We maintained our recommendation on Newfield Exploration Company (NFX) at Neutral on Nov 14, 2013. The company’s diversified portfolio of assets provides both flexibility and significant growth potential. However, its dependence on individual well performance and chances of unsuccessful drilling pose concerns. Newfield carries a Zacks Rank #3 (Hold).
Why Maintained?
Newfield Exploration’s exposure to emerging resource plays, along with its shift of resources away from natural gas into liquids, is likely to help it to grow in the E&P space.
In the third quarter, the company reported strong oil and liquids domestic production of 6.7 million barrels, representing a 10% increase on a year-over-year basis. For 2013, the company intends to spend the capital mostly for liquid-rich operations and expects about 43% year-over-year growth in oil and liquids domestic production.
Newfield’s new STACK play includes Meramec and Woodford shales. STACK wells are estimated to have an ultimate recovery of 800–1,000 MBOE, of which about 70% is liquids (40% oil). To date, Newfield has drilled seven wells in the STACK, with initial production rates averaging 900 Boe/d. Newfield is increasing its operated rig count in the Anadarko Basin to eight, with at least two rigs committed to its STACK development. The results from this area have been encouraging and are likely to augment earnings going forward.
We expect the company’s reserve potential in the Southern Alberta Bakken, Wasatch oil, Uinta Basin and Cana Woodford to be liquid-rich catalysts for the stock. We expect the yield from these plays to nearly double in 2013.
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. Specifically, oil and gas prices have been increasingly volatile in recent years. This volatility tends to impact sector stock performance.
Other Stocks to Consider
While we prefer to remain on the sidelines for Newfield, Zacks Ranked #1 (Strong Buy) stocks – SM Energy Company (SM), Western Gas Partners LP (WES) and Abraxas Petroleum Corp. (AXAS) – could be good buying options for the short term.
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