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Edited Transcript of NFX earnings conference call or presentation 3-May-17 3:00pm GMT

Thomson Reuters StreetEvents

Q1 2017 Newfield Exploration Co Earnings Call

HOUSTON May 6, 2017 (Thomson StreetEvents) -- Edited Transcript of Newfield Exploration Co earnings conference call or presentation Wednesday, May 3, 2017 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Lawrence S. Massaro

Newfield Exploration Company - CFO and EVP

* Lee K. Boothby

Newfield Exploration Company - Chairman, CEO and President

* Stephen C. Campbell

Newfield Exploration Company - VP of IR

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Conference Call Participants

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* Biju Z. Perincheril

Susquehanna Financial Group, LLLP, Research Division - Analyst

* Brian Arthur Singer

Goldman Sachs Group Inc., Research Division - MD and Senior Equity Research Analyst

* Daniel Eugene McSpirit

BMO Capital Markets Equity Research - Equity Analyst

* Kashy Oladipo Harrison

Piper Jaffray Companies, Research Division - VP and Senior Research Analyst, Exploration and Production

* Michael Adam Glick

JP Morgan Chase & Co, Research Division - Senior Analyst

* Neal David Dingmann

SunTrust Robinson Humphrey, Inc., Research Division - MD

* Ronald E. Mills

Johnson Rice & Company, L.L.C., Research Division - Analyst

* Subash Chandra

Guggenheim Securities, LLC, Research Division - Analyst

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Presentation

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Operator [1]

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Welcome, everyone, to the Newfield Exploration First Quarter 2017 Earnings Conference Call. For opening remarks and other housekeeping items, I will turn the call over to Steve Campbell, Head of Investor Relations. Mr. Campbell, you may begin.

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Stephen C. Campbell, Newfield Exploration Company - VP of IR [2]

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Thank you, operator. Good morning, everyone, and thanks for dialing in today. Following this morning's prepared remarks from our Chairman, Lee Boothby, we will have members of our leadership team available to take your questions. (Operator Instructions)

Let me remind you today that this call is being recorded and will be available on our website along with our earnings release, the accompanying financial tables and non-GAAP reconciliations and @NFX. We will reference certain non-GAAP measures. So please see the reconciliation in our earnings release and in our @NFX publication.

Today's discussion will contain forward-looking estimates and assumptions that are based on our current views and reasonable expectations. In summary, statements in yesterday's news releases and @NFX and on this conference call regarding our expectations or predictions of the future are forward-looking statements intended to be covered by the safe harbor provisions under federal securities laws. There are many factors that could cause actual results to differ materially from our expectations, including those we've described in our earnings release, @NFX, our 10-K and 10-Q, our prior outlook releases and other filings with the SEC. Please refer to the legends in our earnings release and @NFX for more information.

Thanks again for dialing, and I'll now turn it over to Lee Boothby.

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Lee K. Boothby, Newfield Exploration Company - Chairman, CEO and President [3]

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Thanks, Steve. Good morning, everyone, and thanks for your interest in Newfield Exploration. We will strive to keep our remarks relatively brief today, and we'll welcome your specific questions at the end.

As you can see from our first quarter results released yesterday afternoon, we are off to a great start in 2017, and we're building important momentum that will carry into 2018 and beyond. We remain confident that our near-term business plan is aligned with today's market realities. When we released our 2017 outlook in February, we discussed our expectations for continued volatility in the crude oil markets as inventories around the world were worked down and OPEC cuts helped accelerate the balance in terms of global supply and demand.

Our 2017 plan was conceived with these realities in mind, and we used a $50 oil price for our budgeting scenarios. Our plan was carefully constructed to achieve several important objectives. First, we've set the organization on a course to balance investments with cash flow, while sustainably delivering double-digit growth in the future. We minimized our outspend in 2017, and we anticipate achievement of balance within our planned period at mid-cycle oil prices. In the immediate term, any outspend can be funded through cash on hand, which today totals about $500 million. Our spending levels were carefully set to ensure that we maintained a strong balance sheet and managed leverage during a period of continued oil price uncertainty.

Secondly, our plan was built to advance our learning curve in STACK through initial infill drilling on multi-well pad. It's imperative that we collect the necessary data and information now and use it properly to plan for the full field development. The information we are collecting today related to geologic targeting, infill well spacing, completion design and flowback practices will help us maximize our future returns and create long-term value for our shareholders. We owe it to you to get it right.

Third, we have some critical deliverables around exploration and the assessment of other liquids-rich targets on our acreage. 2017, we allocated about $100 million to test prospective horizon on acreage we own and control today. In the Anadarko Basin, we affectionately refer to this program as our Sycamore, Caney, Osage, Resource Expansion, or SCORE for short. In terms of sequencing, it's important for us to understand the full scale and scope of our SCORE program in order to properly develop it. We're very encouraged by some of the early results we are seeing in SCORE today and look forward to sharing more information with you later this year as we collect more results from a larger subset of wells. So stay tuned.

