s effort to continue screening for attractive opportunities. We will continue to add top-notch talent to our organization and we will continue to reward those that have been an integral part of our success today.

Five, last and most important, we will unlock that value in our portfolio and gain market recognition to our performance results. I look forward to that day. By now I am hopeful that you have had the time to review our financials for the fourth quarter and year-end 2008.

Our production grew 24% and our reserves increased by 18%. Low prices at year-end forced a large ceiling test charge but our results without this item, were in line with expectations with production volumes and cost and expenses. Our miss against First Call consensus was almost entirely related to commodity prices in the fourth quarter. With few capturing correctly just how wide the basis differentials got for a short period of time.

We enter 2009 with nearly 3 Tcf approved reserves and lots of upside in our portfolio. If you are looking for detailed project updates, please see the @NFX Publication on our website. If you have questions about our financials, Terry Rathert, our CFO, will be happy to take them in just a moment.

As I said earlier, I want today's focus to be on Woodford. We had a great year in the Woodford in 2008 and here are some fun facts. Number one, our Woodford reserves grew by 40% and our total Mid-Continent reserves grew 25% and now make up almost half of our total proved reserves. At best, these reserves were added at $1.80 per Mcf equivalent before price revisions.

Number two, our gross operated Woodford production grew 65% during the year and surpassed our year-end goal of 250 million cubic feet equivalent.

Three, we reduced our cost of drilling and complete the lateral foot at the Woodford Shale by over 40% in 2008, much more than this in just a second.

Four, we operated 12 digs in 2008 compared to the 13 that we averaged in 2007 and despite operating fewer rigs, George Dunn’s team delivered 100,000 feet of additional Woodford section during the year.

Five, we moved into the development mode, a true milestone for us. Nearly 90% of 165,000 net acres is held by production. We control the timing of development, a huge advantage in today's market.

And six, we increased the lateral length of a standard well once again. In 2008, it was up around 4,500 feet. For 2009, we expect to push that up to 5,000. Longer lateral completions will lead to lower F&D and better returns. Our increased lateral lengths should allow us to pump two more frac stages in the average lateral, adding an additional 1 Bcf in reserves at very low incremental cost.

If you haven't had a chance to review the slides we posted to our website this week in conjunction with our Credit Suisse conference presentation, I would encourage you to do so. We also summarized most of this information on our @NFX publication. These slides show just how far we've come in reducing costs but importantly we show you where we are going.

As a point of comparison on how far we have come, back in 2006 we averaged about 2,500 feet of lateral per well for a total completing cost of about $6.3 million. In 2008, that same $6.3 million investment bought us a 4,500 foot lateral. Same cost but 2000 feet more lateral. Solid bottom-line improvements in the phase of quickly escalating service cost over the past two years. This is a testament to the quality of our people.

We have accomplished these cost reductions in several ways. First, drilling improvements. Simply stated, we are drilling our wells faster. We have identified speed zones in the Woodford that have significantly improved our penetration rates in the lateral section. In the vertical section of our wells, we continue to see increases in feet growth per day as we get into this serious development phase where we drill numerous wells back-to-back in a relatively small geographic area.

Pad drilling, until the clock stops ticking on our primary lease terms, we weren’t unable to fully implement pad drilling. We felt confident that our costs would improve with pad drilling and they certainly have. More than 80% of our wells in 2009 will be from common pads. That is up from 70% in 2008.

Completion advances, we have refined our completions with the biggest cost savings coming through reducing the amount of frac water we pump. Pumping horsepower is the biggest cost factor in completions. The less water going in the ground saves money.

Increased lateral length; increasing the lateral length is another significant contributor to the lower cost and we will continue to be focused on this item in 2009, and it is a material driver in our long-term future in the Woodford Shale.

Oklahoma; Oklahoma is a great state in which to develop a giant resource play like the Woodford Shale. The state has a regulatory and business environment, which is very conducive to oil and gas operations and specifically large-scale horizontal developments. I like you to run through a few recent positive developments in that area.

