UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

Form 10-K

 

 

Commission file number: 1-12534

Newfield Exploration Company

(Exact name of registrant as specified in its charter)

 

 

Registrant’s telephone number, including area code:

281-847-6000

 

Securities registered Pursuant to Section 12(b) of the Act:

 

 

Securities registered Pursuant to Section 12(g) of the Act:

None

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes þ     No  o

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.  Yes o     No þ

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer þ     Accelerated filer o     Non-accelerated filer o

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes o     No þ

 

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant was approximately $6 billion as of June 30, 2006 (based on the last sale price of such stock as quoted on the New York Stock Exchange).

 

As of February 26, 2007, there were 129,995,347 shares of the registrant’s common stock, par value $0.01 per share, outstanding.

 

Documents incorporated by reference: Proxy Statement of Newfield Exploration Company for the Annual Meeting of Stockholders to be held May 3, 2007, which is incorporated by reference into Part III of this Form 10-K.

 

 

TABLE OF CONTENTS

 

If you are not familiar with any of the oil and gas terms used in this report, we have provided explanations of many of them under the caption“Commonly Used Oil and Gas Terms” at the end of Item 7 of this report. Unless the context otherwise requires, all references in this report to “Newfield,” “we,” “us” or “our” are to Newfield Exploration Company and its subsidiaries. Unless otherwise noted, all information in this report relating to oil and gas reserves and the estimated future net cash flows attributable to those reserves are based on estimates we prepared and are net to our interest.

 

We are an independent oil and gas company engaged in the exploration, development and acquisition of crude oil and natural gas properties. Our company was founded in 1989 and for the first ten years of our existence we focused on the shallow waters of the Gulf of Mexico. Today, we have a diversified asset base. Our domestic areas of operation include the Anadarko and Arkoma Basins of the Mid-Continent, the onshore Gulf Coast, the Uinta Basin of the Rocky Mountains and the Gulf of Mexico. Internationally, we are active offshore Malaysia and China and in the U.K. North Sea.

 

General information about us can be found at www.newfield.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, as well as any amendments and exhibits to those reports, are available free of charge through our website as soon as reasonably practicable after we file or furnish them. Information contained at our website is not incorporated by reference into this report and you should not consider information contained at our website as part of this report.

 

At year-end 2006, we had proved reserves of 2.3 Tcfe. Of those reserves:

 

 

The elements of our growth strategy have remained substantially unchanged since our founding and consist of:

 

 

Drilling Program.  In an effort to manage the risks associated with our strategy to grow reserves through the drill bit, each year we drill a greater number of lower risk, low to moderate potential wells and a lesser number of higher risk, higher potential prospects. Our low-risk drilling opportunities in the Mid-Continent, the Rocky Mountains and the shallow waters of Malaysia and the Gulf of Mexico are complemented with higher potential plays in areas like the Gulf of Mexico’s deepwater and in international waters. We actively look for

new drilling ideas on our existing property base and on properties that may be acquired. In 2006, substantially all of our reserve additions came through the drillbit.

 

Acquisitions.  We actively pursue the acquisition of proved oil and gas properties in select geographic areas. The potential to add reserves through the drill bit is a critical consideration in our acquisition screening process. From 2000 through 2004, we made several large acquisitions that helped establish new focus areas. Since 2004, our production and reserve growth has come primarily through the success of our drilling programs. Recently, higher commodity prices and stiff competition for acquisitions have significantly increased the cost of available properties. As a result, we have looked to alternative ways to gain access to oil and gas properties such as joint venture alliances and leasing efforts. We did not complete any significant acquisitions during 2006.

 

Geographic Focus.  We believe that our long-term success requires extensive knowledge of the geologic and operating conditions in the areas where we operate. Because of this belief, we focus our efforts on a limited number of geographic areas where we can use our core competencies and have a significant influence on operations. We also believe that geographic focus allows us to make the most efficient use of our capital and personnel.

 

Control of Operations and Costs.  In general, we prefer to operate our properties. By controlling operations, we can better manage production performance, control operating expenses and capital expenditures, consider the application of technologies and influence timing. At year-end 2006, we operated about 70% of our net total production.

 

Technology.  By investing in technology, we give our people the tools they need to succeed. We rely on 3-D seismic surveys in all of our major areas of operation and use the full range of technologies to identify opportunities.

