I did think that Newfield Exploration (NYSE:NFX) was undervalued by the Street back in mid-Feburary, but more on the order of 40% and not the nearly 75% move the stock has delivered since then. Selling the Granite Wash assets for nearly $600 million was a nice development and the company has posted good results from recent wells drilled in Oklahoma and the Uinta. Looking ahead, the company is prioritizing the de-risking of the Oklahoma SCOOP and STACK plays and looking to sell its Chinese assets. I may yet be underestimating the potential here, but a 75% move in six and a half months seems like plenty for now.
The Restructure Is Close To Complete
Newfield wanted to remake itself as an onshore North American energy company with a better mix between gas and liquids, and management has made a lot of good progress with that plan. The company sold its Malaysia assets in 2013 and earlier this year announced a nearly $600 million sale of its Granite Wash assets.
All that's left is the Chinese assets. Anadarko (NYSE:APC) sold its Chinese operations (largely two offshore blocks in Bohai Bay operated by CNOOC (NYSE:CEO)) for just under $1.1 billion in mid-February and Newfield is hoping to sell its stakes in two Bohai Bay blocks and a block in the South China Sea in the Pearl River Mouth Basin. Newfield's sales efforts have been hampered by the need to repair the jacket of the Pearl facility and install topsides. If that all goes as planned, production should commence in the fourth quarter, with commercial production starting in 2015. Estimates are all over the place for the value of Newfield's Chinese assets (which include about 290K net acres), ranging from $500 million to more than $800 million on a pretax basis.
A sale even at the lower end of the range will further clean up the balance sheet. With that job done, Newfield can focus on its 250,000-plus net acres in SCOOP and STACK, as well as well as the 230,000 or so net acres in the Uinta and assorted smaller positions in the Eagle Ford and Williston/Bakken. Newfield won't be too badly situated with respect to its liquidity and I won't be surprised if the company looks to add acreage in the Williston and/or Eagle Ford (or perhaps consider sales of these sub-scale positions).
Unlocking Value Through The Drill Bit
The SCOOP and STACK formations are no consolation price for Newfield or its investors. Both Newfield and Continental (NYSE:CLR) have generated good results in SCOOP, but Newfield's have been better. In the oil window of the SCOOP, Newfield has seen estimated recoveries of 1.1M to 1.4M boe (36% oil), with well costs of around $10 million to $13 million. Continental's wells in the oil window have led to estimated recoveries about half that level (but with 52% oil), with lower overall well costs but higher costs per-lateral (about $2M versus $1.3 million for Newfield). It should be noted that the EURs per 1,000' lateral have been very similar between Newfield and Continental (about 140 EUR/1K' each).
In the wet gas window, Newfield has seen estimated recoveries of between 2.0M and 2.6M (390K per 1,000' lateral) with 6% oil and 44% NGLs at a cost of $1.7M/lateral. For Continental, the comparable numbers are 1.2M (264K/lateral) with a 24% oil and 37% NGL mix at a cost of $2.1M per lateral.
Management has been running eight rigs in the SCOOP/STACK acreage and hopes to go from having about 40% of STACK de-risked to 70% by year-end. At the same time, the company is looking to de-risk its northern SCOOP acreage. All the while, management has been seeing results ahead of its type curve and production from this area was up almost a third between the second and first quarters of this year.
The Anadarko Basin has become the leading source of Newfield's oil and gas production, but the Uinta is still significant at around 20%. The company is running a 5-rig program and recent "SXL" wells have looked really good - three SXL wells in Uteland Butte saw 30/60/90-day IPs come in at 1,532/1,323/1,154 boepd, running about 50% to 60% better than prior Uteland Butte SXL well averages, though the wells aren't cheap (over $11 million).
Still Room To Improve
Debt-adjusted growth hasn't been great at Newfield, lagging Continental by a wide margin, not to mention other operators in areas like the Eagle Ford and Williston like EOG (NYSE:EOG) and Whiting (NYSE:WLL). I don't really look for that to improve tremendously - I do think the adjusted production growth figures will improve, but the relative comps still won't look so great. Likewise, the company is probably three years out from being able to fund its drilling program with its own internally-generated cash flow.
Drilling in SCOOP, STACK, and Uinta ought to lead to better results and as I said before, I think there is room for Newfield to "go big(ger), or go home" in the Williston and/or Eagle Ford. I don't think the company is eager to dispose of quality liquids-producing acreage, though, so the bias might be toward adding acreage.
Re-estimating The Value
Seeing a buyer emerge for the Chinese assets at a price of $800 million or more would be a welcome development for Newfield and its shares. Failing that, the stock looks okay here but not tremendously exciting. At six times 12-month EBITDA (moving the multiple up half a point to account for a better debt-adjusted growth profile), the shares should trade around $44.50. My new NAV estimate is a little higher than this, as progress with SCOOP/STACK and Uinta drilling have led me to raise my gross asset value estimate on proved reserves to about $48 and on risked assets to $19.50, with debt and future costs leading to a NAV estimate of $45.50. SCOOP/STACK have provided much of the upside to my earlier numbers and remains a potential source of upside as the company pursues its drilling program in the second half of the year.
The Bottom Line
At a fair value somewhere around $44 to $46 per share, Newfield doesn't interest me as much as it did in February. I may again be underestimating the potential here (I liked it in February, but didn't expect such a major move) and I like the prospects of SCOOP/STACK, but there are several cheaper-looking E&P companies that investors should investigate alongside or in preference to Newfield.
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