| NEWFIELD EXPLORATION CO /DE/ Item 1A Risk Factors 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 is subject to periodic redeterminations based in part on 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: • the domestic and foreign supply of oil and natural gas; • the price and availability of alternative fuels; • weather conditions; • the level of consumer demand; • the price of foreign imports; • world-wide economic conditions; • political conditions in oil and gas producing regions; and • domestic and foreign governmental regulations |
| 4 _________________________________________________________________ [94]Table of Contents Our use of oil and gas price hedging contracts involves credit risk and may limit future revenues from price increases and result in significant fluctuations in our net income |
| We use hedging transactions with respect to a portion of our oil and gas production to achieve more predictable cash flow and to reduce our exposure to price fluctuations |
| 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 |
| We follow the provisions of Statement of Financial Accounting Standards Nodtta 133, “Accounting for Derivative Instruments and Hedging Activities,” which generally requires us to record each hedging transaction as an asset or liability measured at its fair value |
| Each period, we must record changes in the fair value of our hedges, which could result in significant fluctuations in net income and stockholders’ equity from period to period |
| Our future success depends on our ability to find, develop and acquire oil and gas reserves |
| As is generally the case, our producing properties in the Gulf of Mexico and the onshore Gulf Coast often have high initial production rates, followed by steep declines |
| 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 |
| 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 quality and quantity of available data; • the interpretation of that data; • the accuracy of various mandated economic assumptions; and • the judgment of the persons preparing the estimate |
| 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 |
| 5 _________________________________________________________________ [95]Table of Contents 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 10prca 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 hedge positions) 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 continued production growth from our Monument Butte Field |
| In August 2004, we acquired Inland for approximately dlra575 million in cash |
| Inland’s primary asset is the 100cmam000-acre Monument Butte Field located in the Uinta Basin of Northeast Utah |
| Waterflooding, a secondary recovery operation that involves the injection of large volumes of water into the oil-producing reservoir, is necessary to recover the oil reserves in the field |
| We must negotiate with third parties to obtain additional sources of water |
| The crude oil produced in the Uinta Basin is known as “black wax” and 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 |
| Our ability to significantly increase production from the field may be limited by the unavailability of sufficient water supplies or refining capacity or both |
| In addition, the price we receive for our production from the field could be adversely affected by the availability for refining of crude oil from other basins |
| Competitive industry conditions may negatively affect our ability to conduct operations |
| Competition in the oil and gas industry is intense, particularly with respect to access to drilling rigs and other services, the acquisition of properties and the hiring and retention of technical personnel |
| Recently, higher commodity prices and stiff competition for acquisitions has 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: • recoverable reserves; • future oil and gas prices; • operating costs; and • potential environmental and other liabilities |
| 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 discovered |
| 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: • adverse weather conditions; • unexpected drilling conditions; 6 _________________________________________________________________ [96]Table of Contents • pressure or irregularities in formations; • equipment failures or accidents; • compliance with governmental requirements; and • shortages or delays in the availability of drilling rigs and the delivery of equipment |
| 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: • fires; • explosions; • blow-outs; • uncontrollable flows of oil, gas, formation water or drilling fluids; • natural disasters; • pipe or cement failures; • casing collapses; • embedded oilfield drilling and service tools; • abnormally pressured formations; and • environmental hazards such as oil spills, natural gas leaks, pipeline ruptures and discharges of toxic gases |
| If any of these events occur, we could incur substantial losses as a result of: • injury or loss of life; • severe damage or destruction of property, natural resources and equipment; • pollution and other environmental damage; • investigatory and clean-up responsibilities; • regulatory investigation and penalties; • suspension of our operations; and • repairs to resume operations |
| 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 cause 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 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 may be unavailable or limited |
| 7 _________________________________________________________________ [97]Table of Contents 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 exploitation activities on properties operated by others therefore depend upon a number of factors that will be largely outside of our control, including: • the timing and amount of capital expenditures; • the availability of suitable offshore drilling rigs, drilling equipment, support vessels, production and transportation infrastructure and qualified operating personnel; • the operator’s expertise and financial resources; • approval of other participants in drilling wells; and • selection of technology |
| 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: • the amounts and type of substances and materials that may be released into the environment; • reports and permits concerning exploration, drilling, production and other operations; • the spacing of wells; • unitization and pooling of properties; • calculating royalties on oil and gas produced under federal and state leases; and • taxation |
| 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: • currency restrictions and exchange rate fluctuations; 8 _________________________________________________________________ [98]Table of Contents • loss of revenue, property and equipment as a result of expropriation, nationalization, war or insurrection; • increases in taxes and governmental royalties; • renegotiation of contracts with governmental entities and quasi-governmental agencies; • changes in laws and policies governing operations of foreign-based companies; • labor problems; and • other uncertainties arising out of foreign government sovereignty over our international operations |
| 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 |
| Other independent oil and gas companies’ limited access to capital may change our exploration and development plans |
| Many independent oil and gas companies have limited access to the capital necessary to finance their activities |
| As a result, some of the other working interest owners of our wells may be unwilling or unable to pay their share of the costs of projects as they become due |
| These problems could cause us to change, suspend or terminate our drilling and development plans with respect to the affected project |
| Our certificate of incorporation, stockholder rights plan and bylaws 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 |
| These provisions could potentially deprive our stockholders of opportunities to sell shares of our common stock at above-market prices |