And fourth, ensure that we timely identify any potential bottlenecks or roadblocks to our future development plans and move proactively to mitigate them. Newfield has a history of controlling its operations. In fact, it was one of our founding business principles attached, etched in stone by our founders nearly 30 years ago. We've added several slides in @NFX today that summarize these important activities, which are setting Newfield up for full field development and STACK.

Recent steps we have taken to ensure firm residue gas takeaway, oil pipelines into new attractive markets and the ability to source and recycle water will continue to aid our execution and differentiate our company in the market. We've increased our capital budget by 10% and adjusted the midpoint of our expectations for full year domestic production higher by nearly 2 million barrels equivalent. In February, some of you questioned our capacity to go faster. We certainly have the organizational capacity to do so. And today, we are electing to lean in to some of the year-to-date successes we are seeing in our drilling and completion programs.

Our increasing production profile and improved cost structure is helping to offset our revised spending outlook. The increase in our capital budget is primarily related to greater operated and nonoperated activity, allowing us to build on recent successes with enhanced completions, our ongoing optimization of full field development plans and incremental activity in active areas around us.

From a production standpoint, we are running ahead of our forecast early in the year. As a result, we bested the midpoint of our original first quarter production estimates by about 6,000 barrels of oil equivalent per day. Our early momentum is expected to carry through the remainder of the year, and we raised our production estimates by nearly 2 million barrels of oil equivalent. Higher production levels are expected to add incremental cash flow during 2017 and help offset our near-term outspend at current oil prices.

The trajectory of our production today should lead to an improved outlook for our 2018, 2019 plans as well. We'll make the appropriate adjustments for our 3-year plan later this year or early next as we continue to collect important data from our STACK development plan and gain more clarity on commodity prices and our investment levels.

Let's briefly cover our first quarter financial and operating results next, and then we'll close with an update on the Anadarko Basin. Our domestic production in the first quarter was 12.5 million barrels of oil equivalent. Total company production in the first quarter was 13.1 million barrels of oil equivalent. Of the total, 62% is liquids and 38% was gas.

For the first quarter, we had net income of $0.73 per diluted share. After adjusting for the effect of unrealized derivative gains, net income for the first quarter was $114 million or $0.57 per share, exceeding consensus estimates.

Our revenues were $417 million. Net cash provided by operating activities for the quarter was $167 million, and discretionary cash flow from operations was $243 million. Our cash flow closely matched our capital investments during the quarter. We included a table in @NFX that outlines our investment, which totaled $216 million in the quarter, excluding capitalized interest and overhead.

Our cash operating expenses for the first quarter stated on a unit production basis were also below our guidance ranges. You can see the continued positive improvements we have made in our cash operating expenses, and this should lead to improved profitability in the future.

Let's now talk in more detail about the Anadarko Basin. 2017 is a big year for us in the Anadarko Basin. We're gathering critical information that we will apply to our future development drilling campaigns. This year, about 85% of our total capital investments will be allocated between SCOOP and STACK. We have our sites focused on several key objectives today in the Anadarko Basin. I'll provide a quick update on each of these before moving to Q&A this morning.

Let's start with an update on enhanced completions and the superior results we're seeing through the application of higher fluid and sand concentration. Over time, our average completion design has increased significantly to our standard today of 2,100 pounds of sand and 2,100 gallons of liquid per foot. We're testing a few jobs that are significantly larger as well and tweaking multiple variables in our completions to identify the best path forward to maximize value. These variables include fluid chemistry to reduce friction, the use of diverters and dissolvable frac plugs, increased frac stages and stage lengths along with tighter perf clusters, hybrid fluids to maximize delivery and stimulate more rock volume, micro-proppants and the list goes on.

Year-to-date, we've completed 15 wells with the new 2,100, 2,100 completions, and the results continue to be very strong. These wells are outperforming our 1.1 million barrel type curve by a significant margin. This brings me to our second objective this year, to determine the ideal well spacing for future development drilling.

Newfield and our STACK peers are all working to solve the same equation: how do we create the most value through optimal well spacing and completion designs at today's oil price and service cost outlooks? We are focused on better understanding how our development wells will perform when drilled in close proximity on multi-well pads and completed with our optimized designs. Although, we certainly won't have definitive answers this year, the information will help us to better define our optimal development well type curve.

Most of our activity in STACK this year will be on multi-well development pads. In fact, we haven't completed a new well in the last 60 days. We have 3 development pads in progress, with 10, 10 and 12 wells being drilled in the Meramec alone. We expect to have early flow data from these initial pads late this summer.

For the full year, we expect to drill 10 multiunit well spacing units and participate in several others to test varying horizontal and vertical spacing configurations as well as individual horizontal targets.

