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Newfield Exploration Co. (NFX - Analyst Report) has reported adjusted second-quarter 2011 earnings of $1.02 per share, which missed the Zacks Consensus Estimate of $1.07 and came in below the year-earlier profit of $1.06. The underperformance was primarily due to lower natural gas production and higher operating expenses.

The company’s oil and gas revenues climbed 38.6% year over year to $621 million.

Operational Performance

Total quarterly production of 73.2 billion cubic feet equivalent (Bcfe), comprising 64% natural gas, rose nearly 0.4% year over year. Natural gas volumes were down more than 8% from the year-earlier level at 47.0 Bcf. Oil and condensate volume expanded 22.2% year over year to 4.4 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 17.6% from the year-earlier level. Natural gas prices climbed 5.5% to $5.77 per Mcf. Liquid prices improved 14% to $91.16 per barrel.

Newfield’s recurring lease operating expenses (LOE) during the quarter were $1.00 per Mcfe, up 47% from the year-ago level. Production and other taxes increased significantly to $1.10 per Mcfe from the year-earlier level of 43 cents per Mcfe. General and administrative expenses increased 8.8% year over year to 62 cents per Mcfe.

Financials

At quarter end, Newfield had a cash balance of $74 million, while long-term debt stood at $2,889 million, representing a debt-to-capitalization ratio of 44.8% (versus 42.2% at the end of the previous quarter). Capital expenditure (capex) was approximately $630 million, excluding the company’s $300 million acquisition in the UintaBasin.

Guidance

For the third quarter of 2011, Newfield has projected output in the 74–84 Bcfe range. LOE is expected to range between 87 cents and $1.04 per Mcfe.  

For 2011, management has guided production volume at 312–316 Bcfe, or 8–10% over the year-ago level. Newfield’s liquids are expected to be 39% of 2011 volumes compared with 33% in 2010. Management expects LOE per Mcfe to range between 82 cents and $1.00.

Newfield maintained its full-year capital budget program at $1,900 million. The budget excludes capitalized costs and the recently concluded acquisition in the Uinta Basin.

Outlook

We appreciate Newfield’s high quality gas plays, unconventional acreage in the Marcellus play, growing oil volumes in Monument Butte, record production at Granite Wash and additional potential in the Bakken play (Williston Basin). The company increased its acreage significantly through its latest acquisition in the Uinta Basin and expects oil production growth from the region to exceed 25%.

Newfield’s strategy of raising funds by selling assets and directing them toward growing reserves through an active drilling program and select acquisitions will be value accretive over the long term.

While we like the company’s focus on drilling activities through a hike in capex, we remain cautious on the full-year production guidance as well as escalating costs. Again, competition from peers such as Denbury Resources Inc. (DNR - Analyst Report) and Pioneer Natural Resources Co. (PXD - Analyst Report) is an added cause for concern.

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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