Newfield Misses, Posts a Mixed Bag

Zacks

Newfield Exploration Co. (NFX) has reported adjusted fourth-quarter 2011 earnings of 95 cents per share, which missed the Zacks Consensus Estimate of $1.02 and came in below the year-earlier profit of $1.16. The underperformance was primarily due to higher operating expenses.

The company’s total revenue climbed 28.2% year over year to $677 million but failed to meet the Zacks Consensus Estimate of $709 million.

Operational Performance

Total quarterly production of 79.3 billion cubic feet equivalent (Bcfe), comprising 56% natural gas, rose 2.6% year over year. Natural gas volumes were 44.2 Bcf, down 11.4% year over year. Oil, condensate & NGLs volume expanded 28.3% year over year to 5.9 million barrels (MMBbls).

Newfield’s oil and natural gas price realizations (including the effect of hedges) averaged $9.24 per thousand cubic feet equivalent (Mcfe), up 10.4% from the year-earlier level. Natural gas prices dropped 9.6% to $4.69 per Mcf. Liquid prices improved 6.2% to $88.04 per barrel.

Newfield’s recurring lease operating expenses (:LOE) during the quarter were $1.07 per Mcfe, up almost 34% from the year-ago level. Production and other taxes increased significantly to $1.10 per Mcfe from the year-earlier level of 65 cents. General and administrative expenses increased 35.3% year over year to 69 cents per Mcfe.

Financials

At quarter end, Newfield had a cash balance of $76 million, while long-term debt was $3,006 million, representing a debt-to-capitalization ratio of 43.4% (versus 43.7% at the end of the previous quarter). Capital expenditure (capex) was approximately $479 million in the reported quarter.

Guidance

For 2012, Newfield has projected output in the 290 Bcfe to 300 Bcfe range. Management expects its natural gas production to fall approximately 15% in 2012 due to natural field declines. LOE is expected at $1.10 per Mcfe.

Newfield expects production of approximately 72 Bcfe for the first quarter of 2012. Total production will comprise 52% natural gas.

Newfield provided its full-year 2012 capital budget program in the range of $1,500 and $1,700 million. The company intends to spend the capital mostly for liquid-rich operations and expects to generate more than 20% year-over-year production growth in oil and liquids. Approximately $300 million of the budget will be apportioned for the evaluation of a 125,000 net-acre position in the liquids-rich Cana Woodford play, located in Oklahoma's Anadarko Basin.

Outlook

Newfield’s diversified portfolio of assets provides both flexibility and significant growth potential. We expect the company’s reserve potential in the Southern Alberta Bakken, Wasatch Oil, Uinta Basin and a new resource play to be a liquid-rich catalysts for the stock.

Though we remain positive on Newfield Exploration’s emerging resource plays’ development program, we believe that its sensitivity to gas price volatility, as well as drilling results, costs, geo-political risks and project timing delays will weigh on the stock. Increasing cost pressure in the highly competitive shale plays is also a cause for concern. Again, competition from peers such as Denbury Resources Inc. (DNR) and Pioneer Natural Resources Co. (PXD) remains intense.

Newfield shares currently retain a Zacks #3 Rank, which translates into a short-term Hold rating. Longer-term, we are maintaining our Neutral recommendation on the stock.

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