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Newfield in Neutral Lane

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We maintained our recommendation on Newfield Exploration Company (NFX - Free Report) at Neutral on Aug 14, 2013. The company posted weaker-than-expected second quarter earnings attributable to lower gas volumes. The company holds a Zacks Rank #3, which is equivalent to a short-term Hold rating.

Why Maintained?

Newfield, an independent energy company, is expected to benefit from its exposure to emerging resource plays, along with its shift of resources from natural gas to liquids, which will help it to grow in the E&P space.

Newfield Exploration’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 Williston play to be a liquid-rich catalyst for the stock. The company has also increased its production expectations from Cana Woodford and Williston Basin for 2013.

It appears that Newfield Exploration’s exposure to emerging resource plays, along with its shift of resources from natural gas to liquids, will help it to grow in the E&P space. In the second quarter, the company reported strong oil and liquids domestic production of 10.0 million barrels, representing a 17% increase on a sequential basis. For 2013, the company intends to spend the majority of its capital for liquid-rich operations and expects to generate about 40% year-over-year growth in oil and liquids production.

During the first half of 2013, Newfield increased its rig count in the Cana Woodford play to 7 from 5 at the end of 2012 and oil production increased 31% sequentially, while total production was up 17%sequentially. Further, favorable results from the Uinta Basin, South Cana, Bakken and Eagle Ford validate the upside exploration potential of these plays. Further, horizontal drilling in the Wasatch and high pressure Uteland Butte are expected to enhance shareholders’ value.

Though we remain positive on Newfield Exploration’s emerging resource plays’ development program, we believe that a low natural gas price environment could remain an overhang since most of the company’s 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.

Moreover, 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. Newfield’s lack of economies of scale in Bakken and Eagle Ford Shale has also restricted its ability to compete more aggressively with other leading players due to higher costs and delays.

Other Stocks to Consider

While we prefer to remain on the sidelines for Newfield, there are other stocks in the sector that appear rewarding. Among these, Abraxas Petroleum Corp. (AXAS - Free Report) , Matador Resources Company (MTDR - Free Report) and Range Resources Corporation (RRC - Free Report) , which are expected to outperform the broader market over the next few months, carry a Zacks Rank #1 (Strong Buy).

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