Third, we are ensuring our execution through control of operations. This entails the early identification of our future infrastructure needs and any potential bottlenecks that could negatively impact the timing or field-level operations. This is a key ingredient being recognized as the top tier E&P company, and frankly, it's often overlooked until it's illuminated by a problem that slows growth or impacts returns.

Newfield has proven and experienced teams in place with a track record of superior execution. I can assure you that our personnel are on top of the issue identification, and [their timing of litigation, the same].

In @NFX, we outlined 3 of the critical components we are focused on today. The first is gas takeaway. We recently signed an agreement with Enable for a ground field expansion of an existing system at favorable terms. This 10-year agreement will provide 205 million cubic feet a day of takeaway by October of 2018 and get us to preferred markets along the Gulf Coast. Because it's not a greenfield project requiring FERC approvals and is limited in its construction scope, we have high confidence in the timing of this expansion on our behalf, and it will meet our future need.

Access to premium oil markets. We're fortunate that the preponderance of our acreage is located in the black oil window. We moved early to incentivize a new oil pipeline for Newfield crude into Cushing, allowing us to receive a higher realized price. On Slide 8 in @NFX, we show the improvement in our historical differentials for our STACK barrels.

Water management. By year-end, we will have a cumulative investment of about $100 million in water infrastructure. This includes about 100 miles of water piping and an extensive network of intra-field water storage. Our most recent investment is in the Barton water recycling facility, which will be operational later this summer. It's critical for Newfield to control its water chain and sourcing through use and recycle, and we will work to limit the amount of water that is ultimately disposed.

Lastly, we're actively assessing our SCORE program and the significant resource potential that exists in multiple STACK players across our vast acreage position in the Anadarko Basin. It is important that we timely assess these horizons. And if proven commercial, understand where they rank in our portfolio and how we will incorporate them into our plan developments. We look forward to sharing an exploration update with you later this year.

So that concludes our prepared remarks this morning. Before we open up the lines to take your questions, let me quickly summarize the key takeaways from today's call.

Know that we are very confident in our business plan. We think this is the right plan for the reality -- realities of today's volatile oil markets, and we have carefully balanced our investment levels with our funds from operations. The cash we have on hand is a comforting safety net during a time of uncertainty and will bridge us to our desired future state where we balance our investment and spending levels.

Newfield is executing extremely well today across the enterprise. Our outlook for higher production volumes is being driven by our enhanced completion practices and stronger well results across the company's portfolio, and we plan to do more. As you can infer from our outlook, we're at significantly higher fourth quarter 2017 production rates, our strong results year-to-date will translate into positive momentum for our 2018 and '19 plans, and we look forward to sharing more with you in the future.

Thanks again for your time today and your investment in our company. And operator, we're now ready to take questions. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll take our first question from Michael Glick with JPMorgan.

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Michael Adam Glick, JP Morgan Chase & Co, Research Division - Senior Analyst [2]

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Just on the Burgess well, could you talk about the completion design on that well specifically versus your base 2,100, 2,100 completion and the incremental cost associated with it?

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Lee K. Boothby, Newfield Exploration Company - Chairman, CEO and President [3]

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Well, Michael, what I'll tell you is it was a 5,000-foot lateral. All we've said publicly is that it's a job larger in size than our 2,100, 2,100. I think in the @NFX, you could see the normalized performance on a 10,000-foot basis, and it's materially outpacing the other wells. I think the most exciting part of that well, frankly, is that it sits right in the middle of our STACK acreage. It improves the productivity of that core position in the black oil window. And I'll just tell you, let's await some further results. Our team has an exciting test that we talked about that we'll be conducting during the balance of the year, and we'll update you guys appropriately later in the year.

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Michael Adam Glick, JP Morgan Chase & Co, Research Division - Senior Analyst [4]

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Got you. And then on the SCORE program -- I don't like the acronym by the way, you've seen some interesting results in the Sycamore and Osage, but haven't heard a whole lot about the Caney Shale. Could you talk about the potential prospectivity of that zone?

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Lee K. Boothby, Newfield Exploration Company - Chairman, CEO and President [5]

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Well, it's the same geologic age as the Meramec section that we produced in STACK. And all of us, say, all of us, those of us active down in SCOOP. And I'll say tip of the hat to our friends at Continental for naming that some years back. That's appropriate call down there. We all focused on the Woodford. I think that was the early development in the east flank of Anadarko. We've seen STACK evolve. We're getting through HBP mode. And we and our friends in the industry are at the point that we all said that we'd get to where we started evaluating these other horizons so. Caney is a known producing horizon in basins to the south. It's known to be oil saturated. We think it's an attractive target. We're going to have drill some wells and prove that. That's what we aim to do in the second half of the year.

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Operator [6]

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Our next question comes from Subash Chandra with Guggenheim.

