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1995 Annual Report

Review of 1995
1995 Results
Newfield achieved production and reserve growth during 1995 primarily as a result of the continued success of its capital expenditure program. Production increased 41% to 126.4 million cubic feet equivalent (MMcfe) of natural gas per day over 1994's level of 89.4 MMcfe per day. The Company's annual production of 46.1 Bcfe in 1995 exceeded management's target of 45.5 Bcfe. The increased production was due to exploration successes from the prior year, such as Eugene Island 251/262, Eugene Island 182 and South Timbalier 111, and 1995 discoveries, such as Vermilion 355 and South Timbalier 193, being placed on production. Development programs initiated in 1994 at Eugene Island 181/182 and High Island A-537 were completed and contributed substantially to production in 1995.
Proved reserves increased during the year to 261.4 Bcfe, a 27% rise from 1994's level of 205.6 Bcfe. Sixty-six percent of the reserve additions were through the drillbit. The Company participated in 31 wells, including 10 wildcat discoveries and 12 commercially productive development wells for an overall success ratio of 71%. Newfield also acquired interests in 8 proved properties. Reserve replacement as a percent of production was 221% during 1995. Capital expenditures totaled $104.2 million in 1995 including $32.5 million for exploration, $31.4 million for development and the remainder for the acquisition of properties.
Newfield also continued to focus on maintaining a low cost operating structure during the year. In October, 1995, PaineWebber issued a research report ranking the performance of 25 publicly held oil & gas companies on 1- and 3- year operating and administrative costs. Newfield ranked number one in 10 of 12 categories, having among the group, the lowest operating and development costs, G&A costs and total operating costs, and the highest average cash flow, all expressed on a unit of production basis. In 1995, the Company's all-in cost structure (including lease operating, G&A and depreciation, depletion and amortization expenses) was $1.51 per Mcfe.
The combination of a successful capital program and low cost operations resulted in increased earnings and operating cash flow in 1995. Net income rose to $16.3 million, or $0.90 per share, in 1995, from $14.4 million, or $0.80 per share, in 1994. Operating cash flow before changes in working capital rose 31% to $75.6 million. Increases in net income and operating cash flow were achieved despite lower average unit revenues in 1995. Oil and gas prices averaged $2.05 per Mcfe during 1995, down 4% from $2.14 per Mcfe in 1994. The Company's hedging activities increased net revenues by $2.8 million, and earnings by $0.10 per share in 1995.
Capital Program
Newfield's strategy to expand its reserve base and increase cash flow relies on a capital expenditure program that is balanced between exploration and acquisition activities. Exploration drilling includes a careful balance of both high risk, high potential and lower risk, lesser potential reserve targets. In each area, Newfield extensively uses many forms of advanced technology.
Low Cost Structure

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Newfield's strategy to expand its reserve base and increase cash flow relies on a capital expenditure program that is balanced between exploration and acquisition activities. Exploration drilling includes a careful balance of both high risk, high potential and lower risk, lesser potential reserve targets. In each area, Newfield extensively uses many forms of advanced technology.
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On a unit of production basis, Newfield generates one of the highest levels of cash flow per Mcfe in the industry, which permits reinvestment to add value and reserves on a per share basis. Maintaining a low all-in cost structure also results in a stronger earnings per unit of production.
An example of Newfield's integrated capital program is the Ewing Bank 947 field, where the Company has planned a 4 to 6 well drilling program in 1996. Newfield acquired its initial 50% working interest in this block in July, 1994. An extensive 3-D seismic review of the field was conducted and, as a result, proved undeveloped, probable and exploratory drilling targets were identified. Additional interests were acquired during 1995 bringing the Company's working interest to 59% and Newfield was designated as operator. Currently, the Company is conducting simultaneous drilling and production operations with a platform rig in 460 feet of water. In addition, two nearby blocks were acquired in the May, 1995 Federal OCS Lease Sale. A wildcat well is scheduled to be drilled on one of the blocks during 1996.
Another example is the West Delta 152 field where an active drilling program is also in progress. Newfield acquired a 23% working interest in the field's proved reserves, a 34% working interest in the exploration potential on the block and became operator in January, 1995. A 3-D seismic survey was obtained and several drilling opportunities were developed. Additional interests were subsequently acquired increasing Newfield's exposure to the upside in this field. Drilling activities on West Delta 152 commenced in late 1995 on a 4 to 6 well drilling program. Like Ewing Bank 947, drilling targets include proved undeveloped, probable and exploratory objectives. As part of the capital program, additional acreage around West Delta 152 was acquired by farmin and also at the May, 1995 Federal OCS Lease Sale.
