Newfield Exploration Reports Fantastic Q2, Beats Pre-Call Note

NFX Reports Big Beat In Q2; Operations Highlights Very Strong

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

• They exhibited stellar cost control, better than last quarter and much better than guidance.
  
• They continue to live within cash flow. Their capital budget didn't come down from last quarter so the cost savings mean more feet of hole is getting drilled. They plan to live within cash flow in 2010 as well.
• They are suggesting full year production will come closer to the upper end of the previously stated 6 to 10% growth range.
• Granite Wash horizontals yielding monster results (see details below) and note the lack of expected significant production decline outlined.

On to the quarter and operational update:

• The 2Q09 Numbers
  
  • Production: 64.6 Bcfe (710 MMcfepd) which was just under the mid point (as usual) of the guidance range of 63 to 69 Bcfe (692 to 758 MMcfepd), and up 2% sequentially.
    • Note that an additional 1 Bcfe was produced but not lifted due to timing of liftings in Malaysia.
    • Note also that production increased despite the deferral of completions in the Woodford.
  • Cash Costs Came Well Below Guidance: ($0.25 per Mcfe below on the recurring cash components):
    
    
    • Lifting costs were much better than expected at $0.80 per Mcfe vs:
      • 1Q09 at $0.95 / Mcfe and
      • Guidance for 2Q09 of $0.98
        
    • Production taxes were $0.23 / Mcfe, well below guidance
    • G&A (the non capitalized portion) were $0.52 per Mcfe, in line with guidance.
    • The are reducing cash cost guidance from prior levels for 3Q (see below).
      
      
  • EPS of $1.28 (ex items) vs $1.10 expected
  • CFPS of $3.21 vs $2.70 expected

• Operating Highlights:
  
  • US Onshore:
    • Granite Wash / Stiles Ranch- tight gas sand stacked pay play
      • First seven horizontal completions have had average IPs of 22 MMcfepd. They had kept a lid on the details of these wells until now.
      • • They have 50,000 acres (largely held by production) here and think they have at least 100 horizontal drilling locations (7 drilled so far).
          
        • The first well was completed in December 2008, maintained average production of a whopping 27.1 MMcfepd for the first 2 months (not the cliff dive you'd expect) and has produced 4 Bcfe to date (assuming the well came on mid December, the well has in 7 months produced at a rate of 18 MMcfepd).
          
        • Laterals here have been from 2,900 to 3,900 feet
          
        • 2H09 laterals will be closer to 5,000 feet
          
        • These seven horizontals have averaged $10 mm per well with the most recent coming in at $7.4 mm drilled and completed. That last well had a 3,600 foot lateral and an IP of 24.4 MMcfepd (86% gas).
          
        • EUR - No comment from the company but you've got to be thinking we're in sub $1 finding cost land, maybe sub $0.75 (so > 10 Bcfe per well).
      • Running a 3 rig program now and may add more rigs before year end.
        • Plan to drill 14 wells in 2009 (so 7 more in the back half) but will defer completions due to low natural gas prices.
          
      • Production hit new peak at 147 MMcfed vs 145 MMcfepd last quarter but again, completions are being delayed for higher gas pricing.
    • Woodford Shale, Oklahoma (growth temporarily flattened due to completion deferrals):
      • 10 rigs now, falling to 6 by year end.
        
      • 25 drilled but not completed wells at present.
      • Plan to drill 75 wells now, down from 85 prior estimate. 85% will be drilled from common pads. This reduction in well count and shift to lower per well costs translates into a capital shift to higher return plays.
        
      • Drilling two 10,000 foot lateral wells now vs the projected 2009 average lateral of 5,000 feet. Simple concept: double the reserve exposure with a single vertical (they commented that historically they have experienced more difficulties with the vertical section that the horizontals.
        
      • Gross production of 240 MMcfepd, flat with the 1Q exit rate, down slightly from year end's level of 250 MMcfepd. This is being held essentially flat due to low gas prices.
    • Willston Basin: Bakken Oil Play:
      
      • Not a lot detail here this time, still one rig program with plans to accelerate in 2010.
        
      • The did complete the extended lateral (8,500 foot) Moberg 1-29H in the Three Forks Sanish since the last report for 1,203 BOEpd with a 30 day average of 545 BOEpd. Not shabby, not mind blowing. Would like to here if the completion went off as planned or not.
    • US - Deepwater Gulf of Mexico - I'm not going to run through their recently announced discoveries at Pyrenees and Winter but I'll point out that NFX has five deepwater developments expected to see first production between now and the end of 2010. That and 88 deepwater blocks is one of the reasons they should change their name to Target Exploration if the current low valuation levels hold.

• Guidance:
  
  • Said they will be in the upper end of their 6 to 10% production growth guidance for 2009
  • 3Q09 Guidance: 62.9 to 70 Bcfe - Huge range as usual.
    
  • Cost guidance coming down: (these are mostly for my future notes)
    
    • LOE now at $0.88 to $0.89
      
    • Production taxes of $0.37 to $0.39
      
    • G&A of $0.49 to $0.50

• Hedges: Not much change from yesterday's post except for the addition of 2011 gas hedges on 30% of expected production.

• Nutshell: Excellent quarter from a "making your top line and thrashing your costs perspective". Granite Wash development is a game changer and may yet give NFX some of the appeal of some of the higher flying Big Kahuna shale names, even if it is a sand. The stock remains cheap at 3.3x 2009 CFPS consensus and that consensus is likely to move up this year on reduced costs and more next year due to a firming development production wedge in analysts' models. Recall that these guys are very well hedged (over 75% of expected production this year and 70% next year at high gas and even higher oil prices) and have not yet laid out how much additional free cash flow they will generate by deferring completions and streamlining procedures in the Woodford and Granite Wash. I continue to hold Calls and Common Stock in NFX.

• Conference Call: Thursday, 9:30 EST
  

• Other Names That May Be Affected By The Granite Wash Well Results: EOG, FST, SM, PVA, XEC.

• This pre call note will be archived on the ZEB Reports tab.

Disclosure: I continue to hold Calls and Common Stock in NFX.

Comments

[oh-so-close:]

When you say, "they should change their name to Target Exploration if the current low valuation levels hold." Are you paying them a compliment or are you slamming them?

Jul 23 12:31 PM