These relate to the regulatory structure and how we have been able to increase our lateral lengths. Historically in Oklahoma drilling units have been a 1 mile by 1 mile square. It is a standard section and you have been required to have a 330 foot stand-off from any unit boundary. Simply stated, that meant that our laterals completed interval had to stay 330 feet of the lease line. So added together, north-south that is 660 feet that our drill bit couldn’t access.

In 2008, we received approval to move our laterals from 330 feet from the boundary to 165 foot stand-off. Sounds small, but this change allows us to pump one additional frac stage in a mile long lateral. We have also recently received approvals to drill stand-up 640s. So, instead of a 1 mile by 1 mile section, we have a section that is 2 miles long and 0.5 mile wide. With this modified configuration, our maximum lateral length could be over 10,000 feet.

In early 2009, the Oklahoma legislature will vote on a bill that will allow Woodford drilling units to be expanded to 1,280 acres from the current 640 acres. Representative Mike Thompson and Senator Brian Bingman have authored this proposed legislation, which will allow us much more flexibility to place our wells in the optimum configurations. This is great for Oklahoma, great for our industry, and most importantly great for Newfield.

We are also hopeful that in some areas we can get approval for multi-square mile units. A large multi-sectioned unit would result in a true optimal development and recovery of gas resources and significantly improved capital efficiency. We are currently working with the Oklahoma Corporation Commission to get regulatory approval to proceed.

So what does all this mean for the Woodford. In 2009, it means we expect to grow production 30% by running less rigs and drilling more feet of completed lateral. More feet in the Woodford, more gas, more reserves. We expect to add the reserves at $1.50 to $1.75 per Mcf equivalent. Although, we have not modeled improved service costs, we certainly expect to get them.

We will increase our average lateral length, as mentioned earlier, to over 5,000 feet, up from the 4,500 feet that we delivered in 2008. We will drill 80% of our total wells from common pads. And we will commence gas sales later this year through the new Mid-Continent Express Pipeline. In April, a substantial portion of our gas will move south on firm transportation and we will receive Gulf Coast pricing, pipeline pricing.

Looking forward, our differentials will be about half of what we are seeing today, a big uplift in our economics. And, we will secure the remaining 10% off our leasehold that is not held by production either by drilling wells to hold the ground or through cost-effective lease extensions.

We will work diligently with the regulatory authorities to maximize recovery of Oklahoma's natural resources and optimize our capital investments. Looking beyond 2009, achieving our goals in 2009 will set the stage for F&D metrics in the $1.50 range or below, a far cry from where we were in 2006, and placing Woodford in the top tier of all shale developments.

Although we often interchange the terms Woodford and Mid-Continent, we have nearly 600 Bcf in proved reserves in the mid-con outside of the Woodford. Production from the Stiles Ranch Field, located in the Texas Panhandle, recently set a new record gross production rate of 130 million cubic feet equivalent per day.

As you know, we spud our first horizontal well in the field in the late 2008. We are enjoying our third horizontal well at this time. Results are encouraging and we look forward to sharing more with you on this topic later in the year.

Newfield has an approximate 80% interest in the field. In closing, there is no doubt that 2009 will be a challenging year in our business. I am confident we have taken the right steps to not only to survive the year but to emerge a bigger, stronger, and more profitable company going in 2010 and 2011.

Although today's call did not allow us time to discuss, there are many other positive catalysts in our story today. Five deepwater developments offering visible growth, visible production growth in 2010, 2011 and 2012; and a deepwater prospect inventory that allows for future success.

Thousands of development wells to be drilled – thousands of oil development wells to be drilled in our Monument Butte Basin in the Uinta basin, a legacy asset that is very price resilient. Remember, when we acquired the field in the summer of 2004, oil was trading in the low 30s. Gary Packer and his team in the Rockies have cut the drilling time substantially and our operating folks there do a tremendous job each and every day.

