Newfield Exploration: Dealing with Lower Gas Prices

As gas prices have fallen to levels that equal production costs (including sunk cost), gas companies should look to curtail production. The rationale here is that the sunk cost (exploration and development cost) is written-down (depleted) on a unit-of-production basis.

Newfield Exploration Company (NFX) has announced a curtailment of production for the quarter-ending Sep-09 by 2.5 Bcfe. This is approximately 4% of the earlier guided production levels of 62.9-70 Bcfe.

Source: Gridstone Research

This is despite having 75% of its production hedged at nearly $8 per mcf. The production curtailed is not very significant - less than 1% of total proved reserves of 2950 Bcfe at the end of 2008. However, it does suggest that companies are being hurt by low gas prices.

Another announcement that will have longer-term implications was

Newfield has an inventory of approximately 30 uncompleted wells in the Woodford Shale. The timing of well completions is dependent on natural gas prices.

NFX has ~70% of its reserves as gas and hence it makes sense not to add more gas to the reserves, when the company is looking at curtailing production.

Exploration activity and drilling expenditure was already curtailed as indicated by the low rig count.

Now, the low prices are forcing companies to even not go ahead with wells that are known to have reserves. A not so positive signal for the long-term for consumers of gas.

Disclosures: No position in NFX

Comments

[NGAnalyst:]

2.5 bcfe isn't going to do anything to turn the situation around. I like to see ~100 bcf removed before calling a bottom in prices. But what NFX did today probably will quickly trigger others to follow.

Aug 26 02:39 PM