 

Equity Ownership and Incentive Compensation.  We want our employees to act like owners. To achieve this, we reward and encourage them through equity ownership and performance-based compensation. A significant portion of our employees’ compensation is contingent on our profitability. As of February 26, 2007, our employees owned or had options to acquire 7.3% of our outstanding common stock on a fully diluted basis.

 

Mid-Continent.  Through an acquisition in January 2001, we added the Mid-Continent as a focus area. Since that time, we have tripled our proved reserves and tripled our production from this area. The Mid-Continent now represents 35% of our total proved reserves. The Mid-Continent is a gas-rich province characterized by multiple productive zones. Our two most active plays, the Woodford Shale and the Mountain Front Wash, are characterized by multiple producing horizons and large acreage positions. We drilled 354 wells in the Mid-Continent in 2006 and have a multi-year inventory of lower risk drilling opportunities. Our Mid-Continent division is managed by our Tulsa, Oklahoma office.

 

Onshore Gulf Coast.  We established onshore Gulf Coast operations in 1995 and made major acquisitions in 2000 and 2002 to establish a significant presence in the onshore Gulf Coast. Today, this region is a major focus area for us, representing about 20% of our total proved reserves. Our operations are concentrated in South Texas, the Val Verde Basin of West Texas and East Texas.

 

Rocky Mountains.  Through an acquisition in August 2004, we entered the Uinta Basin of the Rocky Mountains. The Monument Butte Field, located in northeastern Utah, now accounts for approximately 20% of our total proved reserves. The field offers a multi-year drilling inventory of lower risk wells. We drilled 199 wells in the field in 2006. The multiple basins of the Rocky Mountains, which have significant remaining reserves, offer us opportunities for growth and we are actively pursuing acquisition opportunities in those basins. Our Rocky Mountain division is managed by our Denver, Colorado office.

 

Gulf of Mexico.  We are active in all of the major plays in the Gulf of Mexico: the traditional shelf, the deep and ultra-deep shelf and deepwater. Although traditional shelf plays are mature, we remain active and are finding creative ways to leverage our geologic expertise and infrastructure. We operate about 180 production platforms in shallow water. This infrastructure facilitates cost effective operations and timely development of

our discoveries. We have added significant new projects in deepwater over the last two years. At year-end 2006, we were producing from four deepwater fields, and our first operated development — the Wrigley Field — is being prepared for production.

 

Although we believe that significant opportunities remain in the deep shelf play, the economics of these prospects have been negatively impacted by significantly higher rates for offshore rigs. As a result, we have elected to defer most of these opportunities.

 

In 2005 and 2006, we drilled our first ultra-deep well on our Blackbeard prospect. This well was part of an exploration initiative we refer to as “Treasure Project.” The well was drilled to a total depth of 30,067 feet and encountered a thin gas-bearing sand below 30,000 feet. The well failed to reach its primary targets because of higher than expected pressure. The well has been temporarily abandoned. We are working with the MMS to extend the leases containing the prospect, all of which are beyond their primary terms. The ultra-deep targets are high risk but the potential reserve impact could be significant. We have more than 90 lease blocks associated with this concept. There is no production from these depths on the Gulf of Mexico shelf today.

 

International.  Our international operations have grown significantly over the last several years. We now have production from offshore China and Malaysia and are preparing to bring the Grove Field, our first operated field in the U.K. North Sea, on-line. We continue to seek ways to grow our presence in these areas and have a team dedicated to finding new international regions where we can employ our expertise. We have international offices in Beijing, Kuala Lumpur and London.

 

We have interests in two offshore Malaysia blocks that together include current production, undeveloped discoveries and lower risk drilling prospects in shallow water and a large deepwater exploration concession. We have four fields under development and we drilled our first deepwater prospect in late 2006. The well, located on Block 2C, found non-commercial quantities of natural gas. The geologic information gathered from this well is being incorporated into our interpretation for other prospects on Block 2C. We have a commitment to drill one additional exploratory well on this block.

 

During the third quarter of 2006, we commenced production from two oil fields in China’s Bohai Bay. During 2005, we added two license areas offshore Hong Kong in the Pearl River Mouth Basin and we acquired seismic data for these areas in 2006. We are seeking additional opportunities both onshore and offshore China.

 

For revenues from our domestic and international operations, see Note 16, “Segment Information,” to our consolidated financial statements appearing later in this report.

 

Our capital budget for 2007 is approximately $1.8 billion, including about $50 million for continuing hurricane repairs in the Gulf of Mexico and excluding approximately $100 million of capitalized interest and overhead. About $290 million has been earmarked for exploration (exclusive of exploitation) activities. We do not budget for potential acquisitions. We plan to drill approximately 450 wells in 2007, about 80% of which are lower risk wells in the Mid-Continent or the Uinta Basin.

