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Newfield Exploration Company (NYSE:NFX)

Q3 2009 Earnings Call Transcript

October 22, 2009 9:30 am ET

Executives

Lee Boothby – President and CEO

Gary Packer – EVP and COO

Bill Schneider – VP, Onshore Gulf Coast & International

George Dunn – VP, Mid-Continent

Terry Rathert – EVP and CFO

Analysts

Brian Singer – Goldman Sachs

Subash Chandra – Jefferies & Company

Michael Jacobs – Tudor, Pickering

David Tameron – Wells Fargo Securities

David Kistler – Simmons & Company International

Ellen Hannan – Weeden & Co.

Rehan Rashid – FBR Capital Markets

Katherine [ph] – Jefferies & Company

Operator

Good day everyone and welcome to Newfield Exploration's Third quarter 2009 Conference Call. Just 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 annual report on Form 10-K and quarterly reports 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 any 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 President and Chief Executive Officer, Mr. Lee Boothby. Please go ahead, sir.

Lee Boothby

Thank you. Good morning everyone and welcome. Thanks for your interest in Newfield Exploration. By now, I hope you have had a chance to look over our financial and operating results for the third quarter of 2009. As we have done in recent conference calls, we plan to keep our remarks very brief today allowing ample time to take your questions at the end of the call.

I’m joined this morning in Houston, by Gary Packer, our Chief Operating Officer; Bill Schneider, who runs our Onshore Gulf Coast and International business; John Jasek, who runs our Gulf of Mexico business; Steve Campbell, obviously all of you know, Investor Relations; Brian Rickmers, our Controller; and we are joined with our Mid-Continent Office, George Dunn. He will be connected from there.

There are three main topics we would like to cover today. Number one, as you can see from our results for making better capital allocation choices that is leading to improved margins throughout our business. We will highlight some of our ongoing work. Second, I want to spend a little time on the Woodford, and review just how far we have come in lowering our completed cost for lateral foot. It has been a game changer for us this year. And third, I will wrap up the call with some thoughts on our recent entry in the Marcellus Shale, and how it fits in with our vision, and where we are headed as a company.

We made some dramatic shifts in our capital budget early in 2009 and trimmed more than $500 million in planned expenditures from the early look at the year in late 2008. This ensured that we would live within cash flow from operations and fund our best projects. In hindsight, this is a great exercise and it forced us to make some tough choices.

Our 2009 capital budget of 1.45 billion was more than adequate to cover this year's planned activities. At the end of the third quarter, we have invested about $950 million. We are benefiting from falling service costs and our improved cost structure, a great combination. This has allowed us to invest in some new projects, which were not included in the original budget.

An entry into the Marcellus Shale Play, where we will fund about 20 million of 2009 investments within our budget and cash flow. The addition of a fourth operated rig in our Granite Wash field in October this year. The addition of the fourth rig in Monument Butte in September and a fifth rig before year-end 2009.

Our LF-7 Pearl exploration success offshore China and a second exploration well that will spud before year-end on the adjacent Jade prospect. We have accelerated development drilling in lease developments in Malaysia. That activity will add 1 million barrels of oil to our production in 2010. A sidetrack of our Pyrenees discovery announced earlier this year, has recently drilled to delineate downdip limits in the three proven pay sands in the discovery well. It has provided encouragement for the exploration potential of additional shallow and deep sand sections on the feature and more drilling is planned in 2010.

And it is important to note that we added all of these new projects while paying down over $100 million in debt through the end of the third quarter. The improvements in our cost structure are going straight to the bottom line. Lease operating expense on a unit of production basis was below our guidance range and reflect improved margins throughout our core areas. These reductions relate to higher volumes, lower service costs, reduced fluid disposal costs, lower chemical cost, lower fuel cost, and captured operating efficiencies through the superlative efforts of our field personnel around the company.

Our year-over-year oil production was up 40% in the third quarter. This reflects a 4% increase in our domestic crude and a near doubling of our international oil production. We're producing about 18,000 barrels a day net from our international oil fields in Malaysia and China. Throughout this year, we shifted our capital spending towards oil projects that take advantage of the oil and gas pricing differences and improved returns.

Newfield has a portfolio of quality opportunities, and we are using it to ensure that we are making the best possible capital allocation choices. It is important to note that in last night's release that we're increasing investments in oil projects. We are adding two rigs in Monument Butte, two rigs in the Williston Basin, and accelerating planned oil volumes internationally.

As our rig count and oil projects increases, our gas rig count is expected to drop. We expect that our gas volumes will remain strong, benefiting from 2009 drilling activities and a surge of gas going into early 2010 from our deferred completions in the Mid-Continent region, and our expectation for improved deliverability as we continue to drill longer laterals in the Woodford Shale.