We also have the potential underneath our Monument Butte field for a major gas resource play. You will hear more of that in the years ahead. A growing inventory of prospects in the Williston Basin, a drilling success that we are really proud of, and an international oil asset in Southeast Asia, Malaysia, delivering over 45,000 barrels of gross production everyday with attractive production sharing contract terms and economics. I'm looking forward to the coming years and we will work hard everyday to continue building this great company.

Thanks and we will be happy to take your questions at this time. Operator.

Question-and-Answer Session

Operator

Yes, thank you sir. (Operator instructions) And we will take the first person from Michael Jacobs from Tudor, Pickering, Holt.

Michael Jacobs – Tudor, Pickering, Holt

Good morning all. Congrats to both Lee and Gary.

Lee Boothby

Good morning Michael.

Michael Jacobs – Tudor, Pickering, Holt

I wanted to focus on the Woodford, just thinking about longer laterals, can you talk about any operational challenges that keep you from going to 5000 feet and beyond?

Lee Boothby

We have George Dunn here. I will put that call to George Dunn, he runs our Mid-Continent operation.

George Dunn

Now there is from a drilling perspective, it shouldn't be a problem getting up into the 9,000 to 10,000 feet. Maybe in deeper areas, there maybe some limitations but it will still be close. Really, the only challenge comes in completion cleanout but that is – will just be related probably – when we get out to 9,000 to 10,000 feet there maybe some cost things we have to do that cost more to get it cleaned out but it won't be significant. So we don't see any major hurdles to get over.

Michael Jacobs – Tudor, Pickering, Holt

Got you. So, 10,000 feet is kind of the cap on how long laterals can go?

George Dunn

Well, yes, I mean, really there is still a limitation of the regulations although going beyond 10 will – there will be new challenges to do that, but that is not a limiter. It is more the regulations right now.

Michael Jacobs – Tudor, Pickering, Holt

Okay, and now that you have got a couple of 100 wells online with few years of data, are you considering modifying your completion techniques?

George Dunn

We modify our completion techniques all the time, and it has been one of the drivers in both driving costs down and optimizing recovery and production. So, that is a continual thing that we do.

Michael Jacobs – Tudor, Pickering, Holt

Thinking about maybe the amount of profit [ph] that you are using or the amount of water and how we should think about costs, representing two-thirds to three quarters of per well cost. If you could update us on anything you are seeing on the completion cost side or anything that you are doing that might further drive down costs that will be helpful?

Lee Boothby

Yes, we continue to drive down fluid volumes as Lee was mentioning, profit generally we are trying to increase somewhat but the fluid volume itself reduces both the cost of pump the job and the cost to clean up the well and dispose or do something else with the water. And so there are disadvantages on both ends of that. In addition, we are seeing some cost reductions coming through the service companies already on that end.

Michael Jacobs – Tudor, Pickering, Holt

Great, thanks. And if you could just quantify that would be great and I will hop off?

Lee Boothby

Quantify the cost reductions?

Michael Jacobs – Tudor, Pickering, Holt

Right, on a per stage if we were to think about, you know, half million dollars per stage, what that could look like in ’09, if you're expecting those costs to come down at all?

Lee Boothby

Yes, well I can’t tell you for sure how far they are going to come down, but you know, I think right now 10% to 20% range is reasonable.

Michael Jacobs – Tudor, Pickering, Holt

Great. Thank you.

Lee Boothby

Thank you.

Operator

We will move on and take our next question from David Kistler with Simmons & Company.

David Kistler – Simmons & Company

Good morning guys. David congrats; Lee and Gary congrats as well.

Lee Boothby

Thanks David.

David Kistler – Simmons & Company

Following up on the service cost questions, with serious of rigs coming of off contract in Woodford, what kind of savings to you guys expect just from that throughout the year?

