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Steve Zachritz, "Zman", is an investor/trader who specializes in the energy sector. He has managed small cap growth portfolios, been an energy banker, and a sell side exploration and production analyst (Prudential and Jefferies) in his 20 years in the financial markets. His daily writeups... More
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  • NFX - Another Solid Quarter, Strong Guidance, Numbers Headed Higher 0 comments
    Feb 16, 2010 11:13 PM | about stocks: NFX, KWK, ROSE

    The 4Q09 Numbers

    • Production of 64.6 Bcfe (71% natural gas) vs a range of 63.3 to 65.3 Bcf, so high end of range
      • vs 65.5 Bcfe last quarter
    • Costs - they have been improving
      • LOE was $0.91 vs $0.81 last quarter. Guidance is a bit higher, bears some scrutiny as it looks like the international side is dragging it up a bit.
      • Guidance was $0.83 to $0.89
    • EPS of $1.40 (ex items) vs $1.35 expected
    • CFPS of $3.32 vs $2.99 expected

    Reserves:

    • 2009 up 23% to 3.6 Tcfe
    • Market is valuing their reserves at $2.50/ Mcfe.
    • All in Finding and Development costs of $.50 / Mcfe including the impact of negative revisions due to prices, mostly in their PUDs. Without the pricing revisions, F&D costs would have been $1.18 / Mcfe. These are all over the map this year with the new rules so am not sure how much it really matters.

    Guidance:

    • 1Q10 volume guidance: 62.6 to 69.2 Bcfe, as usual straddling the recent quarter's number.
    • 2010 volume guidance: 8 to 12% growth or 278 to 288 Bcfe; they generally inch up guidance as the year progresses. 
    • Food for thought watch: 2009 was 6 to 10% and last year they continually/habitually guided to the top of that range.

    Operations Update:

    Woodford Shale

    • Production reached 191 MMcfepd net recently (that's 27% of company total), a new record as they returned curtailed production to sales and added new wells.
    • Sees lateral length expanding to 6,000' average in 2010 vs 5,000' in 2009; longer laterals have equaled a cost effective approach to bigger per well reserves to date in the program.
    • 5 of 11 super extended wells came in > 10 MM/d; the others are completing. 
    • 50 wells planned this year with a 6 to 8 rig program.
    • They are drilling wells faster than before so don't be surprised to hear that the well count ultimately comes in higher than 50 with the low end of that rig range.

    Monument Butte (Uinta Basin, UT):

    • Production hanging out at 17,000 bopd (14.5% of total co.)
    • Seeing some thicker than expected Green River sections and seeing some larger than normal IPs from step out wells (wells outside the proven area on their acreage). Could be some upside surprise potential here.
    • See growing that 15% this year via 275 new wells

    Eagle Ford (Maverick Basin, Tx):

    • Drilling begins 2Q
    • Plan to spend about $100 mm which should pay for a dozen or so wells (split between the Georgetown and the Pearsall and Eagle Ford Shales).

    Bakken:

    • Current production: 3,000 boepd net, or just 2.5% of total co. 4Q levels
    • 3 rigs for 2010; no well count given, but it should be at least 20, compared to their 14 wells drilled to date in the play.
    • Looking over their results the company is one of the few to drill consistently bigger Three Forks than Bakken completions in the Williston.
    • Their 30 day IPs look better than many I've seen as well with two of significant note:
      • IP of 1,328 boepd, 30 day average 1,114 boepd - this is the Gladys 1-9H
      • IP of 1,256 boepd, 30 day average of 1,010 boepd - the Wisness 1-4H
    • 150,000 net acres around the Nesson and west of it.

    Montana Bakken:

    • 221,000 acres in Glacier County Montana
    • 10 wells in 2010 (unchanged from prior comments).
    • 1st well to spud in April
    • This is where ROSE has 3 wells down but no formally disclosed production as of yet  and KWK may have 2 wells at TD as well.

     

    Granite Wash:

    • First 12 wells average IP of 20 MMcfepd.
      • First 7 averaged 22 MMcfepd
      • Next 6 averaged 16.65 MMcfepd - people will want to read something into lower rates but note that these are Atoka dry gas wells that don't have the liquids components seen in 5 of the first 7 wells. NFX said it will be testing 4 to 6 new formations this year.
      • 20 wells planned for 2010 with a 4 rig program

    Gulf of Mexico:

    • Production is expected to be up 60% in 2010. This is what I've been talking about with comments regarding their stair step production growth as development projects are brought online.
    • This will grow the segment from 7.5% last year to 11% of total company volumes
    • Exploration: 2 to 3 deepwater exploratory tests this year, two of these are in close proximity to current developments.

     

    Capex and Liquidity

    • $1.6 Billion, about 1/3 of it on oil projects.
    • Management commented that spending is in line with projected cash flow for 2010.
    • No borrowings outstanding on its $1.25 B line of credit.
    • Net debt to cap of 41%.

    Hedges:

    • 70% of 2010 gas hedged at over $6.60 (same % as last time, up a dime on the price)
    • 65% of 2010 oil hedged at $108.  (this was only at 40% as their last update so good hedging to them!)

     

    Nutshell: Good quarter. Bottom line beat on EPS and CFPS with strong guidance for 2010 volumes. Costs look a little high during the quarter (that can be end of year stuff) and in the guidance (that could be management bagging the Street). With volumes set to grow 8 to 12% (and I had said it would be 7 to 13% on the site yesterday) and oil and gas prices remaining elevated to what they were last year (especially given NFX's strong hedge position), it's hard to see how Street numbers don't go ahead, with spoonfed guidance in hand, and rally from the current levels. At present the Street puts 2009 CFPS at $11.98 and 2010 at $11.29, it just won't stay that way.

    Conference Call: Wednesday, 9:30 EST.



    Disclosure: LONG NFX and NFX calls
    Stocks: NFX, KWK, ROSE
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