Newfield Misses Despite Vol Growth

Newfield Exploration Co. (NFX - Analyst Report) has reported adjusted third-quarter 2011 earnings of $1.04 per share, which missed the Zacks Consensus Estimate of $1.16 and came in below the year-earlier profit of $1.10. The underperformance was primarily due to higher operating expenses.

The company’s total revenue climbed 39.9% year over year to $628 million but failed to meet the Zacks Consensus Estimate of $709 million.

Operational Performance

Total quarterly production of 75.8 billion cubic feet equivalent (Bcfe), comprising 60% natural gas, rose nearly 6.2% year over year. Natural gas volumes were down nearly 10% from the year-earlier level at 50.4 Bcf. Oil and condensate volume expanded 45.7% year over year to 5.1 million barrels (MMBbls).

Newfield’s oil and natural gas price realizations (including the effect of hedges) averaged $9.28 per thousand cubic feet equivalent (Mcfe), up 16.3% from the year-earlier level. Natural gas prices climbed 1.1% to $5.72 per Mcf. Liquid prices improved 7.7% to $86.16 per barrel.

Newfield’s recurring lease operating expenses (LOE) during the quarter were $1.06 per Mcfe, up almost 36% from the year-ago level. Production and other taxes increased significantly to $1.28 per Mcfe from the year-earlier level of 30 cents per Mcfe. General and administrative expenses increased 21.4% year over year to 68 cents per Mcfe.

Financials

At quarter end, Newfield had a cash balance of $31 million, while long-term debt stood at $2,985 million, representing a debt-to-capitalization ratio of 43.7% (versus 44.8% at the end of the previous quarter). Capital expenditure (capex) was approximately $679 million.

Guidance

For the fourth quarter of 2011, Newfield has projected output in the 79–84 Bcfe range. LOE is expected to range between 91 cents and $1.11 per Mcfe.  

For 2011, management has lowered its production volume target to 300–304 Bcfe from 312-316 Bcfe previously. Management expects LOE per Mcfe to range between 95 cents and $1.01.

Newfield maintained its full-year capital budget program at $1,900 million. The budget excludes capitalized interests and overhead and approximately $300 million in acquisitions.

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 oil production recently reached a high of 24,500 barrels of oil per day.

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. Newfield is also actively increasing its interest in international markets –– Malaysia and China.

While we like the company’s focus on drilling activities, we remain cautious on the lowered 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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Read the full analyst report on NFX