Oil and gas developer Newfield Exploration Company (NYSE: NFX) has commenced an offering of $650 million in Senior Subordinated Notes due in 2020. The notes will be offered under an existing shelf registration statement, and the premium has yet to be set.

Newfield plans to use the net proceeds from the offering to purchase $175 million of its existing 7.625% Senior Notes due in 2011; to fund its acquisition of assets from TXCO Resources, which recently filed for Chapter 11 protection; and to fund 2010 capital investment, among other items.

Newfield has offered about $217 million for about 350,000 net acres of TXCO assets in the Maverick Basin in southwest Texas. Anadarko Petroleum (APC) purchased about 80,000 net acres in the same basin for about $93 million. Current production from the Newfield acres is about 1,500 barrels of oil equivalent/day, about 1,000 barrels of which is oil.

Newfield has had trouble with free cash flow during the past year, and in the third quarter of 2009 was finally able to turn that around to a positive number.

The company announced yesterday that it had achieved record gross production of 323 million cubic feet equivalent/day of natural gas from its Woodford Shale play in the Arkoma Basin of Oklahoma. The increase is the result of well completions extending beyond 5,000 horizontal feet, a technique called super extended lateral completion. The technique boosts well production by increasing estimated ultimate recovery quantities over a longer time period. That substantially improves the economics of drilling and production.

Using the proceeds from new debt to fund capital expenditures is not usually a healthy signal from an exploration and production company. In this case, though, Newfield has tested out its process and verified that well economics can be seriously improved by using the extended lateral process. At a cost of $7-$8 million per well, the company plans to bring another 20 wells into production in the first quarter of 2010. Of that number, six wells are of the extended lateral type.

Newfield expects its Woodford Shale play to produce 20% more natural gas in 2010 than it did in 2009. If natural gas prices remain above $4.50, Newfield earns a tidy profit. Today’s Henry Hub spot price is down slightly, to $5.51. The time could be right for increased investment in natural gas, and Newfield is jumping on it.

Paul Ausick

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