Newfield Exploration Co. Thursday raised its 2011 capital budget to $1.9 billion from $1.7 billion set at the beginning of the year. The increase largely relates to leasing in "an undisclosed resource play," said CEO Lee Boothby during a conference call with financial analysts.

"Our expansion into this area actually began in 2010," he said. "Although we felt it was prudent to include in our planned expenditures, we are not yet ready to disclose our position in this area...[W]e want to keep our stealth play stealth..."

Production guidance for 2011 remains 312-323 Bcfe, an estimated increase of 8-12% over 2010 volumes.

Another reason for the increased budget is higher costs, Boothby said, noting 5-10% increases in service and labor costs throughout the company's onshore operations in the United States. "These increased costs relate to pressure pumping, steel price inflation, water handling trucking costs, mostly diesel-related, as well as overall increases in labor expenses," he said.

Drilling results in Newfield's Eagle Ford Shale acreage in South Texas and elsewhere have been strong. "...[W]e are drilling wells in record time in the Eagle Ford, the Uinta Basin and the Granite Wash," Boothby said. "The resulting impact is more wells and more completions in a given calendar year.

"During the first quarter, our Eagle Ford Shale wells were drilled and cased at an average of less than 10 days. This illustrates that our experience from other resource plays is transportable. Our initial drilling results in the Eagle Ford were encouraging, and our efforts today are focused on optimizing our completions to increase both oil production rates and [estimated ultimate recoveries]."

The level of drilling performance in the Eagle Ford has been a bit of a surprise to the company, Boothby allowed, although he said the play is one area where costs have been rising and the company is monitoring spending closely.

"...I'll just say that drilling and casing Eagle Ford wells, 5,000-foot laterals down there in less than 10 days is not something we were planning for just six months ago," Boothby said. "You need to look at more than just rig count because we can certainly deliver a lot more wells per rig year in the Eagle Ford sitting here today than we were expecting six months ago."

And in the Uinta, capital spending is targeted in association with the company's yet-to-close acquisition of assets from Harvest Natural Resources Inc. (see Shale Daily, March 24), Boothby said. "This deal is expected to close in the second quarter, and we intend to promptly go to work on the assets." In the Harvest Uinta assets "...our first step is to optimize," Boothby said. "...I think that's a prudent first step. And the second step will be acceleration."

As Newfield has shifted capital to oil and liquids-rich production, Boothby said the higher capital spending will be largely offset by higher oil price realizations. "In addition, we have an ongoing program to divest nonstrategic domestic assets," he said. "These sales will allow us to direct proceeds to our core development projects, as well as refocus human capital to other programs."

Newfield has planned about $200 million of divestitures and has reached agreements for deals amounting to about half that amount, Boothby said.

While costs are rising, increases vary by region and Newfield executives emphasized that the company has flexibility to direct capital to where it can get the most bang for its buck. COO Gary Packer also said Newfield's ability to respond to rising costs varies by play. "We see cost inflation in all the plays," he said. "The question is: how much are we able to push back from an efficiency gain? I'd say the Granite Wash team is ringing the bell right now as far as their ability to push back and drill best-in-class wells and offset those increases, that we've been able to essentially hold those flat."

Spending will be prudent and not intended to "make a point," Boothby said.

"Adding activity into an overheated area just to prove that you can run more rigs is not always a smart decision," he said. "In fact, I'd say most days of the week it's a dumb decision. So we're going to be very, very prudent and careful with regard to when and where we ramp, and we're going to make sure that we work hard to preserve our margins."

Newfield reported a net loss of $17 million (minus 13 cents/share) for the first quarter, which includes a net unrealized loss on commodity derivatives of $237 million ($150 million after-tax), or $1.11/share. Excluding this item, net income for the first quarter was $133 million (98 cents/share).

First quarter production was 72 Bcfe. Natural gas production was 45 Bcf, an average of 503 MMcf/d. Newfield's oil liftings and liquids production in the first quarter were 4.4 million bbl, or an average of about 49,000 b/d. Capital expenditures in the first quarter of 2011 were about $434 million.

The largest contributor to Newfield's 2011 estimated increase in domestic oil production is its Rocky Mountain focus area. Production in the first quarter of 2011 increased 27% over the same period of 2010. During the first quarter of 2011, Newfield's sales were about 2.3 MMBoe, or 25,000 b/d. For the full year 2011, Newfield expects that its Rocky Mountain production will grow more than 25% over 2010 annual volumes and exit 2011 at a rate of about 33,000 b/d. About two-thirds of the region's production is oil.

In the Midcontinent Newfield continues to run a four-rig program in the Granite Wash, located primarily in Wheeler County, TX. The 2011 Granite Wash program is focused on the liquids-rich geologic intervals within the play. Over the last year Newfield added more than 10,000 net acres in the Granite Wash. Assessment of new areas is planned for the second half of 2011.

In the Arkoma Basin Newfield is focused on the oily portion of the Woodford Shale. "This relatively new play for the company is prospective on approximately 15% of the company's 172,000 net acres in the basin," the company said. For 2011 Newfield said it plans to run two to three operated rigs in the Arkoma Basin.

In the Eagle Ford Newfield is running two to three operated rigs and continues to assess its 335,000-net acre position in the Maverick Basin (approximate 85% working interest). Drilling and completion operations in the basin ceased in October due to seasonal hunting stipulations. Activities resumed in February. Contracted fracture stimulation services are in the field and five wells have been drilled and are planned for completion in the second quarter.