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NFX > SEC Filings for NFX > Form 10-Q on 30-Apr-2014All Recent SEC Filings

Show all filings for NEWFIELD EXPLORATION CO /DE/

Form 10-Q for NEWFIELD EXPLORATION CO /DE/


30-Apr-2014

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Overview

We are an independent energy company engaged in the exploration, development and production of crude oil, natural gas and natural gas liquids. Our principal domestic areas of operation include the Mid-Continent, the Rocky Mountains and the onshore Gulf Coast regions of North America.

To maintain and grow our production and cash flows, we must continue to develop existing proved reserves and locate or acquire new oil and natural gas reserves to replace those reserves being produced. Our revenues, profitability and future growth depend substantially on prevailing prices for oil, natural gas and NGLs and on our ability to find, develop and acquire oil and natural gas reserves that are economically recoverable. Prices for oil, natural gas and NGLs fluctuate widely and affect:

the amount of cash flows available for capital expenditures;

our ability to borrow and raise additional capital; and

the quantity of oil, natural gas and NGLs that we can economically produce.

Discontinued Operations

During the second quarter of 2013, our international businesses met the criteria to be classified as held-for-sale and reported as discontinued operations. As such, the results of operations for our international businesses are reflected as "discontinued operations" and discussed further in Note 3, "Discontinued Operations," to our consolidated financial statements appearing earlier in this report.

Malaysia. On February 10, 2014, Newfield International Holdings Inc., a wholly-owned subsidiary of the Company, closed the sale of our Malaysia business to SapuraKencana Petroleum Berhad, a Malaysian public company, for $898 million (subject to customary purchase price adjustments). See Note 3, "Discontinued Operations," to our consolidated financial statements appearing earlier in this report for additional information regarding the sale of our Malaysia business.

China. In August 2013, during the installation of the LF-7 topside facilities by a third-party contractor, a hydraulic jacking system malfunctioned and the installation was suspended. We are now in the process of completing our underwater inspections of the jacket to assess the extent of the damage. Plans are underway to repair the damage to the jacket mid-year 2014, and we plan to install the LF-7 topside facilities in the third quarter of 2014. We expect to achieve first oil production in late 2014. We continue to pursue the sale of our China business.

Results of Continuing Operations
Our continuing operations consist of exploration, development and production activities in the United States.

Revenues. Our revenues are primarily from the sale of oil, natural gas and NGLs and may vary significantly from period to period as a result of changes in commodity prices or volume of production sold.

Revenues from continuing operations of $553 million for the first quarter of 2014 were 50% higher than the comparable period of 2013. The increase was primarily due to higher liquids production and higher commodity prices. Our liquids production increased 46% in the first quarter of 2014 compared to the first quarter of 2013. Our natural gas production declined as we continue to focus capital investments on higher-margin liquids production. The following table reflects our production from continuing operations and average realized commodity prices for the following periods:


                                         Three Months Ended
                                              March 31,                 Percentage
                                           2014           2013      Increase (Decrease)
Production:(1)
Crude oil and condensate (MBbls)          4,121           2,964            39  %
Natural gas (Bcf)                          28.0            28.4            (1 )%
NGLs (MBbls)                              1,681           1,018            65  %
Total (MBOE)                             10,466           8,712            20  %
Average Realized Prices:(2)
Crude oil and condensate (per Bbl)   $    86.46         $ 83.90             3  %
Natural gas (per Mcf)                      4.65            3.14            48  %
NGLs (per Bbl)                            38.11           28.63            33  %
Crude oil equivalent (per BOE)            52.60           42.12            25  %


________________


(1) Excludes natural gas produced and consumed in operations of 1.8 Bcf and 2.6 Bcf during the three months ended March 31, 2014 and 2013, respectively.