Our operated Woodford production recently set a new high and today is at 308 million cubic feet per day. That is nearly 30% above the 240 million cubic foot equivalent number that we're producing at the end of the second quarter, and we still have 28 wells that have not yet been completed and turned to production.

In short, we are doing more with less capital resources in the Woodford and are clearly showing the importance of being in the development mode in that important project area.

We continue to improve on our operating performance in the Woodford. Let me share a few recent examples and show you this. First, lateral lengths continue to grow, and we are reducing our completed cost for lateral foot. We are permitting standup 640s, or sections that are half mile wide by two miles long. This configuration accommodates the 10,000 foot lateral. We have drilled two 10,000 foot laterals to date and expect to have eight super-extended laterals drilled by year-end with laterals ranging between 8,000 to 9,000 feet.

We call these super extended laterals or SXL. We will have a handful of these completions online with new IP rates to report early in 2010. Our average lateral length achieved in 2009 will be about 5,100 feet compared to about 4,400 feet in 2008, and about 2,500 feet in 2006, 2007. There are some charts to reference today at NFX, should you like to pursue that.

Over the last year, our drilling complete cost in the Woodford have decreased about 25%, and keep in mind that our rigs are running under term contracts. So our results today do not reflect the fact that rig rates are down 40% from where our term contracts are today. So what does this all mean to actual well cost? We can now drill a 5,000 foot lateral for about $4.5 million to $5.5 million depending upon where it sits within our geographic footprint and a super-extended lateral well, up to about 10,000 foot lateral for $8 million to $10 million. This would represent mining and development cost between a 1.50 and 1.50 per Mcf equivalent, and we continue to make improvements.

The Woodford is a great play and it is very competitive with every other resource play. Today we are running 10 operated rigs in the Woodford; three of those have term contracts that expire before year-end. And our gas is flowing to market via Mid-Continent Express, where we have ample firm takeaway capacity to Perryville, Louisiana, to accommodate our growing production.

Before leaving the region, let me give you a quick update on where we are in our other Mid-Continent resource play, the Granite Wash. In the second quarter, we announced results from our first seven horizontal wells in the Granite Wash Play. All the wells were drilled in our Stiles Ranch Field.

Our first seven different wells tested in three different intervals and initial production rates averaged more than 22 Mcf equivalent per day. We have since drilled additional wells, however, their completions were deferred. We will report on 6 to 8 new Granite Wash wells in early 2010. We expect continued cost improvement in this development as we go forward.

On the drilling side, we have certainly improved our performance with recent wells. We have increased our lateral lengths just as we have done in the Woodford, and our drilling cost for lateral foot is down about 25%, when you compare it against the first seven wells that were drilled and completed versus our most recent four wells. The lateral lengths in our first seven wells averaged 3,500 feet and we expect to push lateral lengths to 4,000 feet in order to improve metrics.

We plan to test four additional zones in the play in 2010 and several more in 2011. Returns on our Granite Wash program are among the highest in our company today. Earlier this month, we added a fourth operated rig in our Stiles Ranch field.

This time we estimate as many as 200 remaining horizontal locations in this exciting play. As in the Woodford and Monument Butte we control timing of our developments in this resource play. We have about 35,000 perspective acres in Texas and Oklahoma, and about 80% of our Stiles Ranch area acreage is held by production.

On the financial front, for the third quarter our earnings before FAS 133 and other special items, were $1.58 per share. As we disclosed a couple of months ago, we elected to curtail about 2.6 Bcf equivalent in the third quarter. Our production for the third quarter was about 65.5 Bcf and we fully expect to end the year at the top half of our guidance range or above 255 Bcf equivalent.

Our costs and expenses were at the lower end of our guidance ranges in most categories. You'd notice in our guidance for the fourth quarter that we have increased the major expense portion of LOE, in addition to well workovers in the Gulf Coast Area there are a number of projects that have been deferred, awaiting material drop in service cost. We have seen that decrease. The funds are available within our budget and we have elected to swiftly carry out these projects.

If you have questions on our financials, Terry Rathert, our CFO will be happy to take them at the end of the call.

Let us now move on to today's final topic, the Marcellus Shale, and how this new entry fits our long-term vision as a company. Last week we announced we had entered the Marcellus Shale through a new agreement with Hess covering up to 140,000 gross acres primarily in Susquehanna and Wayne Counties, Pennsylvania.

This is a ground-floor agreement, which Newfield will operate. Each company will have a 50% interest. Our core competencies in horizontal drilling, completions and production operations in unconventional gas reservoirs are directly applicable to the Marcellus Shale. Because of our experience in the Woodford, we expect to shorten our learning curve here and compress the time required to optimize operations.

Today is a great time for Newfield to enter a new play. Woodford is substantially held by production and that creates options. We fully expect to build the business in Appalachia in the Marcellus Shale just as we have done successful in our Mid-Continent and Rocky Mountain regions during the course of our second decade.