Lee Boothby

Well, I think that one of the neat things about our Woodford program, hats off to our operating team there that our rig fleet was built in staggered 2, 3-year terms. So George has nine of his rigs that during the course of the year will come up for renewal. And, we will monitor the market conditions over time, but I would tell you that we have seen some pretty dramatic adjustments up over 30% on some of the rigs that have gone out of the market looking for work, and we expect that we will get our share of those cost savings at the right time.

George Dunn

And let – excuse me this is George Dunn again, and I needed to correct something earlier, frac stage is typically more in the $2000 to $3000 per stage versus $0.5 million.

David Kistler – Simmons & Company

Great, and then kind of thinking across the whole company from a standpoint of rig count and service cost deflation, with your budget down 30% year-over-year, is any of that incorporating cost deflation and if not can you talk a little bit about kind of your peak rig level down to what you guys think you'll be running your rig level at across the whole company?

Lee Boothby

Well, I think I will start on the first question. We purposely choose to utilize the fourth quarter 2008 cost structure as we built our budget. So, clearly we told you in more than one occasion that we expect to get our share of the cost savings. So as the year unfolds, whatever the magnitude of those cost savings you can bet that Newfield is going to get its share. I think that it is a positive the way the budget is structured and hopefully that gives everybody good comfort with what we are going to be able to deliver in 2009. As far as the rig count during the year, the fact that we are HBP, the fact that we have a dozen rigs that come up for renewal consideration during the course of the year. That is over half of our rig fleet, so clearly we will monitor the conditions as the year unfolds, and we will either take it in cost savings and continue operating or will reduce and move forward.

David Kistler – Simmons & Company

Okay great. Switching over to the hedges that you guys have, any thoughts on monetizing those, just basically tuck away that cash in an environment where it feels like cash is king right now.

Lee Boothby

I will let Terry handle that one.

Terry Rathert

We're certainly looked at the possibility of doing that and the area that I struggle with in terms of monetizing those today is that we are comfortable with our counterparty risk and that would be a driver. When you look at what you can actually get for your position by unwinding it versus holding it and taking the cash in the next few months when they actually come to maturity and the positions close, our experience in getting quotes is that you have to take a discount, and I'm not prepared to take a discount in position where I can get the full value by waiting a few months and letting the position close naturally. So, yes we have considered that. We are comfortable with our counterparty risk at this time. We will get the cash over the course of time. If I were to take the cash and invest it and get nothing and today by not having that cash to pay down my bank debt. My bank debt costs me a little over 1%. So, I think it is a negative value proposition to do that trade if we don't think we have a counterparty issue.

David Kistler – Simmons & Company

Great, thank you for the clarification on that. Then last question, with respect to the dual lateral that you guys did, can you talk a little bit about how you think that might drive economics going forward, what the initial results look like, just kind of any additional color you can give us there for thinking about the possibility of baking that into our models.

Lee Boothby

Yes, the first one from a production standpoint is doing excellent. The cost side of it, we didn't see major gains and most of that was during the completion stage and it has to do with pumping a lot of fracs in two different laterals in the mechanical equipment that is used. So we had essentially some problems with things sticking. So, at the moment what we are doing is we're focusing on driving our lateral length north of the 5,000 feet, and we think we can gain at this point a lot more out of that. Now we are not done with multilaterals and it will be working on the completion equipment to optimize the mechanical risk of that with all these fracs.

David Kistler – Simmons & Company

Great, thank you for the additional color and again congrats guys.

Lee Boothby

Thank you.

Operator

Our next question comes from Joe Allman with J.P. Morgan.

Joe Allman – J.P. Morgan

Yes, thank you, good morning everybody. Hi, I know you mentioned some about differentials, and your thoughts on differentials going forward, do you think you're going to improve. What – could you just repeated what you said in terms of the capacity that is coming online that is going to help the differentials and what kind of impact do you see from the deep Woodford and the Anadarko basins on differentials.