(2) Had we included the realized effects of derivative contracts, the average realized price for total natural gas would have been $3.89 and $4.09 per Mcf for the three months ended March 31, 2014 and 2013, respectively, and the average crude oil realized price would have been $82.26 and $84.07 per Bbl for the three months ended March 31, 2014 and 2013, respectively. We did not have any derivative contracts associated with NGL production for the periods presented.

Production. Our first quarter 2014 total production from continuing operations increased 1,754 MBOE, or 20%, compared to first quarter of 2013 as a result of increased liquids production partially offset by decreased natural gas production. The decrease in natural gas production was due to natural decline as a result of reduced investment in natural gas wells. Our domestic liquids production increased approximately 46% in the first quarter of 2014 compared to the first quarter of 2013.

Operating Expenses. The following table presents information about our operating expenses for our continuing operations for the following periods:

                                               Unit-of-Production                                 Total Amount
                                                                                   Three Months Ended March
                                 Three Months Ended March 31,      Percentage                 31,                Percentage
                                                                    Increase                                      Increase
                                       2014            2013        (Decrease)          2014          2013        (Decrease)
                                           (Per BOE)                                     (In millions)
Lease operating                  $         10.58     $ 10.04           5 %         $      111     $     88           27 %
Production and other taxes                  2.43        1.39          75 %                 25           12          111 %
Depreciation, depletion and
amortization                               17.98       16.91           6 %                188          147           28 %
General and administrative                  5.32        5.17           3 %                 56           45           23 %
Total operating expenses                   36.31       33.51           8 %                380          292           30 %

Our operating expenses for continuing operations for the three months ended March 31, 2014, increased 8% over the same period of 2013 stated on a per BOE basis. The reasons for the increase follow:

Lease operating expense (LOE) increased 5% per BOE in comparison to the first quarter of 2013 primarily due to increased costs for water disposal, labor and fuel gas.

Production and other taxes increased 75% per BOE, or $13 million, in comparison to the first quarter of 2013. Higher revenues resulted in an increase in production and other taxes of approximately $8 million in the first quarter of 2014. The remaining increase between periods was due to nonrecurring production tax credits in our Rocky Mountains region during the first quarter of 2013.

Total depreciation, depletion and amortization (DD&A) increased 28% primarily due to a 20% increase in production during the first quarter of 2014 compared to the first quarter of 2013.

General and administrative (G&A) expenses per BOE increased 3% during the first quarter of 2014 compared to the first quarter of 2013, primarily related to increased employee-related expenses associated with our Stockholder Value


Appreciation Program. See Note 11, "Stock-Based Compensation," to our consolidated financial statements appearing earlier in this report. For the three months ended March 31, 2014, we capitalized $36 million ($3.46 per BOE) of direct internal costs as compared to $28 million ($3.23 per BOE) during the comparable quarter of 2013.

Interest Expense. The following table presents information about interest expense:

                                  Three Months Ended
                                      March 31,
                                  2014          2013
                                    (In millions)
Gross interest expense:
Credit arrangements            $     3       $     2
Senior notes                        25            25
Senior subordinated notes           23            24
Total gross interest expense        51            51
Capitalized interest               (13 )         (14 )
Net interest expense           $    38       $    37

Interest expense associated with unproved oil and gas properties is capitalized into oil and gas properties. Capitalized interest decreased $1 million for the three months ended March 31, 2014, as compared to the first quarter of 2013, due to a reduction in our average balance of unproved oil and gas properties.

Commodity Derivative Income (Expense). The fluctuations in commodity derivative income from period to period are due to the volatility of oil and natural gas prices and changes in our outstanding derivative instruments during these periods.

Taxes. The effective tax rates for the three months ended March 31, 2014 and 2013 were 42.4% and 38.5%, respectively. Unrealized derivative gains and losses are treated differently in the various state taxing jurisdictions to which we are subject. As a result, our effective tax rate fluctuates in periods with significant commodity price volatility.