2009 was the first year of our third decade as a company. Although proud of our past, our sights are fixed on the future and are focused on how we will make Newfield a bigger, better, and more profitable company. We see four major components to our continued success in the next decade.

First, we will focus on domestic resource plays of scale. The good news is that we have three that are already held by production, and we're just entered a fourth play. The Woodford, Granite Wash, Monument Butte, and the Marcellus will all be important components of our future. While they have geographical diversity, the geology and skill sets required to succeed are transportable. We have thousands of ready to drill development locations on held by production acreage in the Mid-Continent in the Rockies, and we have the luxury of timing our developments around commodity prices and efficiently shifting capital and human resources to take advantage of the best possible returns at the time. This is the flexibility that comes with a diversified portfolio.

Second, we will remain focused on marine operations in the international and deep water arenas. And both of these areas provide oil exposure to help balance the fact that three out of four domestic resource plays I just mentioned are natural gas. Because of our rigs operating in marine environments is a core competency in Newfield. We have done very well in building a business in the deepwater Gulf of Mexico and volumes associated with our seven developments will be an important part of our future growth.

Internationally, we are focused on Southeast Asia. With current developments in Malaysia and a new and exciting discovery in offshore China, we have visible oil growth that we simply can't replicate domestically. In short, we are doing the same things in the shallow water marine environment internationally that we did in the Gulf of Mexico 20 years ago.

Third, we will harvest assets as appropriate. In 2007, we sold more than 1.8 billion in assets and use the proceeds to build reserves and production in longer-lived onshore basins. Going forward, we will continue to employ the same grow, hold or divest strategy at the appropriate time in the business unit and/or project lifecycle.

Today we are shifting both people and capital within our core operating areas to ensure that manpower is working on the projects that can and will be a material part of our future.

And fourth in order, but not an important is our pledge to maintain financial strength and effective leadership. Most of our management team has known each other and worked with one another for over 20 years, and in some cases even longer. We know that maintaining a solid capital structure is critical to the longevity in our business. Our third decade is under way, and I like [ph] how we are positioned, how well we are hedged. We are financially strong. We are investing in a diverse portfolio and we have lots of options. I am confident that we have the people and the prospects to succeed.

Thanks for your time today and your investments in our company. Our entire management team will be happy to entertain your questions. Operator.

Question-and-Answer Session

Operator

(Operator instructions) And we will take our first question from Brian Singer with Goldman Sachs.

Brian Singer – Goldman Sachs

Thank you. Good morning.

Lee Boothby

Good morning Brian.

Brian Singer – Goldman Sachs

Looking out to 2010, how are you thinking about ongoing gas drilling in the Woodford and in your legacy areas beyond completing your Woodford inventory, have uncompleted wells?

Lee Boothby

Well, I would say that we have articulated previously that we need to do our part to maintain a healthy and viable service support structure. So we're going to continue operations in our major core areas. Our hedge position allows us to do that confidently. We are well hedged into 2010. We will adjust rig counts and activity levels based upon our views of the market at that time.

I think when you carry that through to decisions that we're making, the note about increasing oil rig counts will lead to a decrease in gas rig counts as balancing the capital budget and living within cash flow, and our hedge position again leaves us in position to do that. I would go one step further to say that with the hedge position that we have got in place for 2010, we are confident that we can execute a similar activity set in 2010 as what we have done in 2009 and with that deliver a 5% a 10% production growth.

In addition, we mentioned the Granite Wash Play where we have got spectacular returns and very good production rates. We have added a rig there. So you can see that we are continuing to shift to the projects that have the highest returns, and can help drive our production numbers up into the right direction that we are so fond of here in Newfield.

Brian Singer – Goldman Sachs

Great, thanks. And secondly, switching to the Bakken, can you give us your latest thoughts, a little more color on return rates and costs in the shallower portions versus the deeper portions of your acreage position?

Lee Boothby

Since Mr. Packer built most of our Bakken position, I will hand the question over to him.

Gary Packer

Brian, as far as the Bakken drilling, as it relates to the deeper portion or the place that we have drilled historically most of our wells, we have got our cost down to somewhere around 4.2 to 4.5 million. As we move into some of the shallower areas, our early drilling in areas such as Big Valley and others have included a considerable amount of signs, so to speak, -- I think we're thinking those wells are typically going to be about $3.5 million well or so.

But early on we have burdened those wells with as I said (inaudible) above and beyond what we typically would do.

Brian Singer – Goldman Sachs

Great, thanks. And any changes in thoughts to EURs there?

Lee Boothby

Really too early to tell right now. I think we're sticking with the numbers we previously spoke to on the (inaudible) and some of the recent drilling that we have done in these other areas are really under way. We have got some completions coming up in the Catwalk area, that are planned for later this month and in the Big Valley area, we have got a well completed, on production. We are encouraged by what we see and likely lead to additional drilling in 2010.

