Niche player takes GIANT step forward

"Being a niche player is great, but we had to grow," said David Trice, chairman, CEO, and president of Newfield. "So far, the market likes what we're doing and seems to have accepted our diversification story."

Indeed it has. Company stock was trading at approximately $60.01 a share in mid November, up from about $40 a share in November 2003.

"Newfield has a good inventory of resource plays that adds value to their stock," said Joseph Allman, an analyst with RBC Capital Markets in Houston. "This is a real strength for the company."

Asked if he sees Newfield's move into international waters as a favorable development for the company, Allman responded, "It is if they can take their expertise in the Gulf and transfer it overseas. The danger is that you spread yourself too thin. If you diversify to the point where you're not focused, this is the downside. However, Newfield makes a good argument that they had to diversify."

Newfield's third-quarter net income climbed 65 percent over the same quarter in 2003 due in part to price and volume spikes that yielded double-digit revenue growth. The company reported net income of $81.6 million, or $1.35 per share, for the most recent quarter, up from $49.4 million, or 88 cents a share, for the comparable period in 2003.

Revenues rose to $327.7 million from $248.7 million, representing a 32 percent increase over the 2003 period. Newfield's production recorded an eight percent jump to 60.7 billion cubic feet equivalent (Bcfe) over 56.1 Bcfe in the third quarter of last year.

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Looking ahead, Newfield expects to produce between 255 Bcfe and 270 Bcfe in 2005, compared with an estimated 240 Bcfe in 2004. This represents an increase of six percent to 12 percent over 2004 figures.

The company uses the forward markets to hedge, which Trice says has the "enthusiastic approval" of the board of directors.

"We always hedge," said Trice. "Our hedging program is intended to try to take some of the [price] volatility out of the market. I can't imagine a company in our business not using a hedging strategy."

New focus area

Following the $575 million acquisition of Denver-based Inland Resources in August, Newfield established a new focus area in the Rocky Mountains. Inland's major asset was the 110,000-acre Monument Butte Field, located in the Uinta Basin of Northeast Utah. Inland operated the field and maintained an average working interest of about 80 percent. The company estimates oil reserves at more than two billion barrels.

The Inland transaction, funded through a combination of debt and equity financing, provides Newfield with an internally estimated 326 Bcfe of proved natural gas reserves and 439 Bcfe of probable reserves. The reserves are 85 percent oil and are 70 percent proved undeveloped. Current net production is approximately 7,000 barrels of oil equivalent per day (BOEPD). Newfield expects to double production by the end of 2006.

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Newfield's proved gas reserves have grown to approximately 1.7 trillion cubic feet equivalent (Tcfe), of which 77 percent are proved developed and 70 percent are natural gas, according to the company. By acquiring Inland Resources assets, which are in longer-lived onshore basins, Newfield estimates its asset reserve life has been extended by nearly 20 percent to about seven years.

"The Monument Butte Field is an under-exploited legacy asset," said Trice. "It offers the opportunity for a well-financed, technically-driven company like us to drill hundreds of wells and to apply current and future technology to grow production for the next 10 years. This acquisition places Newfield on the map in the Rockies, an area in which we intend to grow in the future."

Because the market for long-lived gas reserves is intensely competitive, Trice believes crude oil assets like those in the Uinta Basin offer a better value.

"This is particularly true in view of the futures market for crude oil, which continues to exceed expectations and offers opportunities to assure historically high futures prices through appropriately structured hedging transactions," he added.

International moves

Newfield's newest international focus area is the North Sea, which management views as "similar to the Gulf of Mexico shelf in the late 1980s" when the major oil companies were leaving in search of greater profits in less-mature provinces. Trice and his staff believe the majors left behind many opportunities that could be profitably exploited.

The company purchased a regional 3-D seismic database covering the Southern Gas Basin. From this database, they are developing prospects and appraising undeveloped structures. Newfield and BP Exploration Operating Company have signed a deal to explore and develop the remaining hydrocarbon potential surrounding BP's West Sole Field in that basin. Under terms of the agreement, Newfield has agreed to pay 100 percent of the drilling and development costs for a 65 percent working interest. The company hopes to recover its costs through production.

