Newfield Exploration: Execution of Production Plans Is Key
Newfield Exploration (NYSE:NFX), an independent energy company, has shown strong performance against the market expectations for 2013. A year ago, many investors were doubtful if the company could deliver on its ambitious three-year plan, which called for doubling of domestic liquids production. However, Newfield delivered four back-to-back strong quarters and the production results exceeded expectations.
The Houston-based exploration and production company has key operations in the Mid-Continent, Uinta Basin, Williston Basin, and Eagle Ford shale. The depth and the quality of the company’s inventory has been a persistent concern; however, operational momentum is continuing to build and the success in the SCOOP and STACK plays in the Anadarko Basin has gone a long way in addressing investors’ concerns. From 2,000 – 4,000 drilling locations, Newfield estimates it has 800-1400 MMBOE of recoverable resource (net unrisked), which would provide opportunities to invest sizable amounts of capital at attractive returns for many years to come. Almost half of the company’s 2014 capital expenditure is allocated to Anadarko Basin. The 2014 level of activity implies 30-60 years of drilling inventory.
The company reported 4Q13 adjusted EPS OF $0.48, beating the consensus estimate of $0.47 by 1 cent. Stronger crude volumes, stronger price realizations, lower tax rates, and lower expenses all contributed to strong results. Going forward, the company has set a domestic capital expenditure target, excluding capitalized interest and overhead of $1.6 billion. Out of this $1.6 billion, $700 million, or 44 percent of capital, will be directed to the Anadarko Basin, where the company plans to run an 8 rig program in the SCOOP and STACK plays and drill 66 operated wells this year. NFX will spend $400 million in the Uinta Basin and the remaining $500 million will be directed to the Williston Basin and the Eagleford.
Much of the company’s recent outperformance can be attributed to the reserves report issued alongside 4Q13 results. The report highlighted the discount at which the firm trades relative to pre-tax PV10. The pre-tax present value of the company’s domestic reserves increased to $6.6 billion, a significant Y/Y increase of 44 percent. Domestic reserves account for 94 percent of Newfield’s total proved reserves. Company’s enterprise value adjusted for the divestiture of Malaysian assets stands at $6.5 billion. Finally, the after-tax PV10 of the firm’s Chinese assets increased $300 million compared to the 2012 report.
The company has also hedged most of its 2014 expected oil and natural gas production. Using a mix of two-way collars and swaps, the firm has hedged 89 percent of expected natural gas production. Using 3-way collars, swaps and swaps with sold puts the company has also hedged 86 percent of expected 2014 domestic oil volumes.
Although, for greater investor confidence and multiple expansion, the market needs greater confidence in NFX’s total company resource life, the company is well-positioned to register impressive growth in the next several years. Growth is expected to come largely from the company’s liquids-rich resource plays with Cana and Uinta being the largest drivers. At current valuation, the company is also trading at a discount to its peers. It has a current P/E ratio of 36.1, compared to the industry average of 30.8 and Cabot Oil & Gas Corp. (COG) P/E of 52.6. The company has a forward P/E of 10.7 compared to 16.0 of S&P500.
Newfield has price/book ratio of 1.3, lower than the industry average of 1.9 and company’s own five year average of 1.8. NFX has a price/sales ratio of 2.2, again lower than the industry average of 2.7. The company has a price/cash flow ratio of 2.7, compared to the industry average of 5.3.NFX shares represent significant upside potential if the company can follow throw on its Anadarko Basin growth targets.