Bakken Update: Newfield Misses But Guides Production Upward

Jul.31.12 | About: Newfield Exploration (NFX)

Newfield (NFX) didn't have a lot to say about the Bakken in the second quarter, but there were some positive remarks. Newfield continues to push its Uinta play where it by far the leader. In many ways, its management is comparing the Uinta wells to those in the Bakken. It is an interesting play none the less, but it will be interesting to see how quickly these wells deplete. Either way the play is economic, but it may take some time to get concrete long term numbers.

The Williston Basin and Eagle Ford were both highlighted as plays showing big improvements. This was due to longer laterals, optimized completions and improved flow back techniques. I believe the first was specifically aimed at the Eagle Ford play, as lateral lengths have not changed significantly since 2011, although averages may be slightly longer. An example would be Moberg Federal 29-32-2H, which had an 11000 foot lateral. To give an idea of its significance, Kodiak (KOG) generally uses laterals in the 8800 to 10000 foot range in the Koala and Polar prospects.

Newfield has done a good job of bringing in costs, since the problems late in 2011. It is very important that this is done, as the big miss and announcement of pulling rigs out of the Bakken was quite hard on Newfield's stock price. It is important to state that Newfield has been one of the better players in the Bakken with respect to initial production rates. It did a very nice job of drilling and completing, although at times had difficulty in getting jobs done on time. Year to date, Newfield has averaged 25 days to drill and case. More importantly, it drilled and cased a 10000 foot lateral in 20 days recently. Most of Newfield's work in 2012 has been done from a pad, which is something we are seeing a lot of now that much of the good acreage is de-risked. Additional savings has been seen my Newfield in oil service costs. Newfield expects to realize better savings in 2013 as well. Economics have been good enough to add a rig, and Newfield plans to add rigs in 2013 as well.

Newfield did make a quick comment on the Williston Basin as a stacked play. It has realized good well results from 50 middle Bakken wells and several upper Three Forks wells to date. It hinted at further upside below the upper Three Forks, but gave no specifics other than well spacing with be tighter than originally thought. This was interesting as my latest article on Whiting's (WLL) second quarter results shows it had little interest in identifying the second through fourth bench of the Three Forks. For the full year of 2012, Newfield estimates it will increase production 35% year over year.

Newfield's downspacing program is aggressive. Its projects are from 1060 to 750 foot. Newfield is using other players in the area as an example and bypassing the initial downspacing. By doing so, it not only will find out more, but can drill these together from a pad, which will decrease costs. This could help all players in these areas, but it is important to note that EOG Resources (EOG) did report communication in its wells in Parshall Field during its "mini waterflood". Three Forks spacing will initially be 2 per section, but that number could go to four in some areas. It has completed 8 Three Forks wells to date and a total of four in 2012. Newfield states the Three Forks IP rates are coming in a little less than the middle Bakken. It has well costs of $10 million currently, with that number getting smaller in 2013. Newfield plans to move to 42 stage completions, and gave no hint its well costs would increase as it should be offset with lower service costs, and drilling synergies.

In summary, Newfield missed on the bottom and top lines but did raise production estimates. A difficult environment with respect to differentials and a lower liquefied natural gas price cut into margins. Look for differentials to improve going forward, which will help. Newfield continues to be a top notch operator with respect to drilling and completions. If management can continue to outperform, this stock is a value.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

Additional disclosure: This is not a buy recommendation.