Newfield's operations in China's Bohai Bay began in 1997 and represent the company's first steps internationally. After drilling four large exploration prospects, resulting in two discoveries, the fields were extended but are not yet commercially viable. As of late 2004, further field development plans are being discussed with the Chinese government. The company owns a 35 percent interest in this outside-operated venture.

Offshore Malaysia is another new focus area in 2004. Newfield subsidiaries have signed two production sharing contracts (PSCs) offshore Malaysia in partnership with the E&P subsidiary of state-owned Petroliam Nasional Berhad (Petronas). Oil production from two shallow water fields off the Malay Peninsula has already been established and drilling there continues. The partners are acquiring and evaluating seismic data from a deepwater block covering more than 1.1 million acres offshore Sarawak.

Newfield has a 50 percent non-operated interest in the shallow water fields and a 60 percent operated interest in the Sarawak block.

In Brazil, Newfield has participated in bid rounds and has been awarded three offshore blocks. The company is actively working exploration leads in these areas.

Evolution of GOM drilling

Newfield's exploration program in the Gulf of Mexico has evolved over time. From 1989 to 2000, the company's efforts were focused mainly on the traditional shelf – drilling targets from 10,000 to 15,000 feet. In the early 2000s, the company began to drill deeper targets with higher potential located between 15,000 and 20,000 feet deep.

During this period, Newfield established a deepwater team and the company remains active in this play as well. To date, Newfield has drilled 12 successful deep shelf exploration wells out of 19 attempts, and the company expects to spud additional deep shelf tests in the remainder of 2004 and 2005.

Newfield is developing the ultra-deep Treasure Bay Project in the Gulf of Mexico in collaboration with Petrobras America, Inc., a subsidiary of Brazil's Petrobras. Under the agreement, Petrobras will drill one or two exploration wells to earn an interest in Newfield's Treasure Bay leases. The first test well will spud in January 2005 and is being designed to test prospective objectives that range from 27,000 feet to 30,000 feet. BHP Billiton will serve as operator with a substantial working interest in the project.

In another financial move in 2004, Newfield purchased Denbury Offshore Inc., the subsidiary of Denbury Resources, Inc., that holds all its GOM assets. Purchase price of the predominantly gas assets was approximately $187 million and resulted in an overall production increase of between seven and 11 percent for Newfield. The acquisition was financed through cash on hand and the company's revolving credit facility.

"The Denbury Gulf of Mexico assets are an excellent fit with our offshore operations and will lead to substantial operating cost savings," said Trice.

Developing onshore assets

The decision to move into onshore plays in 1995 was made in part because the capital investment required to drill in the deepwater shelf is huge. This is part of the company's long-term strategy of maintaining a balanced portfolio of assets. Newfield intends to balance capital investment in low-risk properties that produce smaller returns with higher-risk properties with greater potential.

In early 2001, Newfield completed its largest acquisition to date – Lariat Petroleum. This allowed the company to establish a new focus area in the Anadarko Basin of Oklahoma, which added longer-lived reserves to the company's inventory and helping to lengthen its reserve-life index. About 90 percent of the reserves in this Mid-Continent region are natural gas.

At year end 2003, Newfield owned an interest in about 1,700 producing wells, about 614,000 gross acres, and 21,700 mineral acres in the Mid-Continent. The company operates 81 percent of its total proved reserves in the region, ranking it among the top 20 producers in Oklahoma. Although Anadarko is a mature basin, Newfield believes it offers opportunity for future growth and is in the process of identifying several low-risk, margin resource plays that have been underexploited.

In late 2002, Newfield acquired Gulf Coast explorer EEX Corporation, adding significant production and reserves in South Texas. This has been a major component of the company's recent growth. Newfield felt moving onshore in this region was a logical step because much of the onshore Gulf Coast has geologic features similar to the Gulf of Mexico, which they had been exploring for more than a decade.