 

Mid-Continent.  Our largest focus area investment in 2007 will be the Mid-Continent. We expect to drill about 200 wells and invest approximately $700 million. The majority of the planned drilling is associated with the development of our Woodford Shale play. We expect to drill about 150 horizontal wells in the play in 2007.

 

Onshore Gulf Coast.  In 2007, we will balance development drilling of lower risk opportunities with some higher risk, higher impact exploration tests. South Texas will be a significant part of this focus area in 2007. We plan to drill 10-12 wells in South Texas under a joint venture agreement with Exxon-Mobil. Overall, we plan to drill about 70 wells and invest approximately $350 million in the onshore Gulf Coast during 2007.

 

Rocky Mountains.  Our primary capital program in the Monument Butte Field consists of drilling shallow, lower risk wells and water injection wells, waterflood optimization activities and investment in field infrastructure. We plan to drill about 150 wells in the field during 2007. A successful 20-acre infill drilling pilot program, conducted in 2006, indicates that field development will support an additional 1,000 wells.

Production from Monument Butte has been negatively impacted by refining capacity in the Salt Lake City area. We expect our 2007 oil sales to benefit from recent agreements with refiners which allow for firm capacity of approximately 11,000 BOPD (gross) through 2008 and 7,400 BOPD (gross) through 2009. We are working with other area refiners to secure additional capacity. Please see the discussion under the caption “We may not achieve future production growth from our Monument Butte Field” in Item 1A of this report. Our 2007 capital budget includes $135 million for our activities in the Rocky Mountains.

 

Gulf of Mexico.  We expect to drill about 20-25 wells in 2007, including 15-20 in the traditional shelf and 4-5 in deepwater. About $440 million of our capital budget for 2007 has been allocated to our Gulf of Mexico program. Our activities in the traditional shelf are helping to maintain production levels while generating significant cash flow to fund other growth areas.

 

International.  In recent years, we have invested increasing amounts in international operations. Recent field developments offshore Malaysia and China and in the U.K. North Sea are expected to add significant production in 2007. Our planned investment in international ventures for 2007 is expected to be more than $200 million.

 

In 2007, our activities in Malaysia will focus on bringing our Abu Field on-line. In addition, development continues at the Puteri Field on PM 318 and the East Belumut and Chermingat Fields on PM 323. Offshore China, our drilling program for the Bohai Bay will focus on development of our two commercial fields, where production commenced in the middle of 2006. In the U.K. North Sea, our Grove Field is being prepared for production. We plan to drill three exploration prospects in the North Sea in 2007. Under an agreement signed in 2006, a significant portion of the costs associated with these exploration prospects will be funded by another company. The first of the three wells has been drilled and was unsuccessful.

 

Please see the discussion under the caption “Forward-Looking Information” in Item 7 of this report.

 

Substantially all of our natural gas and oil production is sold to a variety of purchasers under short-term (less than 12 months) contracts at market sensitive prices. For a list of purchasers of our oil and gas production that accounted for 10% or more of our consolidated revenue for the three preceding calendar years, please see Note 1, “Organization and Summary of Significant Accounting Policies — Major Customers,” to our consolidated financial statements. We believe that the loss of any of these purchasers would not have a material adverse effect on us because alternative purchasers of this production are readily available.

 

Competition in the oil and gas industry is intense, particularly access to drilling rigs and other services, the acquisition of properties and the hiring and retention of technical personnel. For a further discussion, please see the information set forth under the caption “Competitive industry conditions may negatively affect our ability to conduct operations” in Item 1A of this report.

 

As of February 15, 2007, we had 871 employees. All but 70 of our employees were located in the U.S. None of our employees are covered by a collective bargaining agreement. We believe that relationships with our employees are satisfactory.

 

For a discussion of the significant governmental regulations to which our business is subject, please see the information set forth under the caption “Regulation” in Item 7 of this report.

 

An investment in our securities involves risks. You should carefully consider, in addition to the other information contained in this report, the risks described below.

 

Oil and gas prices fluctuate widely, and lower prices for an extended period of time are likely to have a material adverse impact on our business.  Our revenues, profitability and future growth depend substantially on prevailing prices for oil and gas. These prices also affect the amount of cash flow available for capital expenditures and our ability to borrow and raise additional capital. The amount that we can borrow under our credit facility could be limited by changing expectations of future prices. In addition, lower prices may reduce the amount of oil and gas that we can economically produce.

