FREEMANReports
Newfield Exploration (NFX)April 20, 2015
April 20, 2015FREEMANReports
NEWFIELD EXPLORATION COMPANYNFX/NYSE
Initiating Coverage: 2015, New World, Newfield
Investment Rating: Market Perform
PRICE: $ 38.16 S&P 500: 2100.4 DJIA: 18034.93 RUSSELL 2000:
1264.92Focused production in the high return Anadarko Basin
areaStrengthened liquidity from reconstructing financing
activitiesSharp decline and slow recovery of oil and gas pricesOur
12-month target price is $43.92.
Valuation 2014A 2015E 2016EEPS $6.5 $2.9 $4.18P/E 4.2x 13.15
9.13xCFPS $9.67 $11.69 14.22P/CFPS 2.8x 3.26x 2.68x
Market Capitalization Stock DataEquity Market Cap (MM): $5,170
52-Week Range: $22.31-45.43Enterprise Value (MM): $7,910 12-Month
Stock Performance: 10.11%Shares Outstanding (MM): 135.43 Dividend
Yield: 0.00%Estimated Float (MM): 127.11 Book Value Per Share: $
28.753-Mo. Avg. Daily Volume: 3,829,280 Beta: 1.37
Company Information:
Location: The Woodlands, TexasIndustry: Independent Oil &
Gas ExplorationDescription: Newfield Exploration Company is an
independent oil and gas exploration company that primarily focuses
on properties in the Anadarko Basin regions.Key Products &
Services: Production of crude oil and natural gas.Web Site:
http://www.newfield.com/
Please Note: Freeman Reports are produced solely as part of an
educational program of Tulane Universitys A.B. Freeman School of
Business. The reports are not investment advice and you should not
and may not rely on them for making any investment decisions. You
should consult an investment professional and/or conduct your own
primary research regarding any potential investment.
Freeman Analysts
Xiangjun Gu
Minyuan Fang
Yingjia Zhou
Chao Wang
2
STOCK PRICE PERFORMANCEFigure 1:5-year Stock Price
PerformanceSource: Yahoo! Finance as of April 20, 2015
INVESTMENT SUMMARYThe analysis team gives Newfield a MARKET
PERFORM rating and estimates that the target price by the end of
2015 will be $43.92/share. The target price will increase 33.33
percent from $38.16/share as of April 20, 2015. The team applied
both intrinsic valuation and relative valuation to get the 12-month
target price. According to the PV 10 calculation, the stock price
is $24.06/share. Based on the valuation of Newfield reserves value,
which is $89.9/share-$115.21/share and the uptrend of oil and gas
prices in 2015, the team predicts that the Newfield stock price
will increase. Thus, the team used the average of EV/BOE multiple
and P/CF multiple to get the 12-month target price of
$43.92/share.
Newfield focuses on onshore exploration and the development of
current operating regions such as Anadarko Basin, which has high
production rate. Under successful management, Newfield has improved
its production efficiency. It is certain that with the recovering
of oil and gas prices, the company will be profitable in 2015.
According to the 2014 financial report, Newfield had only $14
million cash on its balance sheet, indicating the poor financial
condition of the company. However, after the reconstruction of the
companys financial structure, it has improved its liquidity and
financial strength. How to maintain the good financial condition is
the greatest challenge of Newfield. In addition, the company cannot
guarantee that it can hedge all the commodity pricing risk, which
adds possibility of losing profits. Despite the economic concerns,
the analysis team has strong confidence that Newfield will perform
well in 2015, based on its current strong fundamentals and good
company strategies.
INVESTMENT THESISUnder volatile commodity price environment, in
order to maximize shareholders value, Newfield Exploration slows
down its expansion and makes disciplined investment to generate
consistent cash flows. By focusing on its advantageous Anadarko
Basin area with hedging, the company now shows stable developing
tendency and organic growth potential.
Disciplined capital expenditures balance expected cash flowsOver
the past four year, crude oil prices have been comparably stable
until last six months. However, as production increased in U.S. and
other global supply and demand factors, crude oil prices declined
by nearly 50% over the last six months. In future, projected
capital spending and drilling programs by exploration and
production companies are expected to dramatically decline.With the
uncertainty regarding the timing and magnitude of an eventual
recovery of crude oil prices, Newfield has reduced planned capital
spending in 2015 by approximately 40% compared to last years level.
As a result, cash flows for 2015 are expected to balance the
disciplined capital expenditures.