Lee Boothby

Well, first of all on the location of our acreage, it is – we are not in the Anadarko basin of the Woodford, we are in the Arkoma.

Joe Allman – J.P. Morgan

I am just trying to think about just more gas trying to find their homes.

Lee Boothby

Well, what we have done is on a series of transactions. We've got 650 million cubic feet a day of firm transportation scheduled to come online between now and July of 2012 and that is a move that we made early last year because we knew that we were going to have growing production volumes and that this was going to be an issue. When Mid-Continent Express comes online here in the start of the second quarter, we are going to gain 300 million cubic feet of that capacity go on top of 50 million that is presently operating. In rough numbers, as mentioned that will allow us to get gas out of the Arkoma, stay underneath our growth track for the project for the next five years and price it down at Perryville against Henry Hub, we were predicting somewhere in the $0.75 range in terms of the total offset on gas.

Joe Allman – J.P. Morgan

So you think, if I heard you correctly, so you think you are in good shape in terms of capacity for at least the next five years?

Lee Boothby

I would say we are in great shape for the next five years.

Joe Allman – J.P. Morgan

Okay. Very helpful.

Terry Rathert

And we have additional options that we will be adding as time goes forward.

Joe Allman – J.P. Morgan

Great. That is all I have. Thanks guys.

Lee Boothby

Thank you.

Operator

Our next question comes from Brian Singer with Goldman Sachs.

Brian Singer – Goldman Sachs

Thank you, good morning.

Lee Boothby

Good morning Brian.

Brian Singer – Goldman Sachs

Congratulations all of you. Given the success that you had in the Woodford and your focus on during this call, do you see reduced strategic importance of various other regions and should we expect a reduced focus, even if cash flow improves from your current expectations, again outside the Woodford.

Lee Boothby

I’ll let Mr. Trice answer that question.

David Trice

Brian, we talked a lot over the last several years about building and the importance of a diversified asset base. We spent nine years doing that. We got hammered on that pretty well last year, but I think a lot of people are really beginning to understand the significance and importance of having different places to allocate capitals. So you can always allocate it to the best return projects. So, we still like all the areas that we are in. We obviously make capital decisions today based on cost and prices. We will allocate capital to the best return areas, but we like our diversified portfolio and we will continue to maintain it.

Brian Singer – Goldman Sachs

Okay. That is helpful. I guess, when can take a step back and you look at your own reduced cost structure in the Woodford and advance of other shale players, do you see areas, are there within your own portfolio or generally in which drilling is likely to not resume secularly because of growth from these lower-cost areas.

David Trice

Clearly the Woodford is going to get the lion share of the budget. It is their biggest single allocation this year. Monument Butte, which Lee mentioned on the call, is very price resilient. It is always going to get the share of capital to the extent that we have a market for it in Salt Lake City, and we can move that crew to other places. I would think for the near term that both of those will be our top two budget allocations. We have had lot of success in deep water, which we don't talk about a lot but were four to five in deep water last year. We have a great portfolio there.

We have got a well drilling now and a very exciting prospect. We will be able to drill after that. The quality of those prospects can be illustrated by the fact that we were able to sell down interest on a promoted basis to partners. So, I think deep water will continue to be significant for us. There are some areas today that are challenged. I think deep high pressure, high temperature wells usually cost $6 million and in last year's cost environment cost $14 million. They are pretty challenging today. So you will see capital move away from South Texas to these other areas in today's environment.

We move capital out of gas drilling in the Rockies and you heard us say that quite a while ago but just quite frankly gas in the Rockies is not a value proposition today, but it will be and we spent some money last year and in the first quarter of this year to start the assessment of the 5 to 10 Tcf potential in the various gas formations below Monument Butte. We feel real good about the data that has come back from that. So, we've got a held-by-production asset out there that will be right for development in the $0.07 gas world and may be lower than that once we get costs down. So, again there are a lot of things in the portfolio and that is what we like about it today.

