Newfield Exploration Reports First Quarter 2006 Results



For the first quarter of 2006 Newfield (NYSE: NFX) reported net income of $149 million, or $1.17 per diluted share (all per share amounts are on a diluted basis). Earnings for the quarter reflect an $8 million gain ($5 million after-tax), or $0.04 per share, associated with hedge ineffectiveness and unrealized changes in the fair market value of open derivative contracts that do not qualify for hedge accounting. Without the effect of this item, net income for the quarter would have been $144 million, or $1.13 per share.

Revenues in the first quarter of 2006 were $431 million. Net cash provided by operating activities before changes in operating assets and liabilities was $352 million. See "Explanation and Reconciliation of Non-GAAP Financial Measures."

By comparison, net income in the first quarter of 2005 was $60 million, or $0.47 per share, and reflected the impact of a $107 million charge ($69 million after-tax), or $0.55 per share, associated with hedge ineffectiveness and unrealized changes in the fair market value of open derivative contracts that do not qualify for hedge accounting; and an $8 million benefit, or $0.06 per share, related to a reduction of the valuation allowance on Newfield's U.K. net operating loss carry forwards because of a substantial increase in estimated future taxable income as a result of the Grove discovery in the U.K. North Sea.

Without the effects of these two items, net income for the first quarter of 2005 would have been $121 million, or $0.96 per share. Revenues in the first quarter of 2005 were $413 million. Net cash provided by operating activities before changes in operating assets and liabilities was $310 million in the first quarter of 2005. See "Explanation and Reconciliation of Non-GAAP Financial Measures."

Newfield's production in the first quarter of 2006 was 53.9 Bcfe, reflecting an estimated 8 Bcfe of deferred production related to the 2005 hurricanes in the Gulf of Mexico. Production in the first quarter of 2005 was 64.9 Bcfe. The following tables detail production and average realized prices for the first quarters of 2006 and 2005.



    Quarterly Production (A)           1Q06           1Q05         % Change
    United States
      Natural gas (Bcf)                44.4           51.2            (13%)
      Oil and condensate (MMBbls)       1.5            2.0            (28%)
    International
      Natural gas (Bcf)                 ---            ---             ---
      Oil and condensate (MMBbls)       0.1            0.2            (50%)
    Total
      Natural gas (Bcf)                44.4           51.2            (13%)
      Oil and condensate (MMBbls)       1.6            2.3            (30%)
      Total (Bcfe)                     53.9           64.9            (17%)


    Average Realized Prices (B)        1Q06           1Q05         % Change
    United States
      Natural gas (per Mcf)           $7.79          $6.23             25%
      Oil and condensate (per Bbl)   $51.17         $40.90             25%
    International
      Natural gas (per Mcf)             ---          $5.01             N/M
      Oil and condensate (per Bbl)   $65.79         $43.87             50%
    Total
      Natural gas (per Mcf)           $7.79          $6.22             25%
      Oil and condensate (per Bbl)   $52.23         $41.20             27%
      Total (per Mcfe)                $7.96          $6.36             25%

     (A) Represents volumes sold regardless of when produced.
     (B) Average realized prices include the effects of hedging other than
         contracts that do not qualify for hedge accounting. Had we included
         the effect of these contracts, our average realized price for total
         gas would have been $7.83 per Mcf for the first quarter of 2006.
         There were no gas contracts that did not qualify for hedge accounting
         that settled in the first quarter of 2005. Our total oil and
         condensate average realized price would have been $50.55 per Bbl and
         $40.20 per Bbl for the first quarter of 2006 and 2005, respectively.

Stated on a unit of production basis, Newfield's lease operating expense in the first quarter of 2006 was $0.97 per Mcfe compared to $0.70 per Mcfe in the first quarter of 2005. Production and other taxes in the first quarter of 2006 were $0.29 per Mcfe compared to $0.17 per Mcfe in the same period of 2005. DD&A expense in the first quarter of 2006 was $2.43 per Mcfe compared to $2.09 per Mcfe in the same period of 2005. G&A expense in the first quarter of 2006 was $0.55 per Mcfe compared to $0.35 per Mcfe in the same period of 2005. G&A expense in the first quarter of 2006 is net of capitalized direct internal costs of $15 million. Capitalized direct internal costs were $10 million in the first quarter of 2005.

Capital expenditures in the first quarter of 2006 were $390 million.

Explanation and Reconciliation of Non-GAAP Financial Measures

Earnings stated without the effect of certain items is a non-GAAP financial measure. Earnings without the effects of these items are presented because the timing and amount of these items cannot be reasonably estimated and affect the comparability of operating results from period to period. In addition, earnings without the effects of these items are more comparable to earnings estimates provided by securities analysts.