 

Among the factors that can cause fluctuations are:

 

 

Our future success depends on our ability to find, develop and acquire oil and gas reserves.  Most of our producing properties have declining production rates. To maintain production levels, we must locate and develop or acquire new oil and gas reserves to replace those depleted by production. Without successful exploration or acquisition activities, our reserves, production and revenues will decline rapidly. We may be unable to find and develop or acquire additional reserves at an acceptable cost. In addition, substantial capital is required to replace and grow reserves. If lower oil and gas prices or operating constraints or production difficulties result in our cash flow from operations being less than expected or limit our ability to borrow under our credit arrangements, we may be unable to expend the capital necessary to locate and develop or acquire new oil and gas reserves.

 

Our use of oil and gas price hedging contracts involves credit risk and may limit future revenues from price increases.  We generally hedge a substantial, but varying, portion of our anticipated future oil and natural gas production for the next 12-24 months as part of our risk management program. In the case of acquisitions, we may hedge acquired production for a longer period. We use hedging to reduce price volatility, help ensure that we have adequate cash flow to fund our capital programs and manage price risks and returns on some of our acquisitions and drilling programs. While the use of hedging transactions limits the downside risk of price declines, their use also may limit future revenues from price increases. Hedging transactions also involve the risk that the counterparty may be unable to satisfy its obligations.

 

Actual quantities of recoverable oil and gas reserves and future cash flows from those reserves most likely will vary from our estimates.  Estimating accumulations of oil and gas is complex. The process relies on interpretations of available geologic, geophysic, engineering and production data. The extent, quality and reliability of this data can vary. The process also requires certain economic assumptions, some of which are mandated by the SEC, such as oil and gas prices, drilling and operating expenses, capital expenditures, taxes and availability of funds. The accuracy of a reserve estimate is a function of:

 

 

The proved reserve information set forth in this report is based on estimates we prepared. Estimates prepared by others might differ materially from our estimates.

 

Actual quantities of recoverable oil and gas reserves, future production, oil and gas prices, revenues, taxes, development expenditures and operating expenses most likely will vary from our estimates. Any significant variance could materially affect the quantities and net present value of our reserves. In addition, we may adjust estimates of proved reserves to reflect production history, results of exploration and development and prevailing oil and gas prices. Our reserves also may be susceptible to drainage by operators on adjacent properties.

 

You should not assume that the present value of future net cash flows is the current market value of our estimated proved oil and gas reserves. In accordance with SEC requirements, we base the estimated discounted future net cash flows from proved reserves on prices and costs in effect at December 31. Actual future prices and costs may be materially higher or lower than the prices and costs we used.

 

If oil and gas prices decrease, we may be required to take writedowns.  We may be required to writedown the carrying value of our oil and gas properties when oil and gas prices decrease or if we have substantial downward adjustments to our estimated proved reserves, increases in our estimates of operating or development costs or deterioration in our exploration results.

 

We capitalize the costs to acquire, find and develop our oil and gas properties under the full cost accounting method. The net capitalized costs of our oil and gas properties may not exceed the present value of estimated future net cash flows from proved reserves, using period-end oil and gas prices and a 10% discount factor, plus the lower of cost or fair market value for unproved properties. If net capitalized costs of our oil and gas properties exceed this limit, we must charge the amount of the excess to earnings. We review the carrying value of our properties quarterly, based on prices in effect (including the effect of our hedging contracts that are designated for hedge accounting) as of the end of each quarter or as of the time of reporting our results. The carrying value of oil and gas properties is computed on a country-by-country basis. Therefore, while our properties in one country may be subject to a writedown, our properties in other countries could be unaffected. Once recorded, a writedown of oil and gas properties is not reversible at a later date even if oil and gas prices increase.

 

We may not achieve production growth from our Monument Butte Field.  In August 2004, we acquired the 100,000-acre Monument Butte Field located in the Uinta Basin of Northeast Utah for approximately $575 million. The crude oil produced in the Uinta Basin is known as “black wax” because it has a higher paraffin content than crude oil found in most other major North American basins. Currently, area refineries have limited capacity to refine this type of crude oil. As a result we curtailed some production from the field in 2006. In early 2007, we reached agreements with two refiners that secure base load capacity of approximately 11,000 BOPD of capacity through 2008 and 7,400 BOPD through 2009. We are working with other area refiners to secure additional capacity. Without additional refining capacity, our ability to increase production from the field will be limited. In addition, the price we receive for our production from the field has been adversely affected by the increased availability of “black wax” and other competitive crude oil in the market.