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Subash Chandra, Guggenheim Securities, LLC, Research Division - Analyst [7]

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Lee, the first question is these enhanced fluid volumes, does that increase the chance of well interference as you place these wells in full development closer and closer together? And my second question is what's the willingness to outspend once you decide what the full field development scheme looks like?

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Lee K. Boothby, Newfield Exploration Company - Chairman, CEO and President [8]

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On the first issue on interference, since most all of the wells up until the course of the last 12 months or so were single wells on individual DSUs, we know that they're unbounded. So that's one of the phrases that we used consistently. I think our teams have been careful to wrap the data accordingly. As we move wells closer, there's -- you get the price element on the spacing equation. You've got the lateral offset equation on that. You got the vertical offset. And then in and amongst that you've got what's the right size job that you start moving these wells in and packing them in closer. We're investing in learning today. Our team has been challenged, and I think we see it in our peers in the play as well to go invest in the learnings that we need to optimize development. So our intent is to test the plays where the constructive interference becomes suboptimal, and then we'll all back up to whatever the right solution is at that time. But I think that that's why we stress the need for time, and time is part of the equation figuring this out. So we'll have that information later this year. There could ultimately be trade offs on size of the job and well spacing, but what we're going to be solving for is maximizing net present value. And I think that's what most of the companies that are in development mode are going to be focused on, and we'll give you what we think the solution is as that data comes available. The second question you have was related to -- I'll flip that one over to Larry, and wonder if you can restate that just to make sure the brush on that.

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Subash Chandra, Guggenheim Securities, LLC, Research Division - Analyst [9]

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Yes, sure. So as you figure out what full field development looks like, densities, laterals and targets, what's your willingness to outspend cash flows at that point once you're beyond the learning phase even though learning phase, I suppose, is ongoing?

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Lawrence S. Massaro, Newfield Exploration Company - CFO and EVP [10]

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Yes. So willingness to outspend cash flows will be dependent on the price environment we're in. So assuming we're back to mid-cycle pricing, we can continue to run small depths and still stay within the kind of leverage targets we've put out there. So we see that we can run at that [depth certain] and it just all depends on price.

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Subash Chandra, Guggenheim Securities, LLC, Research Division - Analyst [11]

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Those asset sales are not a big driver next, say, 18 months or so?

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Lee K. Boothby, Newfield Exploration Company - Chairman, CEO and President [12]

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We got $500 million of cash on the balance sheet. We feel pretty good. We'll continue to test the markets and be prepared at the right time, move assets into the market, but we have nothing active at this time.

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Operator [13]

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Our next question comes from Kashy Harrison with Simmons Piper Jaffray.

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Kashy Oladipo Harrison, Piper Jaffray Companies, Research Division - VP and Senior Research Analyst, Exploration and Production [14]

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So acknowledging that it's still early days on this front, if we were to extrapolate the outperformance you're seeing from your half completion thus far for the wells that you expected to drill in the future, do you think that the multi-year guide you provided last quarter assuming $50 to $60 oil could perhaps be delivered in those maybe a $50 to $50 commodity environment within cash flow?

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Lee K. Boothby, Newfield Exploration Company - Chairman, CEO and President [15]

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Well, we were careful to give you a range, the $50 to $60 of the outlook that we provided in February, and that was basically so that you guys could all calibrate back and say, “Hey, this really is top-tier dirt. Look, what you can do.” But getting to balance and being able to deliver double-digit growth inside of cash flow I think is a really nice place to be in. And we remain committed to that objective, and we see it out in front of us immediately on the road ahead. I think first quarter gives you just some ideas that the results we're seeing are pretty spectacular. Clearly, there's upside. I probably acknowledge that. But our team takes great pains to apply appropriate risk adjustment, et cetera. We embed learnings curves in all of our forecast. I think our team does a fabulous job. I'll take the beatings for calling us conservative. We kind of like it. But we remember the days when we were being asked other questions. So I think we're in a great place today. The momentum is clearly on our side. Our team is working hard to make the wells and the investments better every day. I told people I never bet against them. I wouldn't advise anybody else to bet against them. Our objective is always to beat what's out there. We're going to work hard to do that. But we'll update you later this year on what we're thinking about '18 and '19. But right now, let's enjoy where we're at in '17, because we're ahead. We're building momentum. That's what we said we want to do. '17 is about setting up early. '18, exciting '18 forward, and we're ahead of schedule.

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Kashy Oladipo Harrison, Piper Jaffray Companies, Research Division - VP and Senior Research Analyst, Exploration and Production [16]

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Excellent response there. And then just -- I appreciated the color you provided on the steps you've taken to aid operational execution with respect to future gas takeaway, water management. Are there any other significant operational constraints that you think that occur in general for the Anadarko Basin that investors may not fully appreciate?