Increased investment in higher-return Anadarko Basin areas
continuously improves operation structure and returnsNewfield
decided to focus on high return areas across its portfolio by
increasing investment in the higher-return Anadarko Basin of
Oklahoma. Approximately 70 percent of the companys planned capital
investments in 2015 will be allocated to the Anadarko Basin, which
is characterized by resilient economics at lower prices and a deep
inventory of drilling opportunities in the SCOOP, STACK and
Springer plays. This will also reduce the service costs to further
enhance returns in these plays. In addition, Newfield planned to
slow down its investment the Uinta Basin, Williston Basin and Eagle
Ford plays.
Derivative instruments manage the commodity prices volatility
riskBecause of global supply and demand imbalance, crude oil prices
declined sharply during the fourth quarter of 2014, and this weak
environment will continue into 2015. Under such unfavorable price,
Newfield manages about 85 percent of expected 2015 oil production
using derivative instruments against prices uncertainty. In this
way, Newfield limits or reduces adverse impact on its cash flows of
2015 oil and gas production. The company currently uses five
derivative instruments, including fixed-prices swaps, collars,
fixed-prices swap with sold puts, collars with sold puts, and
swaptions. Fixed-prices swaps ensure that Newfield will receive
money if the settlement price is less than the swap strike price.
Collars are favorable when the settlement price is below the floor
strike price. A swaption is an option to give the counterparty a
right to buy Newfields contract, which if exercised, will equal to
a fixed-prices swap. Newfield uses both single and combined
instruments to hedge 14,640 MMMBtus of 2016 gas production and 732
MBbls of 2016 crude oil production
Strategic acquisitions and divestitures demonstrate healthy cash
flows and organic growthIn order to increase financial strength,
Newfield tries to focus on core areas which the managers think that
they have more experience in exploration and understanding of
technological process. After selected acquisitions and
divestitures, managers can predict the drilling results with
increased accuracy. Through 2012 to 2014, Newfield divested over
$2.1 million non-strategic assets to focus on developing core
areas. The company, in this way, improves exploration efficiency
and guarantees no or few wasted resources on low-performance
assets. In September 2014, Newfield sold its assets in Granite
Wash, located in Texas, for $588 million. In October 2012, Newfield
sold its remaining assets in the Gulf of Mexico to focus on its
onshore business. In addition to divestitures, Newfield acquired
oil and gas properties for $33, $72, and $9 million in 2014, 2013,
and 2012 respectively.In the companys recent acquisitions and
divestitures history, Newfield went through a quick expansion
period through 2005 to 2011, developing new plays both domestically
and internationally. Afterwards, the company slowed down its
expansion, and made adjustments to its asset structures to become a
more oil-focused and liquids-rich onshore company. Accumulating
certain exploration and technology experience, focused investment
in existing areas can allocate the companys budgets into its
advantageous areas. Newfield tends to keep such developing speed
into 2015 to increase proved reserves in high-performance, low-risk
areas, and reduces investment in non-strategic areas. Because of
the downward trend of oil and gas prices, Newfields investment
strategy of highlighting high-grade resources can help the company
ensure its production returns and cash flows.
VALUATIONThe current stock price of Newfield as of April 20,
2015 is $38.16, so based on our valuation, the analysis team
decides the target price of Newfield in 2015 is $44.40/share.
The PV10 calculation shows that the stock price should be
$24.06/share. In the valuation of Newfields reserve value, the team
came out the range of $89.09-$115.21/share, according to the teams
base case and high case valuation assumptions. In addition, the
intrinsic value calculated based on 2014 proved reserved only is
$31.27/share, which is quite close to the current stock price. The
analysis team also estimates that the oil and gas prices will be
slightly higher in 2015 than they are in 2014. Thus, the company
has the potential to have higher stock prices than today.
The analysis team decided our target price based on the average
of EV/BOE multiple and P/CF multiple, using industry average as our
comparable.
The enterprise value is the market value of a whole business and
the BOE refers to the production of oil and gas that a company is
able to generate. The analysis team used the EV/BOE valuation
because first enterprise value shows that how the market prices the
company, and second, in the E&P industry, a companys production
can influence and predict the future cash flows of a company.
First, the analysis team chose 16 companies based on the data the
team got from Bloomberg in E&P industry and calculated the
industry mean EV/BOE ratio. The analysis team then multiplied this
ratio by Newfields BOED production data to reach an enterprise
value of $9005.8 million. By adding market value of cash and
subtracting book value of debt, then dividing the share number
outstanding, the analysis team got the price of $44.4/share.