 

Waterflooding, a secondary recovery operation that involves the injection of large volumes of water into an oil-producing reservoir, is necessary to recover the oil reserves in the Monument Butte Field. In 2006, we signed a water source agreement with the Duchesne Conservancy Water District that secures access to approximately 62,000 barrels of water per day through May 2051. This agreement provides sufficient water for our current operations and will permit some future growth but our ability to significantly increase production from the field may be limited if we do not obtain additional sources of water in the future.

 

Competition for experienced technical personnel may negatively impact our operations or financial results.  Our continued drilling success and the success of other activities integral to our operations will depend, in part, on our ability to attract and retain experienced explorationists, engineers and other professionals. Competition for these professionals is extremely intense. We are likely to continue to experience increased costs to attract and retain these professionals.

We may be unable to obtain the drilling rigs or support services necessary for our drilling and development programs in a timely manner or at acceptable rates.  In periods of increased drilling activity resulting from high commodity prices, demand exceeds availability for drilling rigs, drilling vessels, dive boats, supply boats and experienced personnel. The market for oilfield services is currently very competitive. This may lead to difficulty and delays in consistently obtaining services and equipment from vendors, obtaining drilling rigs and other equipment at acceptable rates, and scheduling equipment fabrication at factories and fabrication yards. This, in turn, may lead to projects being delayed or experiencing increased costs.

 

The oil and gas exploration and production industry is very competitive, and some of our exploration and production competitors have greater financial and other resources than we do.  The oil and gas business is highly competitive in the search for and acquisition of reserves. Our competitors include major oil and gas companies, independent oil and gas companies, financial buyers and individual producers. Some of our competitors may have greater and more diverse resources than we do. Recently, higher commodity prices and stiff competition for acquisitions have significantly increased the cost of available properties.

 

We may be subject to risks in connection with acquisitions.  The successful acquisition of producing properties requires an assessment of several factors, including:

 

 

The accuracy of these assessments is inherently uncertain. In connection with these assessments, we perform a review of the subject properties that we believe to be generally consistent with industry practices. Our review will not reveal all existing or potential problems nor will it permit us to become sufficiently familiar with the properties to fully assess their deficiencies and capabilities. Inspections may not always be performed on every platform or well, and structural and environmental problems are not necessarily observable even when an inspection is undertaken. Even when problems are identified, the seller may be unwilling or unable to provide effective contractual protection against all or part of the problems. We often are not entitled to contractual indemnification for environmental liabilities and acquire properties on an “as is” basis.

 

Drilling is a high-risk activity.  Our future success will depend on the success of our drilling programs. In addition to the numerous operating risks described in more detail below, these activities involve the risk that no commercially productive oil or gas reservoirs will be encountered. In addition, we often are uncertain as to the future cost or timing of drilling, completing and producing wells. Furthermore, our drilling operations may be curtailed, delayed or canceled as a result of a variety of factors, including:

 

 

The oil and gas business involves many operating risks that can cause substantial losses; insurance may not protect us against all these risks.  These risks include:

 

 

 

If any of these events occur, we could incur substantial losses as a result of:

 

 

If we experience any of these problems, our ability to conduct operations could be adversely affected.

 

Offshore operations are subject to a variety of operating risks, such as capsizing, collisions and damage or loss from hurricanes or other adverse weather conditions. These conditions can and have caused substantial damage to facilities and interrupt production. Our operations in the Gulf of Mexico are dependent upon the availability, proximity and capacity of pipelines, natural gas gathering systems and processing facilities. Any significant change affecting these infrastructure facilities could materially harm our business. We deliver crude oil and natural gas through gathering systems and pipelines that we do not own. These facilities may be temporarily unavailable due to adverse weather conditions or may not be available to us in the future. As a result, we could incur substantial liabilities or experience reductions in revenue that could reduce or eliminate the funds available for our exploration and development programs and acquisitions, or result in the loss of properties.

 

We maintain insurance against some, but not all, of these potential risks and losses. We may elect not to obtain insurance if we believe that the cost of available insurance is excessive relative to the risks presented. In addition, pollution and environmental risks generally are not fully insurable. As a result of the damage caused by hurricanes in 2005, insurance coverage for these types of storms is limited. Where available, the cost of this insurance coverage may be excessive relative to the risks presented.