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Lee K. Boothby, Newfield Exploration Company - Chairman, CEO and President [17]

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No, I think there's a lot of if you build it, they will come and go back to field the dreams. And certainly, gas takeaway with all the wells being dressed up, drilled out to west and the gas here in hyperactivity areas has been an issue. But I think industry is working pretty hard, and that's both midstream and upstream to make sure that, that takeaway capacity is available. We see a lot of activity there on multiple fronts. We found ourselves in attractive position to take advantage of our brownfield opportunity that was very, very competitive with price. We think that was a good decision. We'll continue to work those issues. We invested in water and infrastructure before it was cool. I remember we were doing recycling projects on water 15 years ago in the Arkoma Basin and weren't talking about it. So our team has a lot of experience with that. We try things that we think will make sense in terms of leveraging operational efficiencies and expertise. And frankly, we'll continue to push. But I think the water infrastructure that we have in the STACK play is going to pay huge benefits on the road ahead. A lot of things are being done there. As I said, look, our team has a laundry list of things. I'm sure the other top operators' teams likewise have that laundry list. They know and talk to one another. We share ideas. We'll all find the right solution. I'm not losing any sleep over the bottlenecks in SCOOP and STACK.

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Operator [18]

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Our next question comes from Brian Singer with Goldman Sachs.

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Brian Arthur Singer, Goldman Sachs Group Inc., Research Division - MD and Senior Equity Research Analyst [19]

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On the balance sheet, you've highlighted, as you mentioned earlier, your goal of maintaining 1.5 to 2.5x leverage. And you're already slightly below the midpoint of that range. Wanted to explore the upper end of that range with you and what scenarios would you actually end up at the upper end of that range? Does this signify willingness to drill through a lower oil price environment, say, a sub-$50 oil would continue in 2018 when you've got less hedging? Or is there a willingness to pursue acquisitions that would initially lead to higher leverage? Or do you just view the upper end of that range as highly unlikely?

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Lee K. Boothby, Newfield Exploration Company - Chairman, CEO and President [20]

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Well, I'll catch my breath there, Brian. There's a lot in there. So I'm hoping Larry was listening closely. I'm going to flip that to Larry. And if he misses anything, I'll jump in.

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Lawrence S. Massaro, Newfield Exploration Company - CFO and EVP [21]

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Brian, I just need to know what price environment you're talking about. You tell me that I could probably answer it. But now, look, clearly, go to your comment on acquisitions. It all depends on type of acquisition we do, whether it's a small bolt-on or something large. And yes, we're continually looking at that market at really high-quality inventory. So that could affect it. But absent that, it really comes back to what price environment we're in. If we continue to see a deteriorating oil market, naturally that will increase your leverage there. And if you start going to low 40s, we'll have to adjust accordingly, right? And so we're going to monitor that. We know where we've been in -- historically on oil prices, and we're not forgetful on that. And as Lee kind of points out, we're cautious. Get back to -- midcycle pricing, the type of assets we have, the durability, the strength of them, we can afford to go faster. And as we get into that full development phase where we've lowered the risk of the outcomes, we can afford to increase those leverage metrics if we want to. But right now we're kind of just focused right on the middle of that range, and we can go up if we need to. But as Lee points out, we've got that $500 million sitting on the balance sheet. That's our insurance policy against this price environment. That's why we put it on there and protected ourselves, and that gives us great comfort in that being able to execute this plan and kind of maintaining the kind of leverage you see on the balance sheet.

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Lee K. Boothby, Newfield Exploration Company - Chairman, CEO and President [22]

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Brian, I'll only add this. It's real simple. It might be even cliché, but cliché is sometimes worth repeating. I think what we're enjoying today is top tier dirt in the hands of top tier team, and we're going to continue to enjoy great things on the road ahead. And I'm just amazed everyday of our folks to be able to bring out the front lines. Hey, the future is bright. We're going to enjoy it.

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Brian Arthur Singer, Goldman Sachs Group Inc., Research Division - MD and Senior Equity Research Analyst [23]

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That's great. And then on SCORE, could you talk to what -- maybe add a little bit more color on what the hypothesis is in terms of how the pressure environment, the expected variability of wells, IRRs and production mix stack up, pardon the pun, versus your STACK assets?

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Lee K. Boothby, Newfield Exploration Company - Chairman, CEO and President [24]

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Well, we wouldn't have talked about it if we didn't feel pretty good about it. We told all of you guys for 5 or 6 years that the Anadarko Basin east flank is exciting because it's got multi-pay STACK potential up and down that east flank. I think we're fortunate to be in the play with some other top companies and top names. And frankly, we're all at a point where on the road ahead, we're going to chase these piece of information as well. We're just sharing what we call it. I'm sure everybody has got a different idea. We think SCORE says what we're doing. We're working hard in those 3 horizons to expand our resource, and I think the early results there look promising. These are all zones known to be oil saturated, oil zones that have historically produced. We're going to go ahead and test them horizontally. I'm expecting success.

