Newfield Exploration Company
Newfield Exploration Company
Sales: $1.01 billion (2003)
Stock Exchanges: New York
Ticker Symbol: NFX
NAIC: 211111 Crude Petroleum and Natural Gas Extraction
Newfield Exploration Company, based in Houston, Texas, is one of the most successful independent crude oil and natural gas exploration and production companies in the United States. Its performance has been used by many independents as a benchmark for gauging their own success. Newfield's areas of operation include both the shallow and deep waters of the Gulf of Mexico, the onshore U.S. Gulf Coast of Texas and Louisiana, the Anadarko and Arkoma Basins, the North Sea, and China's Bohai Bay. At the close of 2003 the company had proved developed and undeveloped reserves of oil totaling 37.8 million barrels and 1.09 trillion cubic feet of gas. About 60 percent of these reserves were located onshore, with the balance in the Gulf of Mexico. Newfield is a public company trading on the New York Stock Exchange.
Chairman and Founder Launching Tenneco's Business in the 1960s
Newfield's chairman, Joe B. Foster, was the man most responsible for the founding of the company. He was born and raised in the Texas oil patch, the son of an oilman. He attended Texas A&M University and graduated first in his petroleum engineering class while simultaneously earning a business administration degree. He went to work for a new oil company that would become known as Tenneco Oil Exploration & Production. In the 1960s he and some colleagues spearheaded an effort to get Tenneco involved in offshore drilling in the Gulf of Mexico. Foster became manager of exploration and distinguished himself by aggressively acquiring leases, so that in the aftermath of the 1973 oil embargo Tenneco was well stocked with properties and in a position to prosper. Foster was also responsible for establishing a team concept with a multidisciplinary approach that was unusual for the day. As a result, he built employee loyalty, a factor that would become important in the creation of Newfield and its subsequent success.
Foster became a director and executive vice-president, in charge of Tenneco's worldwide operations in oil and gas, and eventually became president of the company. Then in May 1988, in what was considered a shocking move, Tenneco decided to sell its oil and gas properties, despite Foster's objections. Foster took steps to develop a leveraged buyout plan to acquire some of Tenneco's Gulf of Mexico properties, recruiting key employees and enlisting the help of investment banker Shearson Lehman Hutton. After bidding began on the properties, however, the price of oil dropped by four dollars a barrel, dealing a psychological blow to Foster's effort to raise adequate funds, which also was hindered because so many of the properties were undeveloped and banks were reluctant to gamble on mere potential. In the end, the bidders with greater resources—the likes of Arco, Amoco, Chevron, Mesa, and British Gas—acquired Tenneco's properties for an aggregate $7.3 million. It was a major disappointment for Foster, and the several million dollars he received in severance was inadequate consolation. Nevertheless, he considered his treatment by Tenneco as "fair and generous." He told Oil & Gas Investor in July 1989, "They gave me my day in court and an opportunity to make the LBO attempt."
Incorporating Newfield in December 1988
Some 300 people in Foster's Lafayette, Louisiana, division office were also out of work, so that when Foster decided to launch a start-up oil and gas company, he was able to recruit the top two dozen people, who all agreed to invest some of their severance pay to fund the venture as well as to take major pay cuts until the business caught on. The new company was incorporated in December 1988 as Newfield Exploration Company. It started out with $9.1 million in the bank, $1.3 million coming from Foster himself, plus funding from two investor groups: the Houston investment firm of Duncan Cook & Co., headed by Charles W. Duncan, Jr., and The University of Texas Systems Permanent University and Common Trust funds, which until this time had only been allowed to invest in dividend-paying stocks and bonds. All told, about a third of the seed money came from the employees, a third from Duncan Cook, and a third from The University of Texas (which also pledged to provide another $3 million in loans). Foster and his team had a tremendous amount of experience and record of success in finding oil. They and their backers were banking on their ability to replicate what they had done at Tenneco. As part of the business plan, Newfield concentrated on one segment of the market: the shallow waters of the Gulf, 100 yards offshore in a stretch of the Louisiana coast that was known to produce gas. The company also was devoted to being a low-cost producer, one able to weather difficult times. Because employees had a financial stake, they were personally committed to the idea of saving money wherever possible. This commitment was even reflected in the way the company chose to furnish its offices. Newfield's new controller, who during the previous decade had done Tenneco's purchasing, picked up Tenneco's old desks and chairs for 25 cents on the dollar. One area where Foster would not stint, however, was on technology and information. The company spent more than a third of its start-up funds, $3.5 million, to procure seismic data on 30,000 acres of the Gulf of Mexico.