 

Exploration in deepwater involves greater operating and financial risks than exploration at shallower depths.  These risks could result in substantial losses. Deepwater drilling and operations require the application of recently developed technologies and involve a higher risk of mechanical failure. We will likely experience significantly higher drilling costs in connection with the deepwater wells that we drill. In addition, much of the deepwater play lacks the physical and oilfield service infrastructure present in shallower waters. As a result, development of a deepwater discovery may be a lengthy process and require substantial capital investment, resulting in significant financial and operating risks.

 

In addition, we may not serve as the operator of significant projects in which we invest. As a result, we may have limited ability to exercise influence over operations related to these projects or their associated costs. Our dependence on the operator and other working interest owners for these deepwater projects and our limited ability to influence operations and associated costs could prevent the realization of our targeted returns

on capital. The success and timing of drilling and development activities on properties operated by others therefore depend upon a number of factors that will be largely outside of our control, including:

 

 

We are subject to complex laws that can affect the cost, manner or feasibility of doing business.  Exploration and development and the production and sale of oil and gas are subject to extensive federal, state, local and international regulation. We may be required to make large expenditures to comply with environmental and other governmental regulations. Matters subject to regulation include:

 

 

Under these laws, we could be liable for personal injuries, property damage, oil spills, discharge of hazardous materials, remediation and clean-up costs, natural resource damages and other environmental damages. We could also be required to install expensive pollution control measures or limit or cease activities on lands located within wilderness, wetlands or other environmentally or politically sensitive areas. Failure to comply with these laws also may result in the suspension or termination of our operations and subject us to administrative, civil and criminal penalties as well as the imposition of corrective action orders. Moreover, these laws could change in ways that substantially increase our costs. Any such liabilities, penalties, suspensions, terminations or regulatory changes could have a material adverse effect on our financial condition, results of operations or cash flows.

 

We have risks associated with our foreign operations.  We currently have international activities and we continue to evaluate and pursue new opportunities for international expansion in select areas. Ownership of property interests and production operations in areas outside the United States is subject to the various risks inherent in foreign operations. These risks may include:

 

 

Our international operations also may be adversely affected by the laws and policies of the United States affecting foreign trade, taxation and investment. In addition, if a dispute arises with respect to our foreign operations, we may be subject to the exclusive jurisdiction of foreign courts or may not be successful in subjecting foreign persons to the jurisdiction of the courts of the United States.

Our certificate of incorporation, bylaws, stockholder rights plan and some of our arrangements with employees contain provisions that could discourage an acquisition or change of control of our company.  Our stockholder rights plan, together with certain provisions of our certificate of incorporation and bylaws, may make it more difficult to effect a change of control of our company, to acquire us or to replace incumbent management. In addition, our change of control severance plan and agreements, our omnibus stock plans and our incentive compensation plan contain provisions that provide for severance payments and accelerated vesting of benefits, including accelerated vesting of restricted stock and options, upon a change of control. These provisions could discourage or prevent a change of control or reduce the price our stockholders receive in an acquisition of our company.

 

None.

 

Our 10 largest fields accounted for approximately 57% of our proved reserves at year-end 2006. The largest of those fields, the Monument Butte Field, accounted for about 19% of our proved reserves and about 16% of the net present value of our proved reserves at December 31, 2006. Since 2000, we have diversified our asset base, and, as a result, our reserves are more evenly distributed across our focus areas.

 

We have a sizeable presence in the Anadarko and Arkoma Basins. As of December 31, 2006, we owned an interest in more than 825,000 gross acres and about 3,100 gross producing wells. Approximately 130,000 net acres are associated with our Woodford Shale play. The Mid-Continent accounted for approximately 35% of our proved reserves at December 31, 2006. We operate 91% of those reserves.

 

As of December 31, 2006, we owned an interest in nearly 300,000 gross acres and about 650 gross producing wells primarily along the Gulf Coast of Texas. The onshore Gulf Coast accounted for nearly 20% of our proved reserves at December 31, 2006. We operate about 76% of those reserves.

 

As of December 31, 2006, we owned an interest in about 221,000 gross acres, 900 gross producing wells and 400 water injection wells. The vast majority of our assets in the Rocky Mountains are in our Monument Butte Field, located in the Uinta Basin of northeastern Utah. We operate 100% of our reserves in the Monument Butte Field. In early 2007, we closed several transactions that added 100,000 gross acres near our Monument Butte Field. The Rocky Mountain division accounted for approximately 20% of our proved reserves at year-end 2006.

