Newfield to Underperform

Zacks

We have downgraded our rating on energy firm Newfield Exploration Company (NFX) from Neutral to Underperform following unimpressive second quarter results.

Newfield’s earnings and revenue missed the Zacks Consensus Estimate due to lower oil and gas price realizations.  Its Rockies and Gulf Coast centered asset portfolio, along with its lack of meaningful exposure to the emerging shale plays, is also a competitive disadvantage.

We believe Newfield is dependent on the successful development of its liquid-rich plays in the Uinta Basin and Cana Woodford to reach its production targets and subsequently investor expectations. Earlier this year, the company inked a 10-year crude oil agreement with HollyFrontier Corporation (HFC). Per the agreement, Newfield intends to secure capacity of around 40,000 barrels per day for the planned growth of the Uinta Basin. Hence, any region-specific recurrence of issues could adversely affect the company.

Although Newfield hiked its production target for the year, investors remain concerned regarding the portfolio mix and declining asset quality. This is evident from the reduced spending in the Eagle Ford, Granite Wash, Southern Alberta Basin and Woodford (oil). In addition, the company has divested certain Bakken assets and plans to invest around 20% of its capital in Cana Woodford, a relatively new asset added to the portfolio in 2011.

Furthermore, Newfield’s lack of economies of scale in Bakken and Eagle Ford Shale has prohibited its ability to compete more aggressively with other leading players due to higher costs and delays. Newfield’s outlook for the near future has highlighted the issues of escalating service costs and bottlenecks in more prolific plays, both of which could recur in the upcoming quarters.

Though we remain positive on Newfield Exploration’s emerging resource plays development program, we believe that a low natural gas price environment could weigh on the stock since most of its reserves are tied up in natural gas.

Other risks faced by Newfield are dependence on individual well performance, the potential for unsuccessful wells as well as costs, geo-political risks and project timing delays. All these factors and the increasing cost pressure in the highly competitive shale plays have forced us to downgrade our recommendation on the shares of Newfield.
 

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