Similarly, the analysis team calculated P/CF multiple, based on
the idea that cash is the most liquidity asset, which shows the
financial condition of a company. Thus the team got the price of
$43.44/share. Taking the average of these two multiples, the team
got the target price of $43.92/share.
In addition, the analysis team calculated Newfields peer groups
average (SM Energy Company, Rosetta Recourses Inc., QEP Resources
Inc., and Cimarex Energy Co.) EV/BOE ratio. The analysis team then
multiplied the peer groups average EV/BOE by Newfields BOED
production to get the enterprise value of $5953 million, and
arrived at a target price of $22.28/share. The analysis team got
the P/CF multiple of $41.47/share, based on peer companies. As
mentioned above, the analysis team believes the stock price of
Newfield will be higher in 2015, so the team believes that the
stock price, which the team got from using the industry average, is
more persuasive.
In general, compared to the current stock price of $38.16/share,
our target price is 33.33 percent higher. Thus the team believes
that Newfield will be market perform.
Table 1: valuation method
COMPANY DESCRIPTION & PROPERTY OVERVIEWNewfield Exploration
Company (NYSE: NFX) started business in Delaware in 1988.
Currently, the company is headquartered in the Woodlands, Texas.
Newfield mainly operates in three fields: exploring oil deposits,
developing, and manufacturing crude oil, natural gas and natural
gas liquids. Because of the decision to sell Malaysian operation in
early 2014, Newfield now focuses on its domestic operation. Thus,
Newfield has possessed operation land, mainly located in the
Mid-Continent, the Rocky Mountain region and the Onshore Gulf
Coast. Internationally, Newfield is developing offshore business in
China.
HistoryNewfield Exploration was founded by Joe B. Foster, the
former Chairman of Tenneco Oil Company. In the beginning, the
company had $9 million in capital. The first production property
that Newfield Exploration purchased was Eugene Island Block 172.
The company used the ticker NFX on the NYSE at the end of 1993.
After 10 years of development, Newfield Exploration expanded into
southern Louisiana and the Texas coast to diversify its base.
During 2009, Newfield made its first international attempt in
Australia to acquire two producing oil offshore fields. After 2000,
the company made an acquisition and increased its asset base in
South Texas. Through this acquisition, Newfield established its
focus on onshore plays. In 2004, the company started operations in
the Rocky Mountain region and then established international
operations with the Malaysian coast and Chinese coasts. In late
2010, Newfield was added into S&P 500. In 2011, Newfield moved
its headquarters to the Woodlands, Texas.
Business strategyIn order to remain competitive and gain
long-term benefits, which adds value through environmental friendly
production, Newfield has developed five business
strategies.Newfield Exploration tries to maintain a diversified
assets. During its years of development, Newfield has changed its
strategy from the conventional gas drilling to the unconventional
liquids focus. Because Newfield has diversified assets located
mainly in North America, it at most decreases its exposure to
geographic risk and commodity price risk.Newfield Exploration
focuses on improving and strengthening capital structure. Newfields
major focus is on its domestic business currently. In this way, the
company uses the proceeds from selling its Malaysian and Chinese
business to improve financial liquidity. Newfield also hedges some
commodity pricing risks and raises funds through derivative markets
to ensure the success of its operation plans.Newfield Exploration
combines an active drilling program and selects acquisition.
Newfields quick growth comes from two parts: active drilling and
select acquisition. On the one hand, while Newfield has kept its
exploitation in focused land, it is also looking for a new drilling
program. The company has kept its drilling programs under
comparatively low geologic risk. On the other hand, Newfield
continues to expand its drilling area onshore within the United
States through a series of acquisitions. In 2013, Newfield acquired
about 65,000 net acres in Oklahoma's Anadarko Basin "STACK" play.
In 2011, it acquired about 65,000 net acres in the Uinta Basin.
Those select acquisitions in different places hedge Newfield
against geographic risk.Newfield Exploration tries to utilize
assets and resources efficiently. Through effective management,
Newfield is able to control its investments and expenses while
using its assets efficiently. Newfield geographically concentrates
on certain areas in order to improve asset utilization and resource
allocation, as well as to have a better understanding of corporate
responsibility on the environment and safety operations.Newfield
Explorations strategy also includes reserving great human resources
and taking shareholders interest as the first priority. Great human
resources are always key to the companies success. Newfield values
highly of talented employees. Newfield also hands out equity to
employees so that they will make decisions in the interest of
stockholders.