Brian Singer – Goldman Sachs

Great, thank you.

Operator

Our next question comes from Subash Chandra with Jefferies.

Subash Chandra – Jefferies & Company

Yes, good morning. First, I will just follow up on the Bakken, any more color there on sort of what you find encouraging and first of all the Big Valley, was that a Bakken test, and are you going to try and do, could you describe the number of frac stages and if you might push the envelope in the number of frac stages you employ in the Bakken?

Lee Boothby

Yes, that is a good question. First of all, we are not prepared to talk about the targeted interval in the Big Valley. As Bakken continues (inaudible) interval, and as I said earlier will lead to additional drilling. The well that we drilled was a 5,000 foot lateral, and as we previously stated, I think we're going to stick to that. We certainly have options to drill further. We have drilled one 10,000 foot lateral and as we previously stated, we're just not seeing the performance results in the longer laterals to substantiate the incremental cost.

Certainly there are land issues that benefit from having the longer laterals, and it is something that we are going to be looking at. As far as the stages themselves, we are backing off and going through shorter and shorter intervals in the order of 400 to 500 feet. And I suspect we will be doing more of that. So we're going to keep an eye on the lateral lengths. We are continuing to go shorter and lateral, shorter and shorter, and that is kind where we are in today.

Subash Chandra – Jefferies & Company

Sergeant major, you won’t discuss the targeted interval in that well either?

Lee Boothby

That is correct. There is just too much going on there right now. We like to stick with just the price of (inaudible) Bakken.

Subash Chandra – Jefferies & Company

Got it. Okay, just two more quick ones. Do you have a net acreage number in Marcellus at this point?

Lee Boothby

We previously stated so far that our target is up to 140,000 acres. That is not all in the bag yet. We have various initiatives under way to make that happen and working with our partner, yes.

Subash Chandra – Jefferies & Company

That was the 140 gross, right?

Lee Boothby

That is correct.

Subash Chandra – Jefferies & Company

Anyway to clarify the net number.

Lee Boothby

Well, the net number, we are a 50% ground-floor partner in that. So…

Subash Chandra – Jefferies & Company

Okay, so that would apply to the whole gross, got you. Okay, and finally do you have any sort of legacy position in the Eagle Ford?

Lee Boothby

We -- why don’t you take that Bill.

Bill Schneider

Yes, we have a position about 10,000 acres in the passing [ph] field, which is an Edwards [ph] producer, but the Eagle Ford is in the oil window in that area. And we have been looking at putting a horizontal well into that. Talking to working interest partners about doing that in 2010. We haven't made that commitment, but that is one of the things on the radar screen.

We have also done fairly extensive local long trend, and have some interest in picking up acreage in certain parts of the Eagle Ford long trend.

Subash Chandra – Jefferies & Company

Was it -- which county was it the legacy acreage?

Lee Boothby

That is in Harris County [ph].

Subash Chandra – Jefferies & Company

Got it. Okay, terrific. Thank you guys.

Lee Boothby

Thank you.

Operator

We will move on to Michael Jacobs from Tudor, Pickering.

Michael Jacobs - Tudor, Pickering

Good morning everyone.

Lee Boothby

Hi, Mike.

Michael Jacobs - Tudor, Pickering

I know it is a little bit early to talk about total inventory, especially as you are awaiting results from Big Valley and Catwalk, but can you give us an idea of how many locations you have in hand today and how high that number could go with additional success?

Lee Boothby

Mike, I would say in the -- what we would consider low-risk development opportunities, and this would be in areas such as Westberg and Lost Bear, probably in the order of 75 locations that we got identified and are preparing to drill. As we step out into some of the other areas that we previously discussed with you, staying within North Dakota will probably add 100 or so, and as I said earlier we have got of couple of wells that we have drilled, but we enough encouraging results and I anticipate that we will be drilling additional wells in each of those as we look forward.

Now as we describe that infield drilling is certainly something that is going to be something that we will be looking at closely in the future. So depending on how these operations go, conceivably you could be looking at 2x [ph] those numbers.

Michael Jacobs - Tudor, Pickering

So lot of running around, it sounds like.

Lee Boothby

Yes, we are proud of what we built, you know, we have got additional acreage positions in Montana that I would describe as more exploratory base, and we will be stepping into those from -- with some exploration tests in 2010. So, look for us to be talking a little but more about that next year.

Michael Jacobs - Tudor, Pickering

Great, and Lee following up on your comment on the Marcellus, can you give us a little bit of color on how the JV came together? Did your new ventures team approach Hess or did they approach you and why did you choose Susquehanna and Wayne Counties versus say Southeast?

Lee Boothby

Southeast or Southwest?

