"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 David A. Hager, Kerr-McGee chief operating officer. "The board's actions today 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. As a result of the acceleration, we are increasing our estimated compound annual growth rate for production to 7% to 12% through 2008."
Increased Production Growth (previously 5% - 9%) Year Previous Guidance Revised Guidance (thousand barrels of oil (MBOE/d) equivalent per day MBOE/d) 2006 235 - 250 240 - 255 2007 245 - 280 265 - 300 2008 265 - 300 280 - 320 Increased expected compound annual growth rate to 7% to 12% through 2008.
An updated and detailed breakout of expected 2006 quarterly production volumes by product and by region can be found on the company's website at www.kerr-mcgee.com/ir/guidance.htm.
The approved capital expansion provides $60 million for drilling activities in the Greater Natural Buttes area, in the Uinta Basin, which is expected to increase the number of gross wells drilled in 2006, to 275 up from 220 previously. As a result of Kerr-McGee's efforts to clearly define the field's estimated resource potential, the company identified a net unbooked resource potential of approximately 4.7 trillion cubic feet of natural gas equivalent (TCFE). Since that time, experimentation with new drill bits and drilling techniques has allowed the company to drill faster and more efficiently. As it continues to accelerate production in the Greater Natural Buttes area, 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 Kerr- McGee operated rigs in the area to 15, from the current number of eight. The company currently has an approximate one-year inventory of approved permits and is receiving between 20 and 25 additional permits each month, while drilling approximately 15 wells per month.
Approximately $50 million of capital will be dedicated for upgrades to the infrastructure in the Uinta Basin, which includes the construction of a 250- million-cubic-feet-per-day (MMcf/d) natural gas processing plant that is expandable to 500 MMcf/d, and the upgrading of the company's natural gas gathering system. These improvements would enable Kerr-McGee to bring the product to market more efficiently and cost effectively as additional volumes are produced from the accelerated development program.
In the Wattenberg field, the approved plan makes $25 million available to fund additional drilling activities. This plan also includes tendering bids for one to two new rigs each year through 2007, which would increase the total number of operated rigs to eight to ten from the current number of five rigs. The additional drilling activity is expected to begin in the fall and provide for 1% to 3% annual production growth from the field in 2007.
In the southern region, the capital expansion provides $35 million for additional drilling activities in the Frost and Braulia fields of South Texas where the company has recently drilled eight successful wells. The company now plans to drill 15 to 18 additional wells in this area in 2006, which are expected to have an immediate benefit on 2006 production volumes.
"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. "The acceleration of the program will be accretive to reserves, cash flow and production on a debt-adjusted per-share basis."
In addition to the $170 million of capital for drilling and infrastructure onshore in the U.S., the board of directors also approved $80 million of additional capital dedicated to the deepwater Gulf of Mexico for ongoing exploration and development projects including appraisal work on the recently announced natural gas discovery at Claymore in Atwater Valley block 140.
Funding for the expanded capital program is expected to come from internally generated cash flow. The company also anticipates completing its previously announced $1 billion share repurchase program and the repayment of an additional $300 million of debt by year end.
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