 

As of December 31, 2006, we owned interests in about 290 leases on the shelf and 70 leases in deepwater (approximately 1.8 million gross acres) and about 617 gross producing wells. We operate about 75% of our Gulf of Mexico reserves. The Gulf of Mexico accounted for approximately 15% of our proved reserves at year-end 2006.

 

At year-end 2006, approximately 10% of our total proved reserves were located internationally.

 

Malaysia.  Through three production sharing contracts, or PSCs, we own interests in three blocks offshore Malaysia. We own a 50% non-operated interest in PM 318 and a 60% operated interest in PM 323. Both blocks

are located in shallow water offshore Peninsular Malaysia. PM 318 covers approximately 414,000 gross acres and had gross production of about 7,000 BOPD at year-end 2006. On the same block, we are developing the Abu Field and the 2005 Puteri discovery. PM 323 covers 320,000 acres and has four undeveloped discoveries. Also, we are developing the East Belumut and Chermingat Fields. Offshore Sarawak, we own a 40% operated interest in deepwater Block 2C, a 1.1 million acre area. No production exists on this acreage.

 

China.  We have oil production from two fields on Block 05/36 in Bohai Bay, offshore China. These fields are within a 22,000 gross acre unit in which we have a 12% interest. First production from the fields commenced during 2006. In late 2005, we signed agreements to explore on two blocks offshore Hong Kong in the Pearl River Mouth Basin. We acquired seismic data across portions of the acreage in 2006. The two blocks cover more than 2 million gross acres.

 

North Sea.  Our 2005 Grove discovery is being prepared for production. The field is located on license area 49/10a. We have an 85% interest in this field. At December 31, 2006, we owned interests in about 168,000 gross acres in the U.K. sector.

 

The following table shows our estimated net proved oil and gas reserves and the present value of estimated future after-tax net cash flows related to those reserves as of December 31, 2006.

 

 

 

 

All reserve information in this report is based on estimates prepared by our petroleum engineering staff. As a requirement of our credit facility, independent reserve engineers prepare separate reserve reports with respect to properties holding at least 70% of the present value of our proved reserves. At December 31, 2006, the independent reserve engineers’ reports covered properties representing 83% of our proved reserves and

87% of the present value. For such properties, the reserves reported by the independent reserve engineers were within 3% of the reserves we reported. Actual quantities of recoverable reserves and future cash flows from those reserves most likely will vary from the estimates set forth above. Reserve and cash flow estimates rely on interpretations of data and require many assumptions that may turn out to be inaccurate. For a discussion of these interpretations and assumptions, see “Actual quantities of recoverable oil and gas reserves and future cash flows from those reserves most likely will vary from our estimates” under Item 1A of this report.

 

The following table sets forth our drilling activity for each year in the three-year period ended December 31, 2006.

 

 

 

 

We were in the process of drilling 25 gross (20.4 net) exploratory wells (includes 22 gross (18.3 net) exploitation wells) and five gross (3.9 net) development wells in the United States, two gross (0.2 net) exploitation wells in China, one gross (0.5 net) development well in Malaysia and one gross (0.9 net) development well in the United Kingdom at December 31, 2006.

 

The following table sets forth the number of productive oil and gas wells in which we owned an interest as of December 31, 2006 and the location of, and other information with respect to, those wells.

 

The day-to-day operations of oil and gas properties are the responsibility of an operator designated under pooling or operating agreements or production sharing contracts. The operator supervises production, maintains production records, employs or contracts for field personnel and performs other functions. Generally, an operator receives reimbursement for direct expenses incurred in the performance of its duties as well as monthly per-well producing and drilling overhead reimbursement at rates customarily charged by unaffiliated third parties. The charges customarily vary with the depth and location of the well being operated.

 

As of December 31, 2006, we owned interests in developed and undeveloped oil and gas acreage in the locations set forth in the table below. Domestic ownership interests generally take the form of “working interests” in oil and gas leases that have varying terms. International ownership interests generally arise from participation in production sharing contracts.

 

The table below summarizes by year and geographic area our undeveloped acreage scheduled to expire in the next five years. In most cases, the drilling of a commercial well, or the filing and approval of a development plan or suspension of operations, will hold acreage beyond the expiration date. We own fee mineral interests in 317,811 gross (99,380 net) undeveloped acres. These interests do not expire.

