Houston-based independent Newfield Exploration Co. late Monday said it would buy 50,000 net acres in the Marcellus Shale from EOG Resources Inc. in a transaction valued at $405 million.

Exploratory drilling in Newfield's deepwater Gulf of Mexico (GOM) portfolio would be deferred in the coming year to allow the company to reallocate $70 million to its Appalachian development program. GOM production in the middle of May was about 90 MMcfe/d net. Output in 2010 is expected to account for about 11% of Newfield's total production; 14% of the capital budget was allocated to the deepwater this year.

The additional onshore leasehold is mostly in Bradford County, PA, in the Susquehanna River Basin. Closing is expected before the end of the year.

"This transaction doubles our footprint in the Marcellus and adds core acreage with attractive development drilling opportunities," said CEO Lee K. Boothby. "This Marcellus acreage is high quality and has a low cost structure. It will complement our portfolio of oil assets and provide us with greater flexibility in future commodity price cycles.

"The deal is consistent with our strategy of building a business in the Appalachian region, just as we have done in the Midcontinent and the Rocky Mountains. The acreage is contiguous and has a gathering system in place that will allow us to access markets and grow production."

Gross production from EOG's five wells currently is about 7 MMcf/d. Included in the transaction is an inventory of 11 uncompleted wells with 10 additional wells planned by the end of the year. Current gathering capacity is 25 MMcf/d with capability to expand to 95 MMcf/d early next year. Newfield estimates that more than 400 gross operated well locations exist on the acreage with net unrisked reserve potential of 1.5-2.0 Tcfe.

Newfield plans to run two operated rigs and invest about $100 million in 2011 to hold the acreage by production. Net production in 2011 from the acquired properties is expected to exceed the production associated with the nonstrategic assets planned to be sold next year, the producer said.

The independent first entered the Appalachian Basin in October 2009 in a 50-50 joint venture with Hess Corp. that covers about 70,000 gross acres primarily in Wayne County, PA (see Daily GPI, Oct. 15, 2009). To date the partnership has drilled three exploratory wells; Newfield is the operator.

Newfield also has assembled about 165,000 net acres in the Woodford Shale. At the end of 2009 the producer had drilled close to 300 horizontal wells in the play with gross operated production of about 300 MMcfe/d.

The latest transaction would be financed under Newfield's revolving credit facility, which is an undrawn $1.25 billion facility. Longer term, the company plans to reduce its debt through noncore asset sales.

EOG said the sale represents "less than one-half of 1%" of its total North American production. Once the transaction closes, the producer would retain about 170,000 net acres in northwestern Pennsylvania in the Marcellus.

With the Newfield transaction and other lease sales signed or anticipated to be completed by year-end, EOG said total proceeds from the asset sales will be $1 billion.

Earlier this month EOG CEO Mark G. Papa said the company was shifting its focus to onshore oil prospects (see Daily GPI, Nov. 4). EOG plans to sell between $600 million and $1 billion of both producing and nonproducing properties, primarily natural gas, in North America. Most of the transactions are expected to close by the end of the year.

"The sale of this Marcellus acreage is a part of EOG's previously announced tactical plan to sell certain producing and nonproducing natural gas assets in North America," said Papa. "These sales will add liquidity to partially fund EOG's liquids weighted capital expenditure program."

Analysts with Tudor, Pickering, Holt & Co. said Newfield paid about $8,000/acre for the EOG leasehold. Buying the gassy Marcellus assets, they said, is "more negative than positive" from a near-term market view.

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