Michael Jacobs - Tudor, Pickering

Southwest, sorry.

Lee Boothby

Okay, because we have go get our maps out and check out a new area. I would say that our efforts in the Marcellus, and I think we mentioned this over time, we’ve had a team that we rotated out of the Woodford and studied all the basins in North America and we started our efforts there in terms of working the Marcellus four or five years ago.

We weren’t in a position at that time to think about taking that step in because we had plenty to do in the Woodford with our activities that we had underway to get our acreage held by production there. As far as Northeast Pennsylvania and Susquehanna and Wayne Counties, the thing that attracted us to that area and if you looked at the maps, it is the area where the Marcellus is thickest. We think it has got all the right attributes to be a major significant resource.

Clearly it has got all the operational challenges, and everything that we read about on a day-to-day basis, but we see the Marcellus as a major, significant long-term natural gas resource in North America and we wanted to get represented there. In fact, we are held by production that allowed us to rotate both capital and human resources in that direction. The team that we have built actually are folks that grew up and managed and ran our Woodford production through periods of time.

So we have got the right people in place to shorten the learning curve, which was one of the points that I made in the call. So we're very excited about the Marcellus as a play opportunity. With regard to the joint venture, I would say that we have had a long relationship with Hess. We have got a lot of respect for Hess. They contacted us knowing that we were interested in the area, and we've agreed to work together, to jointly exploit the opportunity, the focus being that we were in a position to bring our core competencies and experiences to bear in the Marcellus, and I would say that we are really excited about having Hess as a partner up there.

Some of you will remember that we have been talking about the possibility of a JV type entry into the Marcellus, although we didn't speak about it specifically for the last year and a half or two and this opportunity was the right opportunity at the right time. So we're excited, but we have got work to do, and we're glad that we're in on the ground. We liked the area that we are in. We're going to have to drill some wells and evaluate it to find out what we have got there.

Michael Jacobs - Tudor, Pickering

And if I could squeeze in one more on the international side, can you discuss what your current development scenario is for China, and then what the sensitivities are on both capital requirement and timing given additional exploration success?

Lee Boothby

I will let Bill Schneider answer that question.

Bill Schneider

We are proceeding with the oil and play study on the existing discoveries 7.1, 7.2. As we indicated when we announced that there are additional fault blocks, and we do plan to sidetrack it in 2010 to test some deeper objectives in that existing discovery. The prospect that we're going to be testing now, or later this year, is about 12 miles to the Northeast of the existing discoveries to put in a separate structure. And it has some pretty significant potential.

If that is successful, we have the opportunity or the option to do appraisal drilling in that discovery in 2010, and put that on the clock for oil and play, oil development plan. We look at the timing of a development there in China to be about 30 months from sanction to first production.

We are using our experience in Malaysia as a guide to give us that timescale. We have had obviously discussions with (inaudible) and they see no problem with us achieving that time to first production. Our development plan currently would have a standalone platform and tieback to existing infrastructure. So it would help keep our capital costs and our operating cost at a minimum there.

Michael Jacobs - Tudor, Pickering

Great. Thank you.

Lee Boothby

Thank you.

Operator

(Operator instructions) And we will move on to David Tameron with Wells Fargo.

David Tameron – Wells Fargo Securities

Good morning everybody. A couple of questions, starting back to the Woodford, I think you mentioned Lee, 4.5 million to 5.5 million, are you still targeting with longer levels, what kind of EUR are you targeting now, is it 5 for 4 or…

Lee Boothby

I will let George Dunn of our Mid-Continent Office answer that question for you.

George Dunn

I don’t -- our EURs haven’t changed significantly from what we stated before. I'm not sure if you were asking about I guess congressional laterals or SXL or long ones.

David Tameron – Wells Fargo Securities

Just on existing, I mean it sounds like you are now going 5 million per well cost, are you still targeting 3.5, 4 Bcf as far as EURs?

George Dunn

Yes, 3.5 to 4.5.

David Tameron – Wells Fargo Securities

Okay. All right, and can you guys give any color on, you mentioned you have some rigs coming off contract. What's the --

Lee Boothby

Just where you get off that (inaudible) back-and-forth that you got the question answer that you're asking. What I thought I heard was you're asking about what we're seeing out of the 5,000 foot laterals.

David Tameron – Wells Fargo Securities

Yes.

Lee Boothby

You talked we were delivering in 2009. Nothing has changed from the numbers that we've talked about and articulated previously. You recall that George and his team were able to extend the lateral within the Congressional unit that George talked about, but the five 5,100 foot average is a blended average from all of the different well types that we're looking at, and I think a quick answer to your question would the expectation be, you know, about a Bcf per thousand feet of lateral.