Brian Singer – Goldman Sachs

Thanks. And I’ll just ask one last one. Is there a backlog production from wells either drilled, but not completed or drilling and completed, awaiting hookup.

Lee Boothby

We have a pretty low inventory in the Woodford right now, probably 10 to 12 wells and Gary may have a few, Gary do you have many in Monument Butte at this time.

Gary Packer

We typically keep about a dozen wells that are always in the –

Lee Boothby

We are not drilling and not completing at this stage.

Brian Singer – Goldman Sachs

Thank you very much.

Lee Boothby

Thank you.

Operator

And our next question will come from Gil Yang with Citi.

Gil Yang – Citi

Hi, good morning. Congratulations to Lee and Gary. I think that you mentioned something about speed zones in the Woodford when you drilled horizontal wells. Can you talk a little bit about that and, you know, is there – if I am imaging this correctly, is there a recovery trade-off by drilling into these zones as close to other horizons?

Lee Boothby

Now there is not a recovery issue if you frac it well. First of all, the speed zone just, I guess you'd say was almost found accidentally originally and probably a year ago, just during drilling and so the target is it doesn't – it is not pervasive across the whole acreage position, but where we can find it we focused on the directional drilling getting into that zone and drilling it. Now from there, I mean it's just within the Woodford and so we do our standard completion and frac job and so there is no change to recovery at all.

Gil Yang – Citi

Okay. In the Woodford, are you finding Woodford sensitive to the azimuth of the wells in the horizontals?

Lee Boothby

Rephrase that question one more time.

Gil Yang – Citi

Does the North-South East-West direction of the horizontal drive or have any bearing on the recoverability in the well.

Lee Boothby

Well, yes we want to drill them dominantly North-South, but in the studies we’ve done to date, we have not done a lot that are off azimuth ourselves but when we look across where people have had to do that for geologic reasons, it appears that you can get a pretty good of angle off of that and still get similar recovery. East-West would be the highest risk. There is very few of those even been tried but the issue there is that you may end up fracing along the well bore instead of away from the well bore.

Gil Yang – Citi

Okay. So it's a sort of consistent with the current spacing rules that, you know, as long as it is done in grid, you are okay?

Lee Boothby

That is correct.

Gil Yang – Citi

Okay. I didn't hear any mention about Bakken, and maybe I missed it but what is going on there, what do prices look like, what is your activity level there?

Lee Boothby

As far as the Bakken goes, we currently got a single rig program running that we anticipate running all year. The Bakken program is split between the Bakken itself and the Sanish/3 Forks section and the program is kind of evolving as we go. We continue to build an acreage position up there and we've actually seen oil differentials improve in recent weeks. You know, it had been anywhere in the $12 million to $15 million or so, or $12 to $15 million a barrel and that is narrowed to $7 or $8 bucks here lately. As far as well results, we just brought on a new Sanish/3 Forks well that was in excess of thousand barrels equivalent a day and the Bakken wells continue to be above what I would consider the industry average.

Gil Yang – Citi

What has driven the basis down?

Lee Boothby

You know, there is a table in the @NFX Publication that addresses many of these issues and our current results. As far as the basis, I don't know that I have a great answer for you Gil. I know activities slowed down out there. It may have made some additional capacity available in the refineries and maybe some additional reduction in crudes come out of Canada has provided some room in the pipe.

Gil Yang – Citi

All right. Thanks a lot.

Lee Boothby

Thanks Gill.

Operator

We will move on to Shannon Nome with Deutsche Bank.

Shannon Nome – Deutsche Bank

Hi. I guess a couple of bigger picture questions; one kind of may be asking Brian’s question a little bit different way, you have obviously achieved some great F&D results in your core areas, and yet I think in a way your company-wide F&D was even excluding price revisions was closer to 3 if my math is right. But that would imply that a lot of your non-core areas were quite high or some drag to your F&D performance. I appreciate your comment David on diversity and diversification, but is there an opportunity to pair out some of the higher cost assets and/or can you tell us what percent of your CapEx in ‘09 versus ‘08 will be devoted to these so-called core area, Rockies and Mid-con, so we get a sense of how much the better F&D results will dominate the companywide going forward?