Results of Discontinued Operations - Malaysia and China

Revenues and Liftings. Our international revenues are primarily from the sale of crude oil. Substantially all of the crude oil from our offshore operations is produced into FPSOs and "lifted" and sold periodically as barge quantities are accumulated. Revenues are recorded when oil is lifted and sold, not when it is produced into FPSOs or onshore storage terminals. As a result, the timing of liftings may impact period-to-period results. On February 10, 2014, we closed the sale of our Malaysia business. See Note 3, "Discontinued Operations," to our consolidated financial statements appearing earlier in this report for additional information regarding the sale.

Revenues from discontinued operations of $108 million and crude oil and condensate liftings of 986 MBbls for the first quarter of 2014 were lower than the comparable period of 2013 by 62% and 61%, respectively. These decreases are primarily due to the sale of our Malaysia business. The following table reflects our production from discontinued operations and average realized commodity prices for the following periods:

                                                     Three Months Ended March 31,          Percentage
                                                         2014              2013        Increase (Decrease)
Production/Liftings:(1)
Crude oil and condensate (MBbls)                               986          2,548               (61 )%
Natural gas (Bcf)                                                -            0.2              (100 )%
Total (MBOE)                                                   986          2,588               (62 )%

Average Realized Prices:
Crude oil and condensate (per Bbl)                 $        109.46     $   110.02                (1 )%
Natural gas (per Mcf)                                            -           3.79              (100 )%
Crude oil equivalent (per BOE)                              109.46         108.69                 1  %


________________


(1) Represents our net share of volumes sold regardless of when produced.


Operating Expenses. The following table presents information about our operating expenses for our discontinued operations:

                                              Unit-of-Production                                        Total Amount
                                                                                      Three Months Ended March
                             Three Months Ended March 31,         Percentage                     31,                    Percentage
                                  2014             2013       Increase (Decrease)         2014           2013       Increase (Decrease)
                                      (Per BOE)                                             (In millions)
Lease operating             $         13.52     $  13.66                (1 )%        $         14     $     35               (59 )%
Production and other
taxes                                 28.68        39.69               (28 )%                  28          103               (72 )%
Depreciation, depletion
and amortization                      36.64        28.85                27  %                  36           74               (52 )%
General and
administrative                            -         0.34              (100 )%                   -            1              (100 )%
Total operating expenses    $         78.84     $  82.54                (4 )%        $         78     $    213               (64 )%

Our total operating expenses for discontinued operations for the three months ended March 31, 2014, decreased $135 million compared to the same period of 2013. Operating expenses declined as a result of the sale of our Malaysia business on February 10, 2014.

Liquidity and Capital Resources

The following discussion is inclusive of both our continuing and discontinued operations, unless otherwise noted.

We must find new and develop existing reserves to maintain and grow our production and cash flows. We accomplish this through drilling programs and property acquisitions, which require substantial capital expenditures. Lower prices for oil, natural gas and NGLs may reduce the amount of oil and gas that we can economically produce and can also affect the amount of cash flow available for capital expenditures and our ability to borrow and raise additional capital, as further described below.

We establish a capital budget at the beginning of each calendar year and review it during the course of the year. Our capital budgets (excluding acquisitions) are created based upon our estimate of internally generated sources of cash, as well as the available borrowing capacity of our revolving credit facility. Our 2014 budget will be financed through our cash flows from operations, proceeds from our recent Malaysia sale and the use of our credit facility. Approximately 89% of our expected 2014 domestic oil and gas production (excluding NGLs) supporting our estimated 2014 capital budget is protected from price volatility through our derivative contracts. Our 2014 capital budget for our continuing operations, excluding estimated capitalized interest and overhead of $182 million, is expected to be approximately $1.6 billion and focuses on liquids-rich projects with higher returns. Depending on the timing of the sale of our China business, we intend to invest approximately $145 million in China.

Actual capital expenditure levels may vary significantly due to many factors, including drilling results; oil, natural gas and NGL prices; industry conditions; the prices and availability of goods and services; and the extent to which properties are acquired or non-strategic assets sold. We continue to screen for attractive acquisition opportunities; however, the timing and size of acquisitions are unpredictable. We believe we have the operational flexibility to react quickly with our capital expenditures to changes in circumstances and our cash flows from operations.