I would say all of the information that we put out before stands and you know, you can use those models all that datas out there and available, and if you don't have access to it, Steve can you know, remind you where to find it, and I think that the math is pretty simple at that point. Clearly we are going to have get the SXLs completed and online and we articulated in the call that we will be updating you on that early in 2010.

David Tameron – Wells Fargo Securities

Okay, yes thanks for the clarification. Can you talk about rig -- you mentioned a couple of rigs coming off contract. What's the current rate for a rig out there? These rigs you have coming off contract, you said, you gave us a percentage, but I am looking for an absolute dollar number.

Lee Boothby

Well, we're not able to give you the absolute dollar number on contracts. What I would tell you that if you take the 40% number that we talked about in terms of the spot market that maybe we could get a spot market rig for $13,000, $14,000 a day comfortably and you can do the math.

David Tameron – Wells Fargo Securities

Okay, and then what's the length of – what length of period could you lock that up for, or the service companies willing to do.

Lee Boothby

Gary.

Gary Packer

Yes, that's difficult. You know, certainly in the down-market there are going to be reluctant to too long on these contracts. Notionally, I'd say somewhere in the six months vicinity. We'd like to see if we could tie some of the months a little longer for those negotiations still to take place.

David Tameron – Wells Fargo Securities

Okay, fair enough. Granite Wash, can you talk about the wells you had on line that you brought on. Can you talk about how those are holding up and what you're seeing from the production data?

Lee Boothby

George?

George Dunn

Yes, they are still holding up real well. I think we've quoted before that those original wells we discussed look like you know, 8 Bcf or better wells and they're staying on trend for that, looking real good.

David Tameron – Wells Fargo Securities

All right, and then one more. CapEx for 2010, can you talk about, you mentioned the 5% to 10% growth. Can you talk about or give us a range of where would you expect CapEx to come in?

Lee Boothby

I'll let Mr. Rathert give you some color on -- we're not ready to talk about budget, but we can give you some color in terms of how we are thinking about things.

David Tameron – Wells Fargo Securities

Okay.

Terry Rathert

Actually we are in the process of putting together our budget for 2010, and processes one where all the business units come in, shows us what the opportunities that have in hand, what they can deliver with capital allocation in different ways. We sit down and look at how that mix fits, not only building production and opportunities for 2010, but laying the foundation for future growth. So it will have again a mix of development drilling and investment leasehold sizing to build for the future. We will take that plan to our board for I would say, you know, approval conceptually here in a few weeks.

We been thinking again notionally, we will probably try to target our CapEx to be in the vicinity, certainly it will be well guided by what cash flow is in 2010. Our hedge position for 2010 assures us that with the volumes we talk about in terms of growth you know, we have pretty strong cash flow again that year. I would say you know, notionally CapEx in 2010 is not going to be too terribly different than we had in 2009, but those details are still in the process of all coming together.

David Tameron – Wells Fargo Securities

All right (inaudible). Thanks Terry.

Terry Rathert

Thank you.

Operator

(Operator instructions) And we'll move on to David Kistler with Simmons & Company.

David Kistler – Simmons & Company International

Good morning guys.

Lee Boothby

Good morning Dave.

David Kistler – Simmons & Company International

Real quickly on the Woodford. You know, nice up-tick in production yet rig count is down year-over-year. Can you talk and you've been drilling not completing wells. Can you talk a little bit about what's happening up there in terms of the up-tick in production?

Lee Boothby

Well, you know, we have tried to talk during the course of the year to kind of give some color on how things are going, but I would say at least from the Houston perspective looking north towards Tulsa, hats off to our team there. They've done tremendous work in taking advantage of the market conditions to, you know, really push and accelerate a lot of the optimization work that we talked about on the completion front.

We are focused on pad drilling and development work. We continue to optimize in that arena. We continue to have gains in the vertical and horizontal sections from a drilling standpoint. They've managed to push the lateral length up year-over-year, some 700 feet and you know, based on the discussion previously that adds EUR and all that comes with a material reduction in the cost for a total delivered, completed well. It wasn't an accident that we were able to build an inventory of Woodford Shale wells, success in the Granite Wash early in the year and success in the Woodford were combining to give us really good production, really good production ramp.

So we were able to work completions and capital out of the system, work the market to where we were able to complete those wells now in much more favorable price environment. So we are initiating that activity now out into the first quarter. So none of those wells, wherever included in any of our production forecast. So that's a strong positive on both of those fronts. So I would say it's a combination of a lot of things but development focus, increasing lateral lengths, working costs out of the system, continuing to capture operating efficiencies and gains.

You know, we haven't worked away all the way down to learning curve. You put all of those things together and you get a pretty exciting outcome. I don't want to get the cart ahead of the horse because we still need to deliver the super-extended laterals completed and get the test data out there, but, you know, if you think about the type of numbers that we talked about earlier in the call at $8 million to $10 million completed cost for a 10,000 foot lateral. If you go back to '06 and '07, we were doing 2,500 foot lateral wells. That one well is going to replace four of the wells that we were drilling back in that time period.