David Trice

Sure, there are two answers to that Shannon, and we highlighted the fact that our results in offshore South Texas were not acceptable to us in 2008. That was a combination of limited exploration success with high-cost and we also noted in that release we are cutting our budget allocation to that area by about 70%. So, obviously as I mentioned to Brian high-pressure high-temperature wells that cost $14 million just don't work in today's environment. So, you know, we're not going to do very much of that in 2009.

The other issue, which really has to do with SEC reserve bookings, if you look at our deepwater place and I know you're familiar with this, but you don't get to use seismic under current rules, you will under future rules to book reserves. So we have, you know, four developments under way that in our view are under booked under the current rules and then our Dalmation prospect is not booked at all because we still have to get permits to develop that prospect but we are confident that is going to happen.

So, there are quite a few reserves that just didn't make it to the books this year and then the same thing could be said in our international projects. We made a 15 million barrel discovery in China, which is not on the books. It has got a lot of running room associated with it. So the capital is there, but no reserves are there and then we have one, two, three, four pending developments in Malaysia that will happen over the next couple of years as capital in there – there is some capital in there for that but no reserves in it. So, you know that all evens out over the years, but you know we are making adjustments to areas that we don't see the right economics today and those capital allocation decisions are being made. But obviously the results in Onshore Texas were unacceptable and they influenced overall company results in 2008.

Shannon Nome – Deutsche Bank

That is helpful, thank you. And then just shifting over to the production side, if you can give us a sense of what kind of just rough numbers. What portion of your ‘09 and 2010 your growth of say 6% to 10%. What is coming from Woodford versus deepwater say versus all other, do you have a rough figure for that?

Lee Boothby

Yes. The Woodford is going to be up. I think we said 30% this year on the call, so and Steve just gave me a note that says it is all on adding FX, but I think it will be up a little bit internationally, which should be up in the Rockies.

Shannon Nome – Deutsche Bank

I guess I get that. I'm saying if you had to divide up that 6% to 10% in terms of contribution.

Lee Boothby

Well, it is primarily probably coming from the Mid-Continent region, would be the driver behind that. The real unknown in our production and one reason you got a fairly wide range of production for the year is the timing of deepwater developments. We've got a number of those developments under way. You know, we have learnt from past experience, you know, not to over promise delivery dates on those because in the past they have slipped, but if they come on early we'll have – we will either be at the upper end of that range or well above it and if there are delayed, you know, we'll be somewhere in the middle of that range, I think. So, some of those things are hard to say.

If they come on, then you're going to see significant production growth from deepwater. If they don't make it in 2009, then what you're going to see is I think the number we put out something like 50% compounded average annual production growth from the deepwater assets and over the next three years and we are obviously starting from a low base. There is still a lot of production that will come on and Gary just passed me a note that the Rockies will be up at least 15% next year or so. It is coming from a lot of areas, you know, where it is not coming from is the Onshore Texas unit. It is not coming from there because we are not putting as much capital there.

Shannon Nome – Deutsche Bank

Yes. So at the low-end of your guidance range, the vast majority would be Woodford with the Rockies, I don't know may be75-25 at the high end of your guidance range. There is a lot more contribution from deepwater.

Lee Boothby

Right.

Shannon Nome – Deutsche Bank

Okay, thank you.

Lee Boothby

Yes.

Operator

We will move on to Chris Bray [ph] with Jefferies & Company.

Chris Bray – Jefferies & Company

Hi good morning guys. Just wanted to touch a bit on the Bakken, and really talked about that too much and I saw that Brigham brought a well online kind of West of the Nesson Anticline, and I know you guys have a significant acreage over there in that area. They use an interesting completion technique that we haven't seen too much of 20 stages in a 9,000 foot plus lateral. Can I just get your thoughts there and if you guys have any plans this year to maybe head in that direction and test a similar completion method out.