We continuously monitor our liquidity needs, coordinate our capital expenditure program with our expected cash flows and projected debt-repayment schedule, and evaluate our available funding alternatives in light of current and expected economic conditions. We believe that our liquidity position and ability to generate cash flows from our asset portfolio will be adequate to fund 2014 operations and continue to meet our other obligations.

Credit Arrangements. We maintain a revolving credit facility of $1.4 billion that matures in June 2018, as well as money market lines of credit of $195 million, for a total borrowing capacity of $1.6 billion. At March 31, 2014, we had no scheduled maturities of senior notes or senior subordinated notes until 2018. For a more detailed description of the terms of our credit arrangements and senior and senior subordinated notes, please see Note 9, "Debt," to our consolidated financial statements appearing earlier in this report.

As of April 28, 2014, we had no borrowings under our revolving credit facility or money market lines.

Working Capital. Our working capital balance fluctuates as a result of the timing and amount of borrowings or repayments under our credit arrangements, changes in the fair value of our outstanding commodity derivative instruments as well as the timing


of receiving reimbursement of amounts paid by us for the benefit of joint venture partners. Without the effects of commodity derivative instruments, we typically have a working capital deficit or a relatively small amount of positive working capital. We anticipate that our 2014 capital investment levels will exceed our estimate of cash flows from operations. As a result, we used proceeds from our recent Malaysia sale to fund the shortfall in the first quarter as well as to restore the available capacity of our credit facility to $1.4 billion, which we expect to use to fund the expected remaining shortfall.

At March 31, 2014, we had negative working capital of $328 million compared to negative working capital of $389 million at December 31, 2013. The changes in our working capital are primarily a result of the timing of the collection of receivables; changes in the fair value of our derivative positions; the timing of crude oil liftings in our international operations; drilling activities; payments made by us to vendors and other operators; and the timing and amount of advances received from our joint operations.

Cash Flows from Operations. Our primary source of capital and liquidity are cash flows from operations and are primarily affected by the sale of our oil, natural gas and NGLs, as well as commodity prices, net of the effects of derivative contract settlements and changes in working capital.

Our net cash flows from operations were $365 million (includes $87 million of cash flows from discontinued operations) for the three months ended March 31, 2014, an increase of $6 million compared to net cash flows from operations of $359 million for the same period in 2013 primarily due to changes in working capital.

Cash Flows from Investing Activities. Net cash provided by investing activities for the three months ended March 31, 2014 was $297 million compared to $399 million used in investing activities for the same period in 2013. The change is due to the 2014 sale of our Malaysia business and proceeds from redemption of investments partially offset by increased capital expenditures in 2014 compared to 2013.

Cash Flows from Financing Activities. Net cash used in financing activities for the three months ended March 31, 2014 was $650 million compared to $4 million for the same period in 2013. During the three months ended March 31, 2014, we repaid all outstanding borrowings under our revolving credit facility using proceeds received from the sale of Malaysia.

Capital Expenditures. Our capital investments of $423 million for the first three months of 2014 increased 15% from our capital investments of $367 million during the same period of 2013. These amounts exclude non-cash asset retirement obligations, and capitalized interest and capitalized direct internal costs.