And remember the cost that we're talking about you know, $3.5 million, $4 million, $4.5 million of those 2,500 foot wells. You know 10 divided by 4 is a pretty exciting number, $2.5 million. So that shows you how these plays are revolving and that's how we are able to take rigs out of the system, still deliver increasing lateral lengths and improving capital efficiencies and frankly, I look forward to updating you on our full year progress in our next call.

David Kistler – Simmons & Company International

With that in mind as you start looking at the wells that you've curtailed, and let's use Woodford as an example. As you bring them back online, are they coming back online at previous production rates coming back recharged, are we losing any of the, I don’t know, any of the pressures that were coming out of them as they start to come back online?

Lee Boothby

Well, I guess David simple math and we've got it out there in the call and if I get off track, George will jump in and throw a few other facts in, but we exited the second quarter around 240 Mcf per day. We started bringing our production back online in response to improving gas prices earlier this month. We mentioned in the call that our Woodford Shale production was in excess of 300 Mcf a day. So if you do the math on the shut in volumes and then what we've turn it on, I would tell you that we are clearly getting some early flush production.

It's probably a combination of a number of factors that you talked about you know, reservoir pressures build, et cetera, et cetera, et cetera, but we are too early in the restart to give you any further color in terms of where they are going to go, but I would tell you they are performing above the trend line that we had going into this, which is certainly a strong positive and very encouraging and it might just be another wrinkle on all of the things that we all have left to learn yet on these unconventional plays. I'm pretty excited about it frankly.

David Kistler – Simmons & Company International

Interesting. Jumping over to the Granite Wash in the four zones that you guys are going to explore in 2010, maybe too early to get to this but any sense for whether those are going to be slightly more liquid rich zones, just from what you've seen from the vertical logs that you guys have?

Lee Boothby

Well, I might say it's going to be a mix and you know, George and his team will make the selections if they feel that they need to make so that they can properly assess the resource, but they are all pretty smart and oil prices look pretty good. I'm going to guess that they will get the wet oily ones in the front of the line. That's what I would certainly do if I were on the other end of the line, but we need to evaluate those zones so that we can properly assess our total inventory within that play, and we can properly design our forward exploitation development plan.

So that is four incremental zones. I'll get with the three that we tested in 2009. Hopefully this time next year we're talking about seven successes and we are telling you about all the new zones we're going to test in 2011, but we got a lot of drilling and completion work to do before we get that answered.

David Kistler – Simmons & Company International

Great, and then last question. Hopping over to the trigger well, can you talk a little bit about what you're seeing from that well, obviously didn't have any numbers in the release but more in terms of you know, what that's indicating for de-risking some of the northern North Dakota areas?

Lee Boothby

The well that we've already drilled the Trigger well is on production and it's really cleaning up at this point. So it's premature. I guess I just like to stick with the fact that we are encouraged by what we are seeing, and we anticipate additional drilling in the first quarter next year. These are complicated reservoirs. One of the things that we recognize when we went into some of these new areas were that each of them are going to take a little bit more investigation into optimizing the stimulation.

It is not going to be a one size fits all of those, but based on what we're seeing today again we are encouraged and look for more information as we look into next quarter.

David Kistler – Simmons & Company International

Great. Well I appreciate all the color guys. Thank you.

Lee Boothby

Thanks Dave.

Operator

We'll take our next question from Ellen Hannan with Weeden & Co.

Ellen Hannan - Weeden & Co.

Good morning. Thanks. Just a couple of follow-ons. Lee in terms of the service cost with the exclusion of putting day rates aside, are there any other service costs that are at a point where new builders are interested and may be looking at some longer term contracts?

Lee Boothby

Gary.

Gary Packer

Well, I guess it is suffice to say we would be interested in a number of longer-term contract in this environment, whether be for pumping services, tubulars or rigs. As I said earlier it's just, it's where we've got costs down to its -- I just don't see the service providers being very interested in going very long in this market, but the question is would we be interested? Absolutely. We have a robust capital program for next year and we'd look to take advantage of the current market as long as we could.

Ellen Hannan - Weeden & Co.

Great, thank you and just one other follow-up on the Marcellus deal with Hess. Could you give us any color on, are you going to have additional forces share the drilling Gary to cover the acreage that --

Gary Packer

It is ground-floor. We each have 50% interest.

Ellen Hannan - Weeden & Co.

Okay, great. Thank you very much.

Lee Boothby

Thank you.

Operator

Our next question comes from Rehan Rashid with FBR Capital Markets.

Rehan Rashid – FBR Capital Markets

Good morning Lee.

Lee Boothby

Hi Rehan. Good to see you.

