Newfield Exploration: Overlooked And Underplayed

| About: Newfield Exploration (NFX)

While most of its competitors are planning to keep production stable to ride out 2012, Newfield Exploration (NYSE:NFX) just raised its expectations from 292 to 302 bcfe to 296 to 304 bcfe for the year, a modest increase but an increase nonetheless. Despite low gas prices its revenues for the quarter were actually up, at $628 million due to increases in production, which should continue for the rest of this year according to the raised guidance.

Newfield reported second quarter earnings per share of $1.00 on net income of $135 million, which includes an unrealized gain on derivatives trading of $83 million. Newfield indicated that without the gain on trading, earnings per share in the second quarter were $0.61. Newfield Chairman, President and CEO Lee K. Boothby estimates that Newfield will end 2012 with 30% growth in oil and liquids production over 2011. Its second quarter oil and liquids production, at 6.1 mmbbls or 67,000 barrels per day, was 40% above production in the second quarter of 2011, indicating that Newfield is making strides toward this target, which in turn will raise its earnings per share in the second half of the year.

Strong Oil Base Supports Growth

Newfield is testing its prospects in the Uinta Basin for growth, where its production is at record levels of 25,000 boe per day net from 36,000 boe per day gross. Newfield expects its Uinta production to end 2012 20% higher than the year prior. Within the Uinta, Newfield is working on the Uteland Butte, where its first two wells in the "pressured section" of the Butte garnered initial production rates almost three times those of wells drilled in the normally pressured section. Based on these results, Newfield will be drilling additional wells in the pressured section, at an estimated cost of $5.5 million per well.

Newfield is also betting on the Eagle Ford. After entering the Eagle Ford in 2010, Newfield quickly established itself as a force to be reckoned with. Now, with 230,000 net acres in the Maverick Basin and an additional 40,000 net acres "under assessment and development," Newfield is surging ahead with moving to production, planning an aggressive drilling schedule to round out the year.

Most other independent exploration and production companies are shouldering in on the Eagle Ford along with Newfield. Among the largest are Anadarko Petroleum (NYSE:APC) and BP (NYSE:BP). Anadarko estimates its reserves on the Eagle Ford at 600 mboe or higher, with at least 4,000 drill sites on its 400,000 gross acres, which straddle the oil and gas condensate windows of the play. Its current sales volume mix from the Eagle Ford is 35% gas, 25% natural gas liquids, and 40% oil, reasonably close to the metrics that Newfield produces in its sales mix as a whole.

It is thanks to this mix that Eagle Ford is not seeing the same drop in activity as other, more gas heavy plays in the U.S. are currently suffering. Chesapeake Energy (NYSE:CHK) is increasing its activity on the Eagle Ford as it struggles to increase its oil production and reduce its reliance on natural gas, even as it sheds other oil heavy assets, such as its acreage in the Permian Basin. Thanks to its joint venture with Cnooc Ltd., Chesapeake can fund its activities on the Eagle Ford largely on Cnooc's drilling carry of up to $697 million.

BP owns interests in 450,000 net acres on the Eagle Ford, extending across the dry gas, oil, and natural gas liquids windows, much of which it holds through a joint venture with privately held Lewis Energy Group, the first company to drill on this shale. BP North America, a subsidiary of BP, recently signed a deal with Kinder Morgan Energy Partners LP (NYSE:KMP) for processing and storage services in Houston, indicating that BP plans to grow in the Eagle Ford for the long term as part of its unconventional development program.

EOG Resources (NYSE:EOG), one of the top three Eagle Ford operators by completed wells, indicated in its second quarter conference call that it believes its Eagle Ford "acreage is the largest domestic net oil discovery in the last 40 years." The company is regularly drilling what it calls "monster wells," or wells with IP rates of 2,500 barrels of oil a day with associated gas and natural gas liquids, and Chairman and CEO Mark Papa noted that these results appear to be unique to EOG as no other operator is making announcements on the same scale. But I think it is likely that in time Newfield and others will report such monster wells of their own, given the slim chance that EOG cornered the richest areas of the play on its own.


Newfield is currently trading around $32, giving it a price to book of 1.0 and a forward price to earnings of 7.9. These are attractive numbers for the well diversified firm, which has a debt to equity ratio at a comfortable 0.7. By way of comparison, Anadarko is trading around $70 with a price to book of 1.7 and a forward price to earnings of 15.0, while EOG is trading around $109 with a price to book of 2.2 and a forward price to earnings of 17.1. BP is trading around $40 with a price to book of 1.2 and a forward price to earnings of 15.0, trailed by Chesapeake, trading around $20 with a price to book of 1.0 and a forward price to earnings of 9.6.

Though half of its current production is comprised of liquids, and nearly all of this is in oil, Newfield plans to continue growing its oil development and production. During the second quarter Newfield saw its highest IP gross rate to date, located in the Cana Woodford shale and producing 1,900 boe per day. This encouraging result, along with past positive results on the Cana Woodford, led Newfield to confirm that it has what it believes to be a "growing development inventory" in this area.

Companies like EOG and Devon Energy (NYSE:DVN) are feeling the pinch of reduced natural gas liquids realizations, but Newfield is mostly unscathed by this development, since just 4% of its second quarter production was in natural gas liquids. Combined with its other prospects, Newfield has a solid asset base and concrete plans for liquids growth based in oil, which make Newfield an attractive stock to own.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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