 

 

We believe that we have satisfactory title to all of our producing properties in accordance with generally accepted industry standards. As is customary in the industry in the case of undeveloped properties, often little investigation of record title is made at the time of acquisition. Investigations are made prior to the consummation of an acquisition of producing properties and before commencement of drilling operations on undeveloped properties. Individual properties may be subject to burdens that we believe do not materially interfere with the use, or affect the value, of the properties. Burdens on properties may include:

 

 

We have been named as a defendant in a number of lawsuits arising in the ordinary course of our business. While the outcome of these lawsuits cannot be predicted with certainty, we do not expect these matters to have a material adverse effect on our financial position, cash flows or results of operations.

 

There were no matters submitted to a vote of our security holders during the fourth quarter of 2006.

 

The following table sets forth the names and ages (as of February 28, 2007) of and positions held by our executive officers. Our executive officers serve at the discretion of our Board of Directors.

 

 

The executive officers have held the positions indicated above for the past five years, except as follows:

 

David A. Trice was appointed Chairman in September 2004.

 

David F. Schaible was promoted from Vice President to Executive Vice President in November 2004. He has served as a director since May 2002.

 

Terry W. Rathert was promoted from Vice President to Senior Vice President in November 2004.

 

Michael D. Van Horn joined the Company as Senior Vice President in November 2006. He served at EOG Resources, and its predecessor Enron Oil and Gas, since 1993. Most recently, he served as Vice President of International Exploration. Prior to that position, he was Director of Exploration.

 

W. Mark Blumenshine was promoted from Manager to Vice President in December 2005.

 

Mona Leigh Bernhardt was promoted from Manager to Vice President in December 2005.

 

Lee K. Boothby was promoted to Vice President in November 2004. He has managed our Mid-Continent operations since February 2002.

 

Stephen C. Campbell was promoted from Manager to Vice President in December 2005.

 

George T. Dunn was promoted to Vice President in November 2004. He has managed our onshore Gulf Coast operations since 2001.

 

John H. Jasek was promoted from General Manager to Vice President in November 2006. He has managed our Gulf of Mexico operations since March 2005. Prior to that, he was a Petroleum Engineer in the Western Gulf of Mexico.

 

James J. Metcalf was promoted from Manager to Vice President in December 2005.

 

Gary D. Packer was promoted from a Gulf of Mexico General Manager to Vice President — Rocky Mountains in November 2004.

 

Mark J. Spicer was promoted from Manager to Vice President in December 2005.

 

James T. Zernell was promoted from Manager to Vice President in December 2005.

Item 5.  Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

Our common stock is listed on the New York Stock Exchange under the symbol “NFX.” The following table sets forth, for each of the periods indicated, the high and low reported sales price of our common stock on the NYSE.

 

 

On February 26, 2007, the last reported sales price of our common stock on the NYSE was $44.20 per share.

 

As of February 26, 2007, there were approximately 1,900 holders of record of our common stock.

 

We completed a two-for-one split of our common stock following the close of trading on May 25, 2005. The split was effected by a common stock dividend.

 

We have not paid any cash dividends on our common stock and do not intend to do so in the foreseeable future. We intend to retain earnings for the future operation and development of our business. Any future cash dividends to holders of our common stock would depend on future earnings, capital requirements, our financial condition and other factors determined by our Board of Directors. The covenants contained in our credit facility and in the indenture governing our 65/8% Senior Subordinated Notes due 2014 and 2016 could restrict our ability to pay cash dividends.

 

The following table sets forth certain information with respect to repurchases of our common stock during the three months ended December 31, 2006.

 

 

 

Item 5A.  Stockholder Return Performance Presentation

 

The performance graph shown below is being furnished pursuant to Regulation S-K, Item 201(e). As required by applicable rules of the SEC, the performance graph was prepared based upon the following assumptions:

 

 

Our peer group is comprised of Anadarko Petroleum Corporation, Apache Corporation, Cabot Oil & Gas Corporation; Chesapeake Energy Corporation; EOG Resources, Inc., Forest Oil Corporation, Murphy Oil Corporation, Noble Energy, Inc., Pioneer Natural Resources Company; Pogo Producing Company, St. Mary Land & Exploration Company, Stone Energy Corporation, Swift Energy Company, The Houston Exploration Company and XTO Energy Inc.

 

 

 

SELECTED FIVE-YEAR FINANCIAL AND RESERVE DATA

 

The following table shows selected consolidated financial data derived from our consolidated financial statements and reserve data derived from our supplementary oil and gas disclosures set forth in Item 8 of this report. The data should be read in conjunction with Item 2, “Properties — Proved Reserves and Future Net Cash Flows” and Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” of this report.