After analyzing the seismic data, the Newfield team located desirable leases. The company drilled its first well in the Gulf in August 1989 but it came up dry, as did two more wells drilled between then and February 1990. A fourth well had the misfortune of capsizing because strong currents knocked the foundation out from under the rig. When Newfield finally succeeded in drilling the well, it also proved to be a dry hole. By the end of March 1990, the company had just $100,000 of its initial funds remaining, nine of the ex-Tenneco employees had left, and Foster was taking care of payroll out of his own bank account. Due to falling gas and oil prices and rising exploration costs, it was not the most opportune time to be operating in the Gulf of Mexico. Moreover, most of the reserves in the Gulf had already been tapped, leaving just leftover pockets that were not large enough for the majors to bother with and too difficult to locate without seismic data and a lot of engineering expertise. An investment bank that was planning to make a private placement of Newfield stock was now ready to back out, and only intense lobbying by Foster saved the deal. In April 1990 Newfield received a much needed infusion of cash, $37 million, from such investors as Yale and Duke Universities, Dartmouth College, and Warburg, Pincus Investors, L.P. Finally, on Memorial Day weekend 1990 Newfield located its first discovery, 300,000 barrels of oil and 20 billion cubic feet of gas. Days later Newfield bought its first property, adding 250,000 barrels of oil and 24 billion cubic feet of gas. More leases would soon be acquired, adding another 39 billion cubic feet of natural gas.
The start-up had turned the corner and would soon erase the losses accumulated during the first year. Late in 1990 it made its first operated exploratory discovery, which led to a drilling program of six wells in 1991. Because of a dropoff in activity in the Gulf, Tenneco, by drilling 18 wells in 1991, became one of the most active drillers in the area. Newfield's ability to control overhead costs was a key factor in its success. The company spent an average of $2 million per well, about half as much as many rivals.
From the beginning, Foster intended to take Newfield public, in large part to provide a way for the investors, both institutional and employees, who had been so instrumental in launching the company, to gain liquidity. In 1991 the company posted income of $2.2 million, followed by $11.2 million in 1992. Believing the time was now right to go public, Newfield completed an offering in November 1993, underwritten by Goldman, Sachs and PaineWebber, netting $57.3 million. Because the company had no debt to pay down, the proceeds were earmarked to fund drilling in 1994 and be available should an acquisition opportunity arise. Shares of Newfield stock began trading on the New York Stock Exchange.
Moving Onshore in 1995
Newfield continued to successfully drill offshore in the Gulf of Mexico. Revenues reached $69.7 million in 1994 and net income totaled $14.4 million. A year later revenues improved to $94.6 million and income topped $16.2 million. It was in 1995 that Newfield expanded beyond the shallow waters off the Louisiana coast, moving onshore in Louisiana for the first time. In this way, should offshore rig rates increase, the company would still have a place to drill economically. The fields chosen were similar to the geology and geophysics with which the company was familiar offshore. In addition, Newfield could apply its expertise in 3D seismic technology to an area that had not been studied as systematically as the Gulf. The first significant onshore success came in 1998 with the drilling of an exploratory well in the Lafayette area of Louisiana. But Newfield remained active in the Gulf. In 1995 it was the 17th largest producer in the Gulf of Mexico. The company drilled 16 exploratory wells, of which ten resulted in discoveries, making it the seventh most active driller in the region.
We rely on a proven growth strategy—balancing acquisitions with drill bit opportunities.