In 2003, the company drilled 69 wells in South Texas and Louisiana compared to only eight wells in all of 2002. About 50 of the wells were drilled on properties acquired from EEX.

Company management

Trice assumed the chairman's role in addition to his other titles when legendary oilman Joe B. Foster retired from the position last September. Foster also served as CEO of Newfield until his retirement from active management in January 2000. Previously, Foster was chairman of Tenneco Oil Company and executive vice president and director of its parent, Tenneco, Inc. He was with Tenneco for 31 years and also served as chairman of its Tenneco Gas Pipeline Group. He and a group of Tenneco executives left the company in 1989 to found Newfield, which was taken public in 1993.

Foster announced his retirement and Trice's appointment as chairman at the Herold Pacesetters Energy Conference in Greenwich, Connecticut, on September 21. He remains on the board of directors and is still a major shareholder in Newfield.

"I plan to make it a point to visit the office about once a month, probably to attend the monthly employee birthday party, which helps me keep a finger on the pulse of the company," said Foster.

Trice is the only one of the original founders who is not a former Tenneco executive. An attorney with a JD degree from Columbia University's School of Law and a BA in managerial science from Duke University, Trice was an attorney with an Atlanta law firm from 1973 to 1980. From 1980 to 1989, he served as an officer of several companies owned by Roy M. Huffington, Inc. It was there that he attracted the attention of Foster, who urged him to join them in the creation of Newfield. He did so and served as vice president, CFO, and as a director until leaving for five years in 1991 to become president, CEO, and director of Huffco Group, Inc.

Trice returned to Newfield in 1997 as president of Newfield International Holdings after Huffco was sold to Newfield. He quickly moved up the corporate ladder, becoming president and COO of Newfield Exploration in May 1999. In February 2000, he became chief executive of the company and was elected to the board of directors. Last September, he added the title of chairman of the board – a hat trick in the parlance of ice hockey players and fans.

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In addition to Newfield, Trice currently serves on the boards of directors of Hornbeck Offshore Services, Inc.; Grant Prideco, Inc., and New Jersey Resources.

Other senior Newfield executives include David F. Schaible, executive vice president – operations and acquisitions; Elliott Pew, executive vice president – exploration; Terry W. Rathert, senior vice president, CFO, and corporate secretary; and William D. Schneider, vice president of international. Of the group, only Pew, who joined the company in 1998 from Louis Dreyfus Natural Gas Company, is not a co-founder of the company and former Tenneco employee.

It's A Fact
In November 1993, Newfield completed its initial public offering of common stock and began trading on the New York Stock Exchange under the ticker symbol "NFX." The company went public at a split-adjusted price of $8.75 per share. The closing price at the end of trading on Nov. 20, 2004, was $60.01.

Ethics and corporate governance

Newfield emphasizes that sound corporate governance principles are critical to ensuring the trust of investors. A majority (11 out of 14) of the company directors are independent as defined by the New York Stock Exchange. The company has established a toll-free Ethics Line so that investors, employees and other interested parties can anonymously report through a third party any violation of corporate governance policies.

"From modest beginnings, the company has come a long way," mused Trice. "Newfield began with about $9 million in startup capital and largely through the reputation of Joe B. Foster we were able to obtain about $37 million [more]."

This second private placement of $37 million in April 1990 came from investors that included Yale and Duke Universities, Dartmouth College, and Warburg, Pincus Investors LP.

"We also had timing working for us in 1989 – it was a good time to start an exploration company," said Trice. "After that, we had a track record of success that enabled us to grow and ultimately go public in '93."

He added, "Our overriding mission is to deliver profitable growth every year. We don't feel compelled to grow 15 percent a year, although we will some years.

Two percent growth is more than adequate. As Joe Foster has said many times, 'If each year you do two percent better than the last, you are 50 to 100 percent better than your competition.'"

In November 1993, Newfield completed its initial public offering of common stock and began trading on the New York Stock Exchange under the ticker symbol "NFX." The company went public at a split-adjusted price of $8.75 per share. The closing price at the end of trading on Nov. 20, 2004, was $60.01.