Exploration
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Advanced technology plays an important part of the opportunity generating process at Newfield.
During 1995, the Company participated in 16 exploratory wells and 15 development wells with an overall success ratio of 71%.
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The Company's exploration activities are a key element of the capital expenditure program. During 1995, Newfield demonstrated the ability to increase reserves and add value through its exploratory activities, adding 46.4 Bcfe of new reserves. Newfield participated in 16 exploratory wells during the year, 10 of which were successful, for a 63% success ratio. The Company was operator of discoveries at South Timbalier 148, Vermilion 355 and Vermilion 308 and also participated in discoveries in the Vermilion 306 area.
South Timbalier 148 W/2 Newfield acquired an initial interest in the block and was designated as operator during 1994. Following a successful two well development program in 1994, Newfield drilled the following four new fault block or deeper pool tests in 1995, all of which were commercially productive:
- The South Timbalier 148 #4 well was drilled to a total depth of 16,200 feet, encountered 53 feet of natural gas pay in early January, 1995 and was placed on production in December, 1995.
- Shortly thereafter, the South Timbalier 148 #6 was drilled and logged 342 feet of natural gas pay in fifteen intervals.
- A separate fault trap was tested in April, 1995 as the South Timbalier 148 #5 well drilled to 17,100 feet and found 119 feet of natural gas pay, establishing production in previously untested deeper objectives.
- The South Timbalier 148 #7 was drilled during the fourth quarter of 1995 to a depth of 18,973 feet, logged 201 feet of natural gas pay in multiple productive sands.
Subsequently, Newfield drilled two development wells, South Timbalier 148 #8 and #9, to further delineate these new fault block discoveries.
The Company will install two refurbished platforms with processing equipment capable of producing over 100 MMcf per day over the existing wellbores. The platforms are scheduled to be installed by the third quarter of 1996, thereby permitting all of the wells to be placed on production. In addition, Newfield acquired additional interests in the north half of the block during 1995, and was awarded the adjacent block, South Timbalier 138, in the May, 1995 Federal OCS Lease Sale.
Vermilion 355 The Vermilion 355 #2 discovery was drilled to a depth of 7,700 feet and logged 103 feet of natural gas pay in January, 1995. Newfield acquired its 70% working interest in the block by farmin. In August, 1995, a platform on an adjacent block was acquired from another operator and installed over the Vermilion 355 #2 well without being brought onshore. Significant cost savings resulted and initial production from the platform commenced in October, 1995.
Vermilion 308 During the third quarter of 1995, Newfield acquired an 85% working interest in Vermilion Block 308 by farmin. The Vermilion 308 #3 encountered two gas pay sands. A platform will be set and a development well is planned during 1996 with initial production expected to begin in the third quarter 1996.
Vermilion 306 Area The Company also participated in three exploratory discoveries at Vermilion 297/306 where Newfield holds a 38% working interest and Enron Oil & Gas is the operator. The three wells encountered multiple pay horizons and production commenced in early 1996.
Development
Newfield continued the development of its existing property base, conducting development drilling programs at South Timbalier 193/194, South Timbalier 100/111 and High Island A-537. During 1995 the Company participated in 12 successful development wells.
South Timbalier 193/194 Newfield acquired its initial interest in the South Timbalier 193 and 194 blocks in 1991. After acquiring and interpreting a 3-D seismic survey in late 1994, an exploration prospect at a remote location and a development well target from an existing platform were drilled and completed in 1995. Both wells were placed on production in 1995.
South Timbalier 100/111 In 1993, Newfield drilled a successful exploratory farmin well on South Timbalier 111, a producing block. In 1995, Newfield purchased the farmor's interest in South Timbalier 111 and the adjacent block 100. A two well development program began in the third quarter of 1995. One of the wells encountered hydrocarbons, but was not completed. The other, the South Timbalier 100 A-5 well, logged 72 feet of gas pay in four sands and was placed on production in November, 1995.
