We've recently discussed a striking shift among small and midsized oil and gas producers: They're altering their production mix in favor of oil. Those who don't follow the industry probably think of these companies as "oil" companies -- if they think of them at all. The truth is that countless independents, from Chesapeake Energy (NYSE: CHK) and Encana (NYSE: ECA) on down to the smallest of small fries, are heavily weighted in natural gas.
With technology advances making natural gas reserves easier and cheaper to find in North America, this imbalance served the smaller companies well enough. They were able to post massive growth, low finding costs, and robust cash flows. Then natural gas prices went south -- and unlike oil, they have yet to recover.
Given the current pricing chasm, every independent E&P is now scrambling to get "oily." Newfield Exploration (NYSE: NFX) is a good case in point.
Newfield's actually got a better head start than peers such as Carrizo Oil & Gas (Nasdaq: CRZO). The firm's hydrocarbon mix was 72% gas by reserves and 67% by production as of 2009. This company is clearly aiming to tilt the balance further, though. Nearly half of the 2010 budget is now allocated to oily projects in places such as the Uinta Basin and Williston Basin (both in the Rockies). Domestically, Newfield is looking to crank oil production 20% higher, with the Williston kicking in 40% growth. Companywide crude output should rise by around 8%.
Because Newfield has already established its unconventional oil credibility in plays like Monument Butte, I feel pretty confident that the company will execute on its transformation in an efficient way. It also helps that the firm already has a nice foothold in places like the Eagle Ford shale and the deepwater Gulf of Mexico, with two prospects currently being drilled in the latter -- a gassy one operated by Murphy Oil (NYSE: MUR), and a wild card called Saluki that Newfield is drilling with a Diamond Offshore (NYSE: DO) semisubmersible.
Unless new oil plays really proliferate, I suspect that many of Newfield's competitors are not going to find the transition to such projects nearly so seamless.