Property OverviewAs the company strategy of focusing on North
American business, 96 percent of Newfield proved reserves are
related to domestic operations at the year-end of 2014, which
mostly are located in the Mid-Continent region, the Rocky Mountain
region, and the onshore Gulf Coast. Newfield also has operations in
the offshore China, which contributes 4 percent of the proved
reserves.About 46 percent of Newfield proved reserves are in the
Mid-Continent region, which includes over 400,000 net acres. In
this area, Newfield has Anadarko Basin and Arkoma Basin, where it
develops the Woodford Shale for decades. Another big region of
Newfield Explorations operations is in the Rocky Mountain area,
which represents about 43 percent of the proved reserves at the
year-end 2014. The basic product in Rocky Mountains is oil, which
characterized by long-lived production. Recent years, Newfield
Exploration has focused on Rocky Mountains region and has developed
more than 250,000 net acres in the Uinta and Williston basins. In
2014, Rocky Mountain contributed 32% of total domestic production
and cost 45% of capital budget. The third largest operation area is
in the onshore Gulf Coast, which represents about 7 percent of
Newfields proved reserves. It has approximately 25,000 net acres in
the Eagle Ford, located in the Maverick Basin of Maverick, Dimmit
and Zavala counties, Texas. The Eagle Ford play produced about
11,000 BOEPD (52% oil and 24% NGLs) during the fourth quarter of
2014. Additional to domestic operations, Newfield has about 4
percent of its proved reserves, 23 MMBOE in China, mainly located
in the South China Sea. Newfield is producing oil in three wells
there, and plans to invest the fourth well in 2015 by $40
million.
Figure 2: Operating region of Newfield
Source: January 2014 Goldman Sachs Global Energy Conference
Presentation
The largest production baseThe Anadarko Basin in the
Mid-Continent region is now Newfields largest production area,
which produced 54,000 BOEPD in the fourth quarter of 2014 and
comprised 28 percent of its proved reserves. Now the Anadarko Basin
has 300,000 net acres. Newfield plans to invest 70 percent of
budget in 2015 to this region and estimates that the Anadarko
Basins production will comprise 41 percent of total operations.
Figure 2: Map of the Anadarko Basin
Source: March 2015 Howard Weil Conference presentation
Latest Developments and Recent AcquisitionsDuring 2013, domestic
production increased 19 percent to 47.9 MMBOE, with a 38 percent
increase in domestic liquids. Consolidated fourth quarter
production was 138 MBOEPD (60% liquids). Proved reserves grew 14
percent. Companys PV-10 increased 9 percent in total and 16 percent
in domestic region, compared to the prior year-end number of $8.8
billion and $7.7 billion.Newfield has net developed well 232 in
total in year-end 2014, and was in the process of drilling 15 net
development wells domestically and one in China.Newfield plans to
issue $815 MM common stock and extend credit facility to $1.8
billion. The company restructured its long-term debt to reduce its
domestic lease expense by 7 percent per barrel over 2013. Newfield
sold $1.5 billion non-strategic assets in Granite Wash in September
2014 to align with the liquid-rich plays strategy and enhance
liquidity. The company then uses the earnings to redeem its $600
million Senior Subordinated Notes due 2018. In February 2014,
Newfield also closed its business in Malaysia to fund capital
expenditure throughout the year.Previously, Newfield expected that
the pearl facility in China would reach its peak in mid-2015, and
included China business as discontinued operations for sale.
Because of the greatly declined commodity prices in December 2014,
Newfield did not find an acceptable offer, and decided to
reclassify China business as continuing operations during the
fourth quarter of 2014.To expand the operating areas, Newfield
Exploration made several acquisitions in its core business. For
example, Newfield Exploration increase its oil production in Rocky
Mountain by gaining 65, 00 net acres in Uinta Basin in 2011. In
2013, the company make another acquisition, adding 65,000 net acres
in Oklahomas Anadarko Basin, benefiting the operation in the
Mid-continent region. The acquisition in 2013 makes the
Mid-continent region the most productive field for the company.
