While Newfield Exploration Co. (NFX) has historically focused on the exploration and production of crude oil and natural gas, the company is moving its focus from natural gas to more liquid gases, such as LNG and oil. This transition has investors and analysts nervous, as it is important that Newfield control costs to increase revenue during this fluctuating time. Newfield is behind its competition, as many other companies have already made this switch. Due to this lag, it might not be until 2013 or 2014 that investors see a substantial increase in the price of the stock.
While in theory it would be a good time to invest in Newfield, there are much more favorable options out there in the E&P market (i.e., companies who have already switched their focus of exploration and development). Newfield's competitors that are doing much better in the market right now are EOG Resources (EOG), Anadarko Petroleum (APC), Plains Exploration (PXP), and Whiting Petroleum (WLL).
Plains Exploration and Whiting Petroleum have higher market caps and significantly lower production. Plains Exploration had a strong first quarter and is seeing a rise in prices. One exceptionally outstanding part of Plains' results this year so far is the amount of oil it has been able to produce given the market. The numbers increased from 9,123 BOE/day in Q4 2011 to 13,908 BOE/day in Q1 2012. Whiting is off to a similar start, with a 14% increase in production from Q4 2011 to Q1 2012. This is a prime example of the dangers Newfield now faces from lagging behind its competitors. The competition is starting to thrive, while Newfield is still standing on shaky feet.
EOG Resources is trading around $92.18, which is around its 52-week low, and has a dividend yield of $0.17/$0.74. The company had impressive numbers in the first quarter, which show improved productivity and performance despite the shaky market. Analysts are more confident in EOG's moves than in Newfield's - EOG is truly demonstrating signs of bracing for the potential rocky road ahead.
Newfield is a risky stock right now. The price is down 22% to date and has decreased by almost 20% in the last three months alone. Return on equity and operating margins are down, but are still above industry average, however. Sales growth has increased over the last year, but has not varied much from the last quarter to this one. With natural gas prices not looking to rebound any time soon, Newfield is hoping the switch to liquid assets will account for half of production by late 2012.
At the end of May, Fitch downgraded Newfield Exploration from a "positive outlook" to "stable". As the company attempts to get out of the natural gas sector and focus solely on oil and liquid assets, it will be forced to contend with all its natural gas assets that were proven yet undeveloped. Without capital assets sales, Newfield should see a limited cash flow. Obviously, the debt to proved-developed-reserves ratio will increase, and the company will have to work everything that is left over from the natural gas sector.
The debt to prove-developed-reserves currently sits at an increase of $8.23/boe (barrels of oil equivalent). In order for Newfield to be upgraded, it would have to see a ratio of $7/boe.
Like all other E&P companies right now, Newfield's financial future really depends on the price of oil. Competitors Marathon Oil (MRO), SandRidge (SD), and Kodiak (KOG) are further along in its transitions to mainly being oil explorers and providers and can offer more growth and less risk to investors. This is an absolutely crucial move for those in the E&P field. This transition has been successful for Kodiak, which is continuing to show strength at some of its highest levels yet - the opposite of Newfield. Marathon Oil, which has spun off part of its assets in the IPO, saw an increase in trading performance after such a decision.
Analysts think that Sandridge is still falling short of perfection, but it is a good short-term buy. Its biggest drawback right now is its high debt to equity ratio (which is sitting around 1.9). If not curbed, this could cause the company to become overleveraged. There are talks of a merger with First Titan, which would really be a strong move for the tiny energy company.
With oil in a slump and gas prices consistently rising, the E&P market on the whole is struggling right now. Since Newfield is a smaller oil company (in terms of its competitors), it will suffer commodity price fluctuations that will directly impact overall margins. This is one of the main reasons Sandridge is looking at a merger with a larger company, and why Marathon Oil has decided to spin off a portion of its assets.
But what is the company's strategy? Under-promise and over-deliver. Newfield is hoping to increase oil production by 20% this year, and this focus on liquid instead of natural gas should cause a decrease in that sector by 15%. The company has been able to meet the expectations of investors for the last few quarters, so Newfield's new strategy seems to be to promise substantially and hope that it will be able to deliver more.
The fact of the matter remains the same though - Newfield jumped on the transition bandwagon a bit too late, and now it is running to catch up with the other E&P corporations. Furthermore, will the company even want to continue its switch to solely liquid with gas prices the way they are? This is not to be said it cannot do it, however.
Liquidity is still good for the company and comes mainly from cash balances. It had $27 million as of March 31, 2012, which sits well below the company's $1.25 billion unsecured credit facility and operating cash flows. As a side note, Newfield's next debt maturities will occur in 2016.
According to analysts, buying into the E&P market in these conditions presents investors with a potentially high profit investment. However, this comes with a large amount of risk. This especially holds true for Newfield as the company grapples with its sector transition, which is so tightly linked to oil prices (presenting the greatest amount of risk). Whenever a company undergoes a transition like this, reclassification and restructuring inevitably affect prices.
So, where does Newfield stand? It all depends on oil prices and its ability to successfully transition away from natural gas to solely oil exploration and production. If you have stock in Newfield, it could not hurt to hold onto it for the time being. If you are looking to invest however, you need to keep in mind that Newfield may yield a high profit, but at the cost of enormous risk.
There are several competitors that are in a much better, more stable position than Newfield right now - Kodiak, Marathon Oil, EOG Resources, Plains Exploration, and Whiting Petroleum - and it is definitely worth taking a look at these before you take a look at Newfield.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.