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Newfield Exploration (NFX) recently saw its equal weight rating reiterated by analysts at Barclays Capital, the same rating Barclays assigned to Occidental Petroleum (OXY). Additionally, Newfield's long term unsecured notes, which were issued to repay certain debts under a revolving credit facility, were given a stable by Fitch Ratings; Fitch has a stable rating outlook for the stock. These stable outlooks can be taken as a cautiously positive outlook on Newfield, but in my view Newfield should be viewed with a strongly positive outlook. Part of the reason it generally is not viewed as positively as it deserves is because its peers are comparative media stars, like Devon Energy (DVN) and Anadarko Petroleum (APC), which leaves Newfield in the back of most investors' minds. However, its current price and outlook indicate a buying opportunity being overlooked in favor of the stars, and Newfield is worth a look just for that.

Where Newfield is Operating Now

Nearly all of Newfield's at 20% are earmarked to oil exploration and production, and almost half of its first quarter production was in oil and liquids. Its annual production growth is reliably coming in at 20%, which is set to go higher as its recent focuses on oil bear fruit. Its shale developments are centered on the Anadarko, Maverick, Williston, and Uinta basins, and it has a small hedge against U.S. production with international holdings, including offshore Malaysian oil production of at 20%. Like SandRidge Energy (SD), Newfield is slow and steady on most of its plays, typically using two to four rigs on each, except for the Cana Woodford and Uintah plays, where it plans to operate 7 rigs each.

Newfield's Uintah Basin play, in Utah, has the largest share of Newfield's capital expenditures, at about $500 million in 2012. Its 230,000 net acres here are producing at 20%, and it plans to expand this in the near future. The company has a received approval with the Bureau of Land Management for exploration and drilling of up to 5,700 wells on the Uintah. Its chances are good, since the Bureau of Land Management is relaxing its attitude towards energy producers. Last month, Gasco Energy Inc. received approval to drill up to 1,298 wells on a maximum of 575 drill pads in the area, and in May Anadarko received approval to drill up to 3,675 wells in another part of the Uintah. Newfield's received approval is an in-fill project, meaning that little new infrastructure would be required, so I expect it to be approved.

Newfield may be in for a expanding for its operations near Glacier National Park, as it, Anschutz Exploration Corporation, and Rosetta Resources (ROSE) drill in the area on lands controlled by a tribal Indian reservation. Rosetta is expanding its operations and is currently working with the Bureau of Indian Affairs and the U.S. Fish and Wildlife Service on an environmental assessment for up to 88 more wells, and Indians from the reservation are expanding about encroachment into Glacier National Park. Currently Anschutz is operating closest to the park, but changing opinions amongst the residents would impact the operations of all three firms. However, this area is in no way a focus for Newfield, which reduces its risk.

Outlook

Last year, Newfield stock plummeted, and until recently was on a consistent downward trend. The initial plummet was shattering, based on much worse than expected second quarter earnings combined with increasingly bearish outlooks on natural gas. Meanwhile, West Texas Intermediate and Brent crude fell, hitting lows that sent E&P stocks into a brief freefall. Those with disappointing earnings, including Newfield, were not able to find a new footing until mid-August, at which point Newfield and its immediate peers lost a fifth or more in value. From July 22 to August 22, 2011, Chesapeake Energy (CHK) dropped 18%, EOG Resources (EOG) dropped 19%, Apache (APA) dropped 26%, and Newfield dropped 36%.

While its peers followed a slightly upward track until another drop beginning in late September, Newfield tracked mostly down. Newfield's third quarter earnings were not enough to stop the fall, coming in at $1.04 per share against analyst expectations of $1.16 per share; at the same time, the company reduced its production forecast by 5% while combating a rise in operating costs by cutting production. Newfield was also stable 15 mmboe of natural gas reserves from proved undeveloped to probable according to Securities and Exchange Commission reporting standards, once it was determined that these 15 mmboe were not expected to be developed within the following five years.

Since then, Newfield continued a steady decline, to where it now stands at $30. What I find intriguing about Newfield is that while it is consistently coming in below analyst expectations, it is doing extremely well by most other metrics. Its net sales were $13.3 million in 2009, $18.8 million in 2010, and $24.7 million in 2011, with a corresponding rise in net sales, from a loss of $542 million in 2009 to positive figures of $523 million in 2010 and $539 million in 2011. That did have associated costs as the company took on debt to finance a turn towards oil; net sales was $20.3 million in 2009, $23 million in 2010, and $30 million in 2011. This still gives Newfield a manageable debt to equity ratio of 0.7, all the more affordable since it has a net margin of 25.8% compared to an industry average of 14.9%.

In the last two weeks, Newfield started a reversal, and appears to be on its way back up. Given unsteady investor reaction to Newfield during earnings seasons past, the buy opportunity might not come until after Newfield reports its second quarter earnings on July 25, but it is coming. At $30, Newfield has a price to book of 1.0 and a forward price to earnings of 6.8. With these metrics and a steady growth track, Newfield is one stock where patient investors can buck the trend and make a profit.

Source: Newfield: Profit From This Overlooked E&P Now