Newfield Exploration (NYSE:NFX) is currently one of the riskier assets available on the market for investors interested in the E&P industry. Newfield is experiencing low stock prices while it transitions from being focused on natural gas to liquid assets like LNG and oil. The projected outlook can be based on how the commodities will price throughout the remainder of the year, along with Newfield's ability to control costs to increase earnings during the transition.
Most of its competitors in the industry have already made successful transitions or are effectively managing costs with a diversified portfolio of natural gas and liquid assets. This is the most advantageous time for investors interested in Newfield. However, there are a number of more favorable E&P assets in the industry to consider. Investors and shareholders in Newfield should expect to wait until 2013 or 2014 for a substantial increase in the current stock price.
Newfield's stock price is down 22 percent year-to-date. The price has decreased by almost 20 percent in the last 3 months and down by almost 10 percent in the last month. Return on equity and operating margin figures have been decreasing slightly over the past three quarters. Net margin has increased by almost seven percent over the last three quarters. Sales growth has increased over 24 percent from the previous year but increased by less than one percent since the previous quarter.
Price is around seven times earnings. This is significantly better than the industry average. The price to book ratio is below one, which is also better than the industry average. Newfield's net margin and return on equity are both nearly double the industry average as well. Both the current ratio and quick ratio are slightly below one, while gross margin and institutional ownership both exceed 80 percent. If Newfield is able to control costs while increasing production of its liquid assets, this could be a lucrative investment once commodity prices begin to normalize.
Newfield does not anticipate a near term rebound in natural gas prices. The initial plans to move towards liquid assets goes back to 2009, but the operations have been accelerated substantially in 2012. Liquid assets accounted for 47 percent of Newfield's total volumes during Q1 of 2012. The majority consisted of oil while LNG was five percent of the total production. Newfield expects more than half of the production will be liquid assets for the second half of 2012.
Newfield has been hedging its interests in the natural gas market in order to protect itself from future loss if low prices continue. Liquid production has doubled since 2008. Newfield intends to continue the compound annual growth rate of 20 percent in the year 2012 as well. The oil and liquid production in Q1 of 2012 was an increase of 35 percent from Q1 of 2011. Newfield has had significant success producing oil offshore in Malaysia. It is the fourth largest producer in this region and its projects in the area are resulting in internal rates of return ranging from 30 to over 100 percent. Newfield is focused on domestic growth as well, this year it expects a 35 percent increase in its Bakken play from 2011.
For the first time in thirteen years, Newfield does not have any rigs drilling natural gas. Liquid assets will account for 70 to 80 percent of the total revenue by the end of 2012. This is a significant increase from 55 percent in 2010. Newfield's stocks have been hit harder than most of the other E&Ps in the industry as natural gas prices slowly rally from a ten year low.
Over the past year, Newfield's stock price is down more than 50 percent while Chesapeake (NYSE:CHK) is down over 40 percent and EOG is only down five percent. Wall Street expects Newfield's profits to decline by 20 percent by the end of 2012. The outlook for the year mostly depends on the degree of success Newfield will have in finding more oil in its current assets in Malaysia and the Rocky Mountains. Newfield Is exclusively drilling for oil right now so much of its success will depend on the price of the oil as the year progresses. Newfield's stock price will increase throughout the year from increases in oil production and pricing as well as strengthening its balance sheet by controlling costs and lowering its current debt.
At the end of May, Fitch downgraded Newfield from a positive outlook to stable. Fitch released the issuer default rating as a BB+ and the Newfield senior subordinated notes as a BB rating. This is mainly due to the timing and obstacles facing Newfield in its transition from a natural gas producer to an E&P focused on oil and LNG. The debt to proved-developed-reserves ratio increased as Newfield decreased its activity in natural gas reserves for oil exploration. Many natural gas assets that were proven but undeveloped are now rated as probable because they are unlikely to be developed within the next five years. Without capital asset sales, Fitch expects production and capital spending to hamper Newfield's free cash flow.
Newfield's future outlook depends greatly on the pricing in the oil industry. There are comparable E&Ps like Marathon Oil (NYSE:MRO), Sandridge (NYSE:SD) and Kodiak (NYSE:KOG) that are further along in their transitions and offer more growth and less risk for investors. A rebound in Newfield's stock price will depend greatly on its ability to control costs, increase oil production this year and improve its earnings in the next quarterly report.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.