Newfield's consolidated statement of income for the first quarters of 2006 and 2005 includes the effects of these items:

     -- Commodity derivative income (expense), which for the first quarter of
        2006 is comprised of $8 million of income associated with an
        unrealized commodity derivative gain resulting from changes in the
        fair market value of open derivative contracts that do not qualify for
        hedge accounting, hedge ineffectiveness and $2 million of realized
        losses related to the settlement of contracts that do not qualify for
        hedge accounting. Commodity derivative expense for the first quarter
        of 2005 includes $107 million of unrealized commodity derivative
        expense resulting from changes in the fair market value of open
        derivative contracts that do not qualify for hedge accounting, hedge
        ineffectiveness and realized losses of $2 million related to the
        settlement of contracts that do not qualify for hedge accounting.
     -- Income tax provision for 2005 includes an $8 million benefit related
        to a reduction of the valuation allowance on Newfield's U.K. net
        operating loss carry forwards because of a substantial increase in
        estimated future taxable income as a result of Newfield's Grove
        discovery in the U.K. North Sea.

    A reconciliation of earnings stated without the effects of certain items
to net income is shown below:

                                                     1Q06           1Q05
                                                        (in millions)
    Net income                                       $149            $60
      Less: Unrealized commodity derivative
             income (expense)                           8           (107)
      Plus: Income tax provision adjustment
             for above item                             3            (38)
      Less: Tax benefit related to U.K. net
             operating loss valuation allowance       ---              8
    Earnings stated without the effect of the
     above items                                     $144           $121

Net cash provided by operating activities before changes in operating assets and liabilities is presented because of its acceptance as an indicator of an oil and gas exploration and production company's ability to internally fund exploration and development activities and to service or incur additional debt. This measure should not be considered as an alternative to net cash provided by operating activities as defined by generally accepted accounting principles. A reconciliation of net cash provided by operating activities before changes in operating assets and liabilities to net cash provided by operating activities is shown below:


                                                     1Q06           1Q05
                                                        (in millions)

    Net cash provided by operating activities        $340           $261
    Net change in operating assets and liabilities     12             49
    Net cash provided by operating activities before
     changes in operating assets and liabilities     $352           $310


    Second Quarter 2006 Estimates

Natural Gas Production and Pricing The Company's natural gas production in the second quarter of 2006 is expected to be 47 - 52 Bcf (517 - 570 MMcf/d). Based on current prices, Newfield estimates that its realized price for natural gas production from the Gulf of Mexico and onshore Gulf Coast, after basis differentials, transportation and handling charges, will average $0.40 - $0.60 less per MMBtu than the Henry Hub Index. Realized gas prices for the Company's Mid-Continent properties, after basis differentials, transportation and handling charges, typically average $0.70 - $0.80 less per MMBtu than the Henry Hub Index. Hedging gains or losses will affect price realizations.

Crude Oil Production and Pricing The Company's oil production, including international liftings, in the second quarter of 2006 is expected to be 1.7 - 1.8 million barrels (18,700 - 20,300 BOPD). Newfield expects to produce approximately 3,000 BOPD from its Malaysian operations. The timing of liftings in Malaysia may affect total reported production. The price the Company receives for Gulf Coast production typically averages about $2 per barrel below the NYMEX West Texas Intermediate (WTI) price. The price the Company receives for its production in the Rocky Mountains is now averaging $9 per barrel below WTI. Oil production from the Mid-Continent typically sells at a $1.00 - $1.50 per barrel discount to WTI. Oil production from Malaysia typically sells at Tapis, or about even with WTI. Hedging gains or losses will affect price realizations.

Lease Operating Expense and Production Taxes LOE is expected to be $55 - $60 million ($0.95 - $1.00 per Mcfe) in the second quarter of 2006. Production taxes in the second quarter of 2006 are expected to be $21 - $23 million ($0.37 - $0.42 per Mcfe). These expenses vary and are subject to impact from, among other things, production volumes and commodity pricing, tax rates, service costs, the costs of goods and materials and workover activities. Newfield expects to record an additional business interruption insurance benefit of approximately $12 million in the second quarter of 2006. The benefit will be recorded on its income statement as a reduction to operating expenses.

General and Administrative Expense G&A expense for the second quarter of 2006 is expected to be $31 - $34 million ($0.50 - $0.60 per Mcfe), net of capitalized direct internal costs. Capitalized direct internal costs are expected to be $14 - $16 million. G&A expense includes stock and incentive compensation expense. Incentive compensation expense depends largely on adjusted net income (as defined in the Company's incentive compensation plan), which excludes unrealized gains and losses on commodity derivatives.

Interest Expense The non-capitalized portion of the Company's interest expense for the second quarter of 2006 is expected to be $10 - $12 million ($0.18 - $0.20 per Mcfe). As of April 26, 2006, Newfield had no outstanding borrowings under its credit arrangements. Long-term debt consists of five separate issuances of notes that in the aggregate total $1.4 billion in principal amount. The total includes $250 million aggregate principal amount of the Company's 8 3/8% Senior Subordinated Notes Due 2012, which have been called for redemption on May 3, 2006. Newfield anticipates that it will take a charge to second quarter 2006 earnings of approximately $26 million ($17 million after-tax) related to this early redemption of notes. Following this redemption, long-term debt will total approximately $1.2 billion. Capitalized interest for the first quarter of 2006 is expected to be about $11 - $12 million.

Income Taxes Including both current and deferred taxes, the Company expects its consolidated income tax rate in the second quarter of 2006 to be about 35 - 39%. About 60-65% of the tax provision is expected to be deferred.

RELATED COMPANIES