Newfield Stays Neutral

We have maintained our long-term Neutral recommendation on Newfield Exploration Company ( NFX - Analyst Report ) – a Houston, Texas-based independent energy company engaged in the exploration and production (E&P) of crude oil and natural gas.

The company started the year on a positive note and reported strong oil production of 5.9 million barrels, representing 47% of its total first quarter 2012 production. Total quarterly production of 76.1 billion cubic feet equivalent (Bcfe), comprising 53% natural gas, increased 6.4% from the year-earlier period. This improvement was mainly on the back of successful drilling results in the Uinta and Williston Basins. For the second half of the year, oil output is expected to be over 50% of its total production.

Newfield’s diversified portfolio of assets provides both flexibility and significant growth potential. We expect the company’s reserve potential in the Southern Alberta Bakken, Wasatch oil, Uinta Basin and a new resource play to be liquid-rich catalysts for the stock. Notably, in response to strong quarterly production, Newfield raised its 2012 production guidance by approximately 1% with a focus on oil and liquids-rich gas plays within the Uinta and Williston basins, the Anadarko Basin and offshore Malaysia. Whereas, capital expenditure for the year remains unchanged in the $1.5–$1.7 billion range.

However, we believe that the company’s increased expectation for production appears to be due entirely to the first quarter production beat and suggests a lower range for the balance of the year.

Though we remain positive on Newfield Exploration’s emerging resource play development programs, the low natural gas price environment could weigh on the stock since 60% of Newfield’s reserves accounts for natural gas.

Again, Newfield’s Rockies and Gulf Coast-centered asset portfolio, along with its lack of meaningful exposure to the emerging shale plays, is a competitive disadvantage. We believe the company is dependent on the successful development of its liquid-rich plays in the Uinta Basin, Granite Wash and North Dakota Bakken to reach its production targets and thereby investor expectations. Hence, any region-specific recurrence of issues could have adverse effects on the company.

Hence, considering the above discussions we see limited upside potential for the Newfield shares. Newfield, which competes with Pioneer Natural Resources Co ( PXD - Analyst Report ) and Denbury Resources Inc ( DNR - Analyst Report ) , retains a Zacks #3 Rank, which is equivalent to a short-term Hold rating for a period of one to three months.