Newfield to Buy Oil-rich Assets

Newfield Exploration Company (NFX - Analyst Report) entered into a deal with Harvest Natural Resources (HNR - Snapshot Report) to acquire U.S. oil and gas assets in the liquid-rich Uinta basin of Utah. Newfield has agreed to acquire 70,000 acres in the Uinta basin from Harvest and an unnamed private company for a total consideration of $308 million.

The transaction came in at $4,400 per acre that Newfield added to its current 183,000 net acreage in the basin. The acreage is close to Newfield's largest oil asset, the Monument Butte field, and is largely undeveloped. The deal will be financed through Newfield's revolving credit facility and will likely close in May 2011.

In a separate press release, Harvest Natural announced the sale of its Uinta basin oil and gas interests to Newfield for $215 million in cash. However, net proceeds from this 47,600 net acres sale is expected to be $205 million after deducting transaction related costs. Harvest holds a 70% working interest in the Uinta properties. The sale has an effective date of March 1, 2011 and Harvest expects it to close in May 2011.

Newfield projected $17 billion in capital expenditure (capex) for 2011, which it will draw prudently from its cash flow. The 2011 capital spending is more skewed toward oil, as 67% of the planned expenses are for oil projects with the balance allocated toward the liquid rich gas business.

We believe the company’s increasing focus on liquids is commendable in a favorable price environment. In the wake of rising oil prices, major oil companies are concentrating on oil weighted projects and we believe Newfield’s exposure to emerging resource plays, along with its reallocation of money from natural gas into liquids, will help it in the exploration and production space. The company expects production for 2011 to range from 312–323 billion cubic feet equivalent (Bcfe), exceeding the 2010 level by 8–10%.

However, we remain skeptical on the company’s first quarter 2011 production expectation of 68–75 billion cubic feet equivalent (Bcfe), which is lower than 77.3 Bcfe in the last quarter. Houston, Texasbased Newfield Exploration faces competition from Cabot Oil & Gas Corporation (COG - Analyst Report) and Forest Oil Corp. (FST - Analyst Report).

We maintain our long-term Neutral recommendation on the company, which is supported by a Zacks #3 Rank (short-term Hold rating).

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