                                                            Three Months Ended
                                                                 March 31,
                                                               2014             2013
                                                               (In millions)
Exploitation and development                          $       328              $ 264
Exploration (exclusive of exploitation and leasehold)          53                 30
Leasing proved and unproved property (leasehold)               12                  3
Pipeline spending                                               4                  3
Plug and abandonment settlements                                -                  3
Discontinued operations                                        26                 64
Total                                                 $       423              $ 367

Commitments under Joint Operating Agreements. Most of our properties are operated through joint ventures under joint operating or similar agreements. Typically, the operator under a joint operating agreement enters into contracts, such as drilling contracts, for the benefit of all joint venture partners. Through the joint operating agreement, the non-operators reimburse, and in some cases advance, the funds necessary to meet the contractual obligations entered into by the operator. These obligations are typically shared on a "working interest" basis. The joint operating agreement provides remedies to the operator if a non-operator does not satisfy its share of the contractual obligations. Occasionally, the operator is permitted by the joint operating agreement to enter into lease obligations and other contractual commitments that are then passed on to the non-operating joint interest owners as lease operating expenses, frequently without any identification as to the long-term nature of any commitments underlying such expenses.


Contractual Obligations

The table below summarizes our significant contractual obligations by maturity
as of March 31, 2014.
                                                                          Less than                                     More than
                                                              Total        1 Year        1-3 Years      4-5 Years        5 Years
                                                                                          (In millions)
Continuing operations
Debt:
       5% Senior Notes due 2022                            $   750      $        -     $       -     $         -     $       750
       5?% Senior Notes due 2024                              1,000               -             -               -           1,000
       7?% Senior Subordinated Notes due 2018                   600               -             -             600               -
       6?% Senior Subordinated Notes due 2020                   700               -             -             700               -
               Total debt                                     3,050               -             -           1,300           1,750
Other obligations:
       Interest payments                                      1,416             190           571             316             339
       Net derivative (assets) liabilities                       93             108           (15 )             -               -
       Asset retirement obligations                             109               4            20               3              82
       Operating leases and other (1)                           239              88            75              37              39
       Firm transportation                                      425              78           218             105              24
               Total other obligations                        2,282             468           869             461             484
               Total contractual obligations from
               continuing operations                        $ 5,332      $      468     $     869     $     1,761     $     2,234
Discontinued operations
Other obligations:
       Asset retirement obligations                         $     2     $         -     $       -     $         -     $         2
       Operating leases and other                                 1               1             -               -               -
       Oil and gas activities (2)                               159               -             -               -               -
       Total contractual obligations from discontinued
       operations(3)                                        $   162      $        1     $       -     $         -     $         2


________


(1) Includes agreements for office space, drilling rigs and other equipment, as well as certain service contracts. The majority of these obligations are related to contracts for office space and drilling rigs and are included at the gross contractual value. Due to our various working interests where the drilling rig contracts will be utilized, it is not feasible to estimate a net contractual obligation. Net payments under these contracts are accounted for as capital additions to our oil and gas properties and could be significantly less than the gross obligation disclosed.

(2) As is common in the oil and gas industry, we have various contractual commitments pertaining to exploration, development and production activities. We have work-related commitments for, among other things, drilling wells, platform construction, obtaining and processing seismic data and fulfilling other related commitments. At March 31, 2014, these work-related commitments totaled $159 million, all of which were attributable to our China business. Actual amounts by maturity are not included because their timing cannot be accurately predicted.

(3) On February 10, 2014, we sold our Malaysia business; therefore, contractual obligations for discontinued operations only include our China business.


We have various oil and gas production volume delivery commitments that are related to our domestic operations. Given the size of our proved natural gas and oil reserves and production capacity in the respective divisions, we currently believe that we have sufficient reserves and production to fulfill these commitments. However, in the event that we are unable to meet our crude oil volume delivery commitments, we would incur deficiency fees ranging from $2.67 to $6.50 per barrel. As of March 31, 2014, our delivery commitments through 2025 were as follows:

                                   Less than                              More than
                         Total       1 Year     1-3 Years    4-5 Years     5 Years
Natural gas (MMMBtus)    21,481       21,481            -            -            -
Oil (MBbls)(1)          115,977        7,483       38,818       27,778       41,898


_________________


(1) Our oil delivery commitments include a particular commitment with a Salt Lake City, Utah refiner. This delivery commitment will begin upon the refiner completing the expansion of their facility, which is expected in late 2015. . . .
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