INDUSTRY ANALYSISThe petroleum industry includes business of
exploration, extraction, refining, transportation, and marketing
the petroleum products. The main products in this industry are oil
and gas. Primarily, the industry consists of three sub-business
sectors: upstream, midstream, and downstream. The upstream
companies are responsible for exploring and extracting oil and gas
products. The midstream business provides the service to carry the
petroleum products nationwide and aboard with pipelines, trucks,
barges, and other means of transportation. The downstream sector
provides refining and processing services. Newfield Exploration
(NFX) is in the upstream industry, focusing on the exploration and
production of oil and gas onshore in the United States.
Industry specifies On the whole, the oil and gas exploration and
production sector has a massive size. Capital IQ listed an average
$42.4 billion market cap for large cap companies, $8.3 billion for
mid-cap companies, and $1.77 billion for small cap companies.
According to Capital IQ sector growth data, the sector has total
revenue growth rates of 14.3 percent in 2011, -28.4 percent in
2012, 9.1 percent in 2013, and 3.3 percent in 2014. The unique
nature of oil and gas cause the growth rate fluctuate, affecting
revenues. The world crude oil prices have shown a sharp downward
trend since last year because of oversupply. However, the capital
expenditure in finding new drilling spots is also a big driver for
higher revenues.
Newfield Explorations role in the industryNewfield Exploration
is a small cap company in the upstream sector. The company has seen
fast growth during past two years in its four main drilling areas
through campaigns. In the Uinta Basin, the company focuses lowering
the well costs by changing the design and well orientation.
Besides, Newfield is among the first to try extended laterals
technique, which proved to be profitable in Williston and Eagle
Ford areas.
Macroeconomic driversBecause of the globalization, the world
market has a deep impact on the United States energy industry. For
example, OPEC decisions, global supply and demands and currency
exchange rates all bring volatility to the domestic oil and gas
production. On the other hand, US GDP, regulations and price
forecasts, seasonality are the domestic macroeconomic drivers of
the energy industry.
International driversOrganization of Petroleum Exporting
Countries (OPEC) is an organization, through which members
co-ordinate their production periodically to ensure the balance of
oil price and supply. OPEC contributes about 40 percent of global
oil and gas production. The organization is an important factor in
global energy market. Generally, when OPEC cut its oil supply, the
price rises.In addition, because crude oil transactions use US
dollars to settle accounts, the buying power of US dollars against
other currencies also influences oil prices. Mostly, the higher
value of US dollars, the lower oil prices will be.
Domestic driversIf the economy is good or people have positive
expectation for the future, the demand for oil will rise, which
will push the price up. However, if domestic supply cant satisfy
national demand, the difference between supply and demand should be
fixed by importing, which will have a negative effect on GDP. On
the other hand, price forecasts for oil and gas also have deep
impact on the energy industry. For example, the predicted demand
for oil is lower in 2015 than it was in 2014, which contributes to
the drop in oil prices in the second half of 2014.Since the BP oil
spill in the Gulf of Mexico in 2010, the federal, states, and local
authorities gave put strict regulations on the oil and gas
industry. The industry must obey regulations of drilling and
production, and of environmental protection.Nature is also an
important factor on the United States energy industry. Every year
when the temperature falls below 65 Fahrenheit, oil demand rises.
Seasonality increases the volatility of the oil price and
consumption
Microeconomic DriversMicroeconomic factors also influence oil
and gas companies. Sunoco Logistics Partners Operation GP LLV,
Royal Dutch Shell plc, Tesoro Corporation and other Monument Blue
field oil production companies are major customers of Newfield
Exploration. Sunoco Logistics Partners Operation GP LLC and Royal
Dutch Shell plc have lower bargaining power than the other major
customers. The great loss of revenue from Tesoro Corporation and
other large purchases of Monument Blue field oil production
companies has a strong bargaining power. Therefore, Newfield
Exploration has an advantage over most buyers except those large
purchases of Monument Blue field oil production companies.Suppliers
have important impacts because of their high bargaining power, such
as drilling equipment, experienced employees, and many other
resources.
Threat of entryIn oil and gas industry, the threat of entry is
low because of high barriers to new entrants in this area. In
addition to government regulations, high capital investment to the
regular equipment is another important reason keeping new entrants
out of the industry. The cost to start a business, including
exploration cost, development cost, and operation cost is high.
Despite those reasons, its hard for new entrants to find a place
and survive under pierce competition.
Bargaining power of suppliersThe bargaining power of suppliers
is moderate. Suppliers provide high-tech and expensive drilling
equipment, and well trained employees. The market of drilling
suppliers are concentrated, controlling oil and gas industry.
Company