Lee Boothby

Chris, I am not specifically familiar with the Brig well and their completion techniques. We have done, expedited most of our drilling programs on a 640 space and we are – do have a 1280 in our drilling program coming up, which will certainly increase the number of frac stages, you know, upwards of 8 or 10. That has been our plan today, and I don't really see us changing that, but we are going to always be looking at additional technologies that are out there that – to improve upon that.

Chris Bray – Jefferies & Company

Okay. There haven't been too many data points over in that area. Do you guys have any plans to, I know you're only going to run one rig in the Bakken this year. Do you have any plans to move in that direction and even test the acreage over there?

Lee Boothby

Yes, we do have in our current budget some plans to drill west of the –.

Chris Bray – Jefferies & Company

And if they get any kind of improvement in oil prices, let's say in the back half of this year, I don't know what your thoughts are there, if you're thinking that that is a possibility. Do you have any plans to maybe increase the rig count in the Bakken to kind of capture that?

Lee Boothby

Well, I'd go back to what Lee said at the beginning here. It is all about our capital allocation. We have a commitment to live within cash flow and we are certainly going to do that if product prices improve. We will look at that allocation. We have options and that is the beauty of the portfolio that we have today. I would love to be able to say that we would compete favorably for an additional rig, but we've got a lot of good things going on throughout the company and will have that discussion.

Chris Bray – Jefferies & Company

Okay, great. I appreciate the insight. Thank you.

Lee Boothby

Thank you.

Operator

And we will move on to Fletch John [ph] with Bandida Capital [ph].

Fletch John – Bandida Capital

Good morning.

Lee Boothby

Good morning.

Fletch John – Bandida Capital

I'm just wondering if you can provide some detail on your hedging, your existing hedges like how much is hedged in calendar ‘09 versus calendar ’10 and the combo basis, how much is (inaudible) basis, how much is fixed-price, if you don't mind?

Terry Rathert

There is the real detail table in our @NFX Publication, but we have about 70% of our natural gas hedged in 2009, a minimum floor price there averages just under $8. We have about 100% of our domestic oil hedge for 2009 that will average around $115 when you put the floors and the collars together. And for 2010, it is about half that amount in oil in collars between $130 and $170 a barrel. But in our @NFX Publication it will break all that out for you by quarter by position. And that is how you get to the mark-to-market value of north of $1 billion at year end.

Fletch John – Bandida Capital

As the basis – it has the basis in it as well.

Lee Boothby

You know, those are all NYMEX related trades. I think we do have a small portion of basis and that is in the Rockies and that detail is an our @NFX and it would be the same position that was disclosed in our 10-K last year, as we have not added to that.

Fletch John – Bandida Capital

Okay, and you're expecting basis to come in on your gas plays. So you don't anticipate hedging any other basis going forward. You have a view that it is going to tighten.

Lee Boothby

The largest portion of our natural gas production again coming from the Mid-Continent regions in the Woodford Shale, as Lee described earlier and we have firm transportation so effectively we have dealt with the basis concerns by securing firm transportation for that production.

Fletch John – Bandida Capital

Okay, thank you.

Lee Boothby

Thank you.

Operator

And there are no further questions at this time. Mr. Trice, I'll turn the call back over to you for any closing remarks.

David Trice

I just want to thank everybody for supporting me in Newfield over the last 9 and 10 years that I have been in my positions with the company. This will be my last conference call. I can tell you it has been a – it has been a pleasure to work with each and every one of you and I'll be missing you, but you will see me from time to time around here assuming that the shareholders will elect me as chairman, but thanks again and it has been a great ride for me.

Operator

That does conclude today's conference. Thank you for your participation and have a wonderful day.

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