Revenues grew at a steady clip in the mid-1990s, reaching $149.3 million in 1996 and approaching $200 million in 1997. Net income grew to $38.5 million in 1996 and $40.6 million in 1997. Commodity prices fell in 1998, hurting everyone in the oil and gas business. Newfield saw its revenues decline slightly to $195.7 million, but it recorded a net loss of $57.7 million. Prices did not rebound until the spring of 1999, and when they did, Newfield resumed its pattern of strong growth. Revenues increased to more than $265.6 million and net income totaled $32.2 million in 1999. The year also was marked by a continued effort to diversify. The company expanded its area of focus by entering into joint ventures to drill in new areas of the Louisiana and Texas Gulf coasts. Newfield also made an international move, acquiring a pair of offshore oilfields in Australia. (Two years earlier the company had made its first overseas acquisition when it picked up a 35 percent interest in a property in Bohai Bay, offshore China, as part of the purchase of Huffco International.) In addition, there was a change in the management ranks at Newfield announced in November 1999: Effective in February 2000 Foster would step down as chief executive officer, replaced by David A. Trice. Foster would stay on as chairman, however, and remain very much involved in Newfield's affairs.
Newfield became a serious player onshore in 2000 when it paid $139 million for three producing gas fields in south Texas. It was by far the largest acquisition in the company's history, but it would soon be eclipsed by the purchase of Lariat Petroleum, an independent exploration and production company, in a deal that closed in January 2001. The total cost of approximately $333 million included $265 million in cash and $68 million in stock. Not only did Newfield significantly bolster its onshore drilling program, further reducing risk to a downturn in the offshore sector, it added a new area of focus—Oklahoma's Anadarko Basin—as well as Lariat's team of experienced employees. Another significant event in 2000 took place in offshore China, where in August Newfield's joint venture drilled a successful well, capable of producing 2,700 barrels of oil a day.
Revenues reached $480 million in 2000 with net income soaring to $132.4 million. A year later revenues continued to grow to $714 million and profits were again strong, totaling $119 million. In 2002 Newfield completed another major deal, acquiring EEX Corporation in an exchange of stock valued at $280 million, plus the assumption of $360 million in debt and existing obligations. The addition of EEX was important for a number of reasons. Its onshore properties located in Newfield's area of concentration in south Texas were highly complementary, transforming Newfield into one of the largest independent gas producers in the basin. EEX also afforded Newfield an opportunity to become involved in the deep waters of the Gulf of Mexico. For some months, the company had been assembling a deepwater team and the EEX addition gave it an impressive slate of properties and a running start. EEX had become involved in deep water some 20 years earlier but was unable to exploit its deepwater acreage, much of which had gone untested.
After experiencing a dropoff in revenues in 2002, dipping to $626.8 million, and a decrease in net income to $73.8 million, Newfield experienced a record-breaking year in 2003, topping the $1 billion mark in revenues while recording net income of $199.5 million. The company enjoyed deepwater success in the Gulf and took steps to transfer the knowledge it gained there to another part of the world: the North Sea. At the same time, it sold off its Australian holding. All told, Newfield was well stocked with promising properties, both onshore and offshore, both domestically and internationally. Given the company's track record of consistent success, there was every reason to expect Newfield to maintain a strong pattern of growth for the foreseeable future.
Newfield Explorations Mid-Continent Inc.; Newfield International Holdings Inc.; Newfield Gulf Coast Inc.; EEX Exploration and Production Company LLC.
- The company is incorporated.
- The company drills its first successful well.
- The company is taken public.
- The company engages in its first onshore drilling.
- Lariat Petroleum is acquired for approximately $333 million.
- EEX Corporation is acquired through a $280 million stock transaction and the assumption of $360 million in debt.
BP p.l.c.; The Houston Exploration Company; Royal Dutch/Shell Group of Companies.
Calkins, Laurel Brubaker, "Tenneco Exes Team Up to Form New Energy Firm," Houston Business Journal, January 23, 1989, p. 11.
Cederberg, Wendy, "Reunited and Ready to Roll," Oil & Gas Investor, July 1989, p. 43.
Poruban, Steven, "Newfield Balances Experience, Technology for Success in the Gulf of Mexico Region," Oil & Gas Journal, February 22, 1999, p. 18.
Snow, Nick, "Deeper Roots," Oil & Gas Investor, July 2002, p. 57.
Solomon, Caleb, "Oil Firm's Best Find: Penny-Pinching," Wall Street Journal, September 30, 1992, p. B1.