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Operator [25]

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We'll take our next question from Biju Perincheril with Susquehanna Financial.

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Biju Z. Perincheril, Susquehanna Financial Group, LLLP, Research Division - Analyst [26]

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Following up on an earlier question about sort of this bigger frac than in well spacing, when you look at the Burgess well, I guess, do you have any information about sort of what you think that drainage area will be? And I'm just wondering, is there a possibility in the Meramec that you can develop this more efficiently with a bigger frac than pure well?

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Lee K. Boothby, Newfield Exploration Company - Chairman, CEO and President [27]

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Those are all good questions. I -- we have a employee -- all employee meeting later today. I want to make sure I don't violate sacred covenants that we have amongst ourselves where we're investing and learning, and we're going to wait until we have the answer before we tell people what we think the answers are. So I'm not going to take the bait on the Burgess. But on the second question, definitively, yes. I mean I think that when you think about the variables that teams are going to be solving for, our teams and other teams in the industry, price is going to be part of the equation. How close the wells are going to be horizontally and vertically is going to be part of the equation. Part of that total cost equation on the F&D side is going to be size of the completion and deal. So it's a complicated calculus that's going on there. It will vary somewhat over time, as Larry indicated, depending on the pricing environment, but we're focused on maximizing NPV. The right solution, what are fewer wells, bigger jobs and higher recoveries at the lowest F&D and the highest rate of return, we're all over that. At this point, what we're all over is investing in data acquisition information translation that we need to solve that and know that we know the answer and not just guess what the answer is. I think that's important.

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Biju Z. Perincheril, Susquehanna Financial Group, LLLP, Research Division - Analyst [28]

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Got it. I appreciate that. And then it looks like you have had some interesting oily Woodford tests here in the northeast side of Canadian County. How should we think about development of that? Is that something that will be codeveloped with Meramec there? Or I guess, where does that fall in your Q?

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Lee K. Boothby, Newfield Exploration Company - Chairman, CEO and President [29]

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Well, I'm not sure exactly what you're talking about. But if I think about the northeast corner of Canadian County to move up tip of Cana into the oil window, that is the STACK play, and we started our drilling there in the Woodford. So we know and the industry knows that the Woodford is oil saturated all along that front. I know there are a number of wells being drilled both in STACK and the merge play, which is just thinner areas of these horizons between STACK and SCOOP that are all producing oil. And some of those are, in fact, interesting but not a surprise. I mean anybody that knows the play and knows the geology, it's not a surprise to hear that there's oil being produced out of the Woodford-Mansa pit.

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Operator [30]

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Our next question comes from Ron Mills with Johnson Rice.

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Ronald E. Mills, Johnson Rice & Company, L.L.C., Research Division - Analyst [31]

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Just a question on the multi-well development. Are all your rigs in the STACK now focused on drilling 10 to 12 well pads? And how are you developing that in terms of number of wells per lateral target?

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Lee K. Boothby, Newfield Exploration Company - Chairman, CEO and President [32]

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So in the call I -- earlier comments on the call, I noted that we hadn't completed a well in the last 60 days. These are things that we warned everybody about. We call this the lull period when you go from single well to drilling, complete, produce to the multi-well pad. So that tells you the answer is yes. All of our rigs, the majority of our rigs are tied up on multi-well pads at this stage. From time to time, there will be maybe 1 or 2 wells, 1 or 2 rigs that get utilized on our exploration program. But as far as the development and the spacing policy, majority of the rigs will be on multi-well pad. They are today and they will be for the balance of the year.

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Ronald E. Mills, Johnson Rice & Company, L.L.C., Research Division - Analyst [33]

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Perfect. And then relative to even your update at the end of March, your production even came in above what you had expected at the end of March. I'm assuming part of that's due to continued outperformance in the STACK. Any commentary on how much the Bakken contributed to that, which seems to be a little bit of a lost asset for you?

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Lee K. Boothby, Newfield Exploration Company - Chairman, CEO and President [34]

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Well, it's not lost. I think it plays an important part in the portfolio. And our team -- we actually made some notes in the press release on the well performance there. There's been some amazing things, upsize, completions, drilling, really strong wells there. So it shows why the capital continues to be allocated. We've got our 1-rig program there, really good performance. But the truth is all of our -- as I said earlier, all of our asset portfolio areas that are receiving capital are running ahead of schedule in that regard. So we're blessed to start this year with some really strong well results in multiple areas, and we hope to continue that through the balance of the year. And that's why we're ahead. Team does the best they can from one point to the next to give us the best available forecast. And sometimes you're fortunate to perform in the high end of expectations [that's why we're] in one of those cycles right now.

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Ronald E. Mills, Johnson Rice & Company, L.L.C., Research Division - Analyst [35]

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That last segment, it didn't capture as much external attention as it probably should.

