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Newfield Waits for Better Economics to Increase Woodford Activity

Newfield Exploration Co. has slowed the drilling pace in some of its Midcontinent operations for "economic reasons" -- low natural gas prices and a continuing decline in service costs -- the company's president said Thursday.

The independent, one of the biggest operators in the Woodford Shale in Oklahoma, released one rig in the play in 1Q2009. It now has 11 operated rigs under term contract in the field, with six of the rigs rolling off of term contracts in 2009, said President Lee K. Boothby.

"The timing of rig contract expirations and the fact that more than 90% of the company's 165,000 net acres now held-by-production provide Newfield with operational flexibility in the second half of 2009," Boothby told energy analysts during a conference call. Boothby, who was named president in February, is expected to be named CEO at the company's annual meeting in May to succeed David Trice, who is retiring (see Daily GPI, Feb. 9).

Newfield is "encouraged by the service cost reductions that we're seeing, but we haven't reset the budget at this point despite the observations on service costs because there are still uncertainties on cash flow and pricing," said Boothby. "All the vectors are positive, but we don't have any plans to increase activity at this stage. We're focused on executing the plans laid out for 2009 and that's our focus."

The process to defer wells in the Woodford Shale "is just starting," said George T. Dunn, who leads the company's Midcontinent division. "Our cycles are lumpy, and in January and February we were slowing down, and now wells are being deferred through the second quarter...Pumping services are about as low as they are going to get, and as we move forward, we'll continue to monitor gas prices. Costs are in the right direction already, but we'll need to determine what we need to do in regards to gas prices and when they come back and when we begin to complete wells."

Boothby said there were "about 10" wells deferred so far. "It's in the early stages, and we'll monitor the inventory in real time. We will have to monitor the economic conditions as the year unfolds."

Energy analyst Dan Pickering of Tudor, Pickering, Holt & Co. Securities Inc. (TPH) said Newfield (NFX) was "sending a clear message to the guys in the field...drill wells that are economic today...having 75% of production hedged does not suggest NFX will lose money on the other 25%. We estimate NFX has 15-20 wells that are drilled but not completed and expect that backlog to grow over the next several months. Completion costs in the Woodford are down 20% year to date (YTD), with 65% of a Woodford well's cost is on the completion side, so NFX will keep drilling wells while rig contracts expire (two rigs already off contract, six more rigs expected to come off contract shortly)."

More important, said the TPH analyst, "NFX increased its average working interest by 3% YTD (now 61%) by utilizing Oklahoma's forced pooling to take up its working interest in wells where smaller partners (who don't have NFX's strong hedged position) decided to opt out. We believe this is one of the most economic ways to add acreage, as working interest increases in areas where you've already decided to drill without writing a check for access to acreage."

Newfield's management was more optimistic about Midcontinent development in the Stiles Ranch Field in the Texas Panhandle. There, the producer achieved record production in the first three months of the year, with output of 145 MMcfe/d gross. Newfield, which has an 80% working stake in the field, added one rig in the field in 1Q2009 bringing its total to three rigs drilling horizontal wells.

Even though drilling has slowed in the Woodford Shale, Newfield's gas pricing across its Midcontinent operations is expected to improve once an expansion of the Midcontinent Express Pipeline (MEP) begins operations, said Boothby. MEP in February asked the Federal Energy Regulatory Commission for permission to add 300,000 MMcf/d to its 1.5 Bcf/d pipe project, which would provide more takeaway capacity for producers across Oklahoma, Arkansas and Texas (see Daily GPI, Feb. 12). MEP is scheduled to complete part of the expansion around mid-July.

By the end of June, Newfield's realized prices for its Midcontinent gas are "expected to improve to 80-85% of the Henry Hub Index" as the company begins to use firm transportation agreements to move its gas to the Perryville, LA, markets, Boothby said. Newfield's Midcontinent gas prices, after basis differentials, transportation and handling charges, "typically" have averaged 70-80% of the Henry Hub.

Gross operated production in the Woodford Shale, where Newfield is the top operator, is about 240 MMcfe/d. Production from Newfield's entire Midcontinent division is about 400 MMcfe/d gross, or nearly 300 MMcfe/d net. Across its global operations, Newfield's total quarterly production reached 63 Bcfe. Capital expenditures were $369 million.

Newfield posted a quarterly net loss of $694 million (minus $5.35/share), which it attributed to a $1.3 billion writedown of its natural gas and oil assets because of lower commodity prices. Minus the one-time charges, net income would have been $112 million (85 cents/share). Revenue totaled $262 million; net operating cash was $347 million.

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