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Kerr-McGee Hikes Spending, Sees Output Growing 7-12% through '08

Kerr-McGee Corp. last week pumped up its 2006 capital program by $170 million to accelerate drilling onshore in the United States, which in turn is expected to boost estimated oil and natural gas production by 7-12% through 2008. About $50 million will be used to expand infrastructure in the Uinta Basin, including construction of a 250 MMcf/d gas processing plant, which could be expanded to 500 MMcf/d.

Total U.S. gas production by the end of this year is expected to reach 903-941 MMcf/d. Actual 1Q2006 output was 934 MMcf/d.

"The additional capital supports our strategic plan to accelerate development activities and production in the U.S. onshore and maximize the value of our vast inventory of low-risk growth projects," said COO Dave A. Hager. "The board's actions...enable us to increase the number of rigs operating in the Greater Natural Buttes area of eastern Utah and the Wattenberg field in northeastern Colorado, as well as maintain the current three-rig program in the South Texas and Gulf Coast areas."

Kerr-McGee had forecast production would grow at a rate of 5-9% through 2008. In its new forecast, 2006 output will range between 240,000-250,000 boe/d, 2007 output will range between 265,000-300,000 boe/d, and 2008 output will range between 280,000-320,000 boe/d.

About $60 million will be spent to increase drilling in the Greater Natural Buttes area in the Uinta Basin, with plans to raise the number of gross wells drilled to 275 from 220. Kerr-McGee has identified a net unbooked resource potential there of 4.7 Tcfe. The company plans to tender bids for two new rigs to be built each year for the next three to four years, bringing the total number of operated rigs to 15 from the current eight. It currently holds a one-year inventory of approved permits and is receiving 20-25 additional permits each month, while drilling about 15 wells per month.

In the Wattenberg field, the approved plan makes $25 million available to fund additional drilling activities, including tendering bids for one to two new rigs each year through 2007, which would increase the total number of operated rigs to nine from five. Additional drilling would begin in the fall and provide for 1-3% annual production growth in 2007.

Another $35 million would be spent on the Frost and Braulia fields of South Texas, where the company has drilled eight successful wells. This year, the company now plans to drill 15-18 additional wells there.

"Our program in the U.S. onshore has extremely strong economics, and by expanding the capital program, we will be able to increase organic growth, near- and long-term production rates and enhance our capacity to deliver FD&A (finding, development and acquisition) costs that are very competitive," said Hager. He said the accelerated program would be accretive to reserves, cash flow and production on a debt-adjusted per-share basis.

Funding would be internally generated. By year's end, Kerr-McGee also expects to complete its $1 billion share-repurchase program and pay down $300 million of debt.

Also last week the company's board of directors approved an additional $80 million dedicated to the deepwater Gulf of Mexico (GOM) for ongoing exploration and development projects, including appraisal work on its latest natural gas discovery at Claymore in Atwater Valley Block 140. The No. 1 well drilled to a total depth of 25,000 feet and encountered more than 150 feet of net pay in multiple zones.

Claymore is located in 3,700 feet of water, 150 miles southeast of New Orleans, and Kerr-McGee operates the lease with a 33.5% working interest. Dominion Exploration & Production Inc. owns 31.5% interest, Statoil Gulf of Mexico LLC holds 25% interest, and Woodside Energy (USA) Inc. holds a 10% stake. The rig will remain on location and begin drilling the side-track appraisal well, about 4,600 feet to the northeast of the discovery well to test the down-dip limit of the reservoir.

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