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Lee K. Boothby, Newfield Exploration Company - Chairman, CEO and President [36]

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Oh, yes. Yes. I've got...

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Ronald E. Mills, Johnson Rice & Company, L.L.C., Research Division - Analyst [37]

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And lastly for Larry, real quick. As you think forward with the new gas takeaway contract with your oil takeaway deals and once the water management system is fully operational, any thoughts as you think about that 3-year program, the impact that can have on cost structure or relative pricing leading to potential margin improvement? Any quantification of that?

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Lawrence S. Massaro, Newfield Exploration Company - CFO and EVP [38]

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We don't -- going forward, I mean, you're going to probably continue to see slight improvement, but it's not -- I don't think it'll be driven as much by the infrastructure stuff that we're putting in. I mean, we're advantaged. You saw that we put in the contract with Enable that was a great coverage for us on our gas takeaway, and it was an advantage deal. How many more of those that are out there? I don't know. There aren't that many more brownfield projects. So everything else going forward will be more greenfield. And so I think that would be kind of keeping our margins from an infrastructure standpoint side.

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Operator [39]

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We'll take our next question from Neal Dingmann with SunTrust.

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Neal David Dingmann, SunTrust Robinson Humphrey, Inc., Research Division - MD [40]

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Lee, I appreciate your conservativeness. Just a question I had was on the revised guidance. Obviously, it was nicely -- you had revised upwards. Is this for completion techniques? What are -- is this just assuming the type curve or the 2,100 pounds? What does this assume on the hand completion?

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Lee K. Boothby, Newfield Exploration Company - Chairman, CEO and President [41]

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Well, the base game plan that we have, so majority of our wells are presently programmed at the 2,100, 2,100. We've got a handful at best. Gary Packer and John Jasek and the team are working every day, they pick places to test, i.e., invest in learnings. And we're trying to test increased outsizes in areas. So we've got that data set mapped out so that we can solve -- ultimately solve the equation. But majority of the plan is based on the 2,100, 2,100 at this stage. And where we do plan to drill larger wells, our teams does expect that by putting larger jobs in plays that will yield a better result. We actually do forecast those. There's uncertainty around it on things that you haven't done. And I think the real driver ultimately is what I said -- answer to the previous question. We've just been blessed where we've had outsized success on frankly everything we've touched so far this year. It's a pretty exciting time.

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Neal David Dingmann, SunTrust Robinson Humphrey, Inc., Research Division - MD [42]

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And Lee, you mentioned -- I agree with you the rock and especially where that Burgess well. How different will your completions be, I guess, when you look at kind of the upcoming completions in the Kingfisher or around the Burgess area versus like if you would think about that recent, where you'd be in that new extension area? Well, you assumed the rock's going to be pretty similar there so as such the completion would be very similar or it's just too early to know?

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Lee K. Boothby, Newfield Exploration Company - Chairman, CEO and President [43]

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Well, remember that we're accumulating knowledge and learning, and I think that clearly, as we attack something new, we're going to use the benefits of everything that we've learned. People sometimes forget that we did what we did in STACK proper by design. We held completions at a fixed level over a 2, 2.5-year time period so that we wouldn't be confused about what the geology was telling us. We saw that, that was a consistent result across that whole acreage footprint. That's an important piece of information. Now we're back to saying, "Okay. Now we'll upsize to completion and test that element." And frankly, it's working. And we're seeing it, and others are seeing it. We never advertised that the early 1,000 by 1,000 type jobs that was the ZIP Code we were in were optimal. We actually said we're doing it this way because we think it's going to set us up for success in the development mode. That's just where we're at. So I can't tell you what the right answer is because we don't know right now. But in general, the trend on everything that's being tested by ourselves and industry has been positive. Decreasing the spacing between perf clusters, you win. Increasing fluid volumes, you win. Increasing proppant volumes, you win. And great plays just seem to get better, and I think we're in the top-tier asset. It's performing. That's what I (inaudible).

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Neal David Dingmann, SunTrust Robinson Humphrey, Inc., Research Division - MD [44]

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Lee, then sort of to that point -- the point's well take in there, just do you guys with that conservative nature, how much more -- I don't know if it's a timing question or whatever, but how much more would you all need to see in order to bump type curves? I mean, you continue, as you point out, to really have great success. But generally, unlike some others that maybe will drill things out there after a couple of months, you guys generally have a bit more conservative nature. So I'm just wondering when is there a time point this year the we should look for updates on enhancements? Or is that just something further down the road?

