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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 Apr 4, 2013.

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.

During the fourth quarter, Newfield completed drilling three wells in the Cana Woodford play, the performance of which exceeded expectations. Further, favorable results from the Uinta Basin, South Cana, Bakken and Eagle Ford validate the upside exploration potential of these plays. Horizontal drilling in the Wasatch and the high pressure Uteland Butte are also expected to help the company enhance shareholders’ value.

For 2013, the company intends to spend the majority of its capital for liquid-rich operations and expects to generate about 35% year-over-year growth in oil and liquids production.

Newfield’s operations abroad, especially in Malaysia, hold immense potential. This is evident from the natural gas find it made off Sarawak, Malaysia, which is considered the largest conventional exploratory success in its history.  The discovery is estimated to hold 1.5 trillion to 3 trillion cubic feet of gas initially in place.

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. The outlook for 2013 is quiet uncertain with the pending international asset sale.

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, Stone Energy Corporation , Range Resources Corporation (RRC - Free Report) and EPL Oil & Gas, Inc , which are expected to outperform the broader market over the next few months, carry a Zacks Rank #1 (Strong Buy).

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