High Island A-537 The development program initiated in late 1994, which was based upon a 3-D seismic evaluation of the High Island A-537 field, was successfully completed during 1995. A total of five wells were drilled, four of which were commercially productive. Gross production has increased from the level of 5 MMcf and 400 barrels of oil and condensate per day to the current level of 14 MMcf and 1,600 barrels of oil and condensate per day. Newfield owns a 45% working interest in this field.
Newfield is currently participating in an outside operated development program at Main Pass 259. To date, eight development wells have been drilled, all of which have been successful. Gross production rates now exceed 150 MMcf per day. Newfield's working interest in this field is 8%.
Acquisitions
Value Added Investment Cycle (1991-1995)
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Newfield's reserve value (SEC-10) was $28 million at year-end 1990 and $365 million at year-end 1995, a $337 million increase.
In the intervening 5 years, Newfield invested $342 million and received $240 million of cash flow for a $102 million "net" investment
and an internal rate of return of %31. (Source: John S. Herold, Inc.)
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The acquisition of properties containing proved reserves with drilling potential remains an important element of Newfield's capital program. During 1995, the Company acquired interests in 14 new blocks and increased its interests in 3 blocks.
West Delta 152 In January, 1995, Newfield acquired the West Delta 152 field including a 23% working interest in the proved reserves, a 34% working interest in the block's exploration upside and was designated operator. Drilling opportunities were then evaluated using a 3-D seismic survey. A 4 to 6 well drilling program to target proved undeveloped, probable and exploratory prospects was commenced in late 1995. Simultaneous drilling and production operations are being conducted with a rig on the platform.
Vermilion 398 Newfield acquired an 85% working interest in Vermilion 398 during September, 1995 for cash and an overriding royalty interest. Seven wells drilled by the prior operator delineated and tested oil and gas pays. During 1996, 3 of the initial wells will be completed and a 2 well drilling program is planned. Gross future development costs are estimated to be $33 million in 1996, including the drilling program and the installation of a platform and facilities, with initial production projected in the fourth quarter of 1996 at an estimated rate of 5,000 barrels of oil and condensate and 15 MMcf of natural gas per day. The lease is in 380 feet of water.
East Cameron 64 In June, 1995, Newfield acquired an 18% working interest in 8 blocks in the East Cameron 64 field and was designated as operator. The platform facilities were upgraded during 1995 and several wells were returned to production. Current daily production is 16 MMcf and 1,000 barrels of oil and condensate. A drilling program is scheduled to begin in the second quarter of 1996 to test the upside for which this field was acquired.
Eugene Island 128 Newfield assumed operations at Eugene Island 128-A in October, 1995 with a commitment to drill 2 wells. A 3-D geophysical survey is currently being reviewed to finalize drilling plans, which are expected to commence during 1996. The block has cumulatively produced 14 million barrels of oil and 20 Bcf of natural gas. Currently, oil production is 650 barrels of oil per day. Newfield owns a 75% working interest in this field.
East Cameron 151 The Company also acquired an interest in East Cameron 151. Newfield is currently obtaining a permit for a well to be drilled from the East Cameron 151 ÒAÓ platform and evaluating additional drilling opportunities. Newfield's working interest in this block is 33%.

Newfield is a significant operator in the Gulf of Mexico with a large inventory of drillable prospects. The Company's focused strategy includes a balance between exploration and acquisitions, control of operations for a low cost structure and the application of 3-D seismic technology.
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Lease Sales
A total of seven blocks were awarded to the Company for bids that totalled $2.15 million in the May, 1995 Federal OCS Lease Sale. Most of the leases are adjacent to or nearby existing Company operated fields with current activity. Newfield plans to drill and evaluate three of the newly acquired leases during 1996.
Operations
Newfield is a significant operator in the Gulf of Mexico. The Company operates properties that, for 1995, accounted for 94% of its total equivalent production and include 50 platforms and 46 gathering lines or pipelines, an increase from the prior year's level of 27 platforms and 25 gathering lines or pipelines. Based upon Newfield's year-end 1995 operated production and publicly available production figures, excluding the major oil companies, the Company ranked as the ninth largest independent operator in the Gulf of Mexico.
The Company managed gross capital expenditures in excess of $150 million in 1995. On average, 3.4 drilling and completion rigs were under contract each day.
In January, 1996, the James K. Dodson Company ranked Newfield seventh in the Gulf of Mexico by the actual number of wells drilled in 1994 and estimated wells drilled during 1995, surpassed only by Shell, Chevron, Mobil, Pennzoil, Exxon and Vastar.