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Lee K. Boothby, Newfield Exploration Company - Chairman, CEO and President [45]

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All right. So I'm catching my breadth here. There's a lot in there. I make sure I follow this the right way. So here's the way I think about it. We're -- yes, we work everyday as far as we can to accurately forecast, accurately describe future states. And there's always uncertainty, upside and downside. So first point I'd say, we're working entire team, entire management team working to understand what infill development looks like. That means the optimizing and spacing like we've talked about. And it's ultimately about determining the optimal completion within that vertical set. So that's horizontal lateral offset and optimizing on completion. Just stated, we're very encouraged by the larger jobs and the impact we've seen on our early results. I think we're right to be encouraged and you're right to be encouraged when you look at the, I don't know, 40%, 45% uplift on the performance of these 15 wells with the larger jobs versus the type curve, it's great. The challenge for us is to applying those learnings early to create value over that large scale development. That's backed by the NPV. It's a complicated equation, solving multiple variables. And we're trying to be not just cautious. We're trying to be pragmatic and honest. I think in the end of the day, we're telling you that yes, these are bigger jobs, but I'll also tell you that I can't tell you that in development that that's going to be the well with the completion and the yield that we choose in the development. And ultimately, once we choose that, you'll have the whole iteration of going back through and resetting on what the portfolio looks like with the appropriate size job, appropriate capital, et cetera. So we're just trying to be honest with the data that's there and sort of politely, if we can, ask you guys to walk with us a little bit. We're going to keep you posted and tell you what we're thinking. And when we learn something, our objective is to get the answer where we can definitively say this is the answer. Here's why we're going to do what we're going to do on each of these variables. And at that point, ultimately, once the technical data is acquired and we've analyzed it, then the decision will be mostly what's the commodity price environment, where the decisions are being made. And you could see some slight variability in terms of how you're attacking the development from period-to-period in response to the commodity. So we're focused on maximizing net present value.

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Operator [46]

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We have one more question left in queue. And we will take question from Dan McSpirit with BMO Capital.

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Daniel Eugene McSpirit, BMO Capital Markets Equity Research - Equity Analyst [47]

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Can you express your current thoughts on the Bakken operation as either a recipient of more capital or a source of proceeds from a divestiture, recognizing there's no urgency to raise capital today?

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Lee K. Boothby, Newfield Exploration Company - Chairman, CEO and President [48]

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I'm going to start by saying I love the Bakken, and I love our team, and I love the results they're posting. And we've demonstrated that we're going to make the right decisions over time. I know there's a lot of you out there that would've liked us to sell the Bakken when oil was at $26. We said we don't think that makes sense. We've got $500 million of cash in the balance sheet. And the magical thing is with what our team does every day, Steve and I've been on the road talking to you guys the last 4 or 5 years, and it seems like we always have about 300-plus locations. And I think we built 300 wells in the last 5 years, and we still have 300-plus locations. They're high return. We're actually -- we've actually grown production with the 1-rig program. Larry likes the joke we should have gone from 4 rigs to 1 rig a long time ago. And it's a good asset. It fits well in the portfolio. It doesn't presently compete on scale with SCOOP and STACK. We get that, but it fits nice right now. And we're not under any duress. We'll make the right decision at the right time. I'll close again by saying I love our team, I love the Bakken and I love the results they're posting.

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Daniel Eugene McSpirit, BMO Capital Markets Equity Research - Equity Analyst [49]

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Wonderful. And just as a follow-up, Lee, if I could, I think essential to the story what I believe underscores the value proposition of the shares here is the improvement in capital efficiency. To that end, can you comment and/or clarify on whether increased recoveries or increased drilling activity will be the biggest driver or the bigger driver of a potential positive change in out-period production growth guidance?

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Lee K. Boothby, Newfield Exploration Company - Chairman, CEO and President [50]

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So you want me to trade off increased recovery, i.e., improved yields from the well versus increased activity?

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Daniel Eugene McSpirit, BMO Capital Markets Equity Research - Equity Analyst [51]

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Yes. Just what's going to be the bigger driver here and...

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Lee K. Boothby, Newfield Exploration Company - Chairman, CEO and President [52]

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Yes. So clearly over the long run, given the economic strength of these assets' cash generation ability, these assets' pricing environment that we're living in today, ultimately, the value proposition driving value and pulling it forward is going to be approximate of activity to pace. I think that's probably going to be the biggest driver, just given the overall scale -- number of location, scale of resource. When you start talking about billions of barrels of recoverable hydrocarbons, it's pace, and we get that. So going faster and accelerating, bringing that future state forward is what we're going to be focused on. And the other aspect of the yield for the well is that optimization equation. We'll be going faster with whatever we believe at the time is the most optimal development. So I think it's scale, acceleration and optimization kind of in that order.

Thanks, guys. Appreciate everybody dialing in today. We're excited. I hope that comes across in the call. We're off to a great start. I'm really looking forward to visiting with our full team here later this afternoon and enjoying this. But we're focused on the future, and we're going to be talking about how we can continue to outperform in the road ahead. So thanks for your investment in Newfield, your interest and your time. We look forward to visiting with you on the road. Have a great day.

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Operator [53]

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And that does conclude today's conference. We thank you for your participation.