Rehan Rashid – FBR Capital Markets

Same here. On the Woodford really quickly, what -- if you were to think about in the development mode, what portion of the overall acreage do you think that's developed with the 5,000 foot laterals and maybe what portion gets developed with 10,000 foot laterals if they do indeed work the way we think it could work.

Lee Boothby

I would say that's a product that George and his team are working on, and it's going to go a long way towards factoring in the budget plans and development. I don't have the number. If I had it I'd tell you, you know, what it looked like. I'm confident that I can tell you that the average well, perspectively as we look into the future is going to be something north of, you know, 5,100 feet. I don't know what that number is.

I think you'd be safe to go ahead and assume at the moment that we've done 5,100 this year. That's probably a safe number in terms of thinking about an average well, but it would be my expectation that we would be able to deliver a portfolio of development opportunities that have an average lateral length in excess of that number perspectively, but George's team has to finish that work and we've got a number of other issues in terms of units and you know, it's not just the standup 640s that have been talked about. George's team are working on large area wide units. If we can get those in place it opens up additional options, and be confident with the 5,000 and be confident that we are going to push it to maximize that number because that's how you maximize the returns and minimize the cost.

Rehan Rashid – FBR Capital Markets

But from a geological prospective, you know, that the size, whatever drilling you've done So far. Is that saying anything in terms of kind of what terms I'm looking for, how quickly enough? How far do we go in terms of the average or is this just too early?

Lee Boothby

I'm sorry. I didn't understand your question.

Rehan Rashid – FBR Capital Markets

Is it just too early in terms of making conclusions off of your 3-D seismic, and whatever wells you have drilled, how far higher can this average go?

Lee Boothby

Well, it's not just geological. That is a regulatory overprint. So they've got to work there. The regulatory, the unit issues, the geology, we've got us do all of that together and our folks are still working through some relatively new seismic, and we're learning every day. So I will tell you, just as soon as we've got a view to what that portfolio might look like perspectively, we'll let you guys know.

Rehan Rashid – FBR Capital Markets

Okay, and then on the cost front, the 5,000 foot lateral at $4.5 million to $5.5 million, is that based on today's drilling cost, is that based on the contracted rigs that you have?

Lee Boothby

George?

George Dunn

It's both -- the range kind of covers both, but coming off term there is probably some downside of another 5% to 8%.

Rehan Rashid – FBR Capital Markets

Okay, okay, and last question on Monument Butte. The refining capacity expansion quite material in 2011 and 2012. What comfort do you have from the refiners that you could see a reasonable chunk of that come through and from a competitive standpoint, are you guys the only game in town or should we see some kind of market share gain by the guys also from the growth perspective?

Lee Boothby

Rehan, I'd say we're quite comfortable we are at right now, more comfortable than we've ever been in the five years, we've been in the Rockies and with Monument Butte. As far as assurances, I can tell you there is a great deal of interest in the crude that we are producing at Monument Butte, and we've had material discussions with the refiners and they are interested in refining -- expanding their refining capacity up there.

I think Holly has already talked about new hydrocracker up there that's given them the ability to run increased volumes. Are we the only game in town? Certainly not, we are the biggest game in town. You know, history would suggest that we have a long track record up there of increasing oil volumes, and despite elevated commodity prices we haven't seen volumes grow materially outside of Monument Butte.

So I'm encouraged where we are at right now, and I still think as I said in the past it's a partnership between us and the four refiners that we currently sell to. Both of us need each other, and I think both of us are interested in making increasing capital investments up there to grow our volumes.

Rehan Rashid – FBR Capital Markets

Okay, thank you.

Operator

Our last question will come from Katherine [ph] from Jefferies & Company.

Katherine - Jefferies & Company

Hi guys, I just had a quick question about hedging. I wanted to make sure I understood the actual cash flows that you realized during the quarter. Based on the cash flow statement, it looks like you took in about $242 million of cash proceeds from hedging. Is that correct?

Lee Boothby

That's pretty close in the $230, $240 range.

Katherine - Jefferies & Company

Okay, and so that was on top of the 375 of unhedged oil and gas revenues.

Lee Boothby

That's correct.

Katherine - Jefferies & Company

Okay, and that 242, 230 whatever of realized cash proceeds from hedging, was that entirely from hedges that were layered in for the third quarter period, or where there any kind of one-time unwinding of hedges for future periods in that?

Lee Boothby

No, that was all associated with production in the period.

Katherine - Jefferies & Company

Okay, great. Thank you very much.

Lee Boothby

Thank you.

Operator

We have no further questions.

Lee Boothby

Well, we'd like to thank everybody again for your interest in Newfield, and we look forward to updating you on our full-year results in our next call. Have a good day.

Operator

Ladies and gentlemen that does conclude today's conference. We thank you for your participation.

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Source: Newfield Exploration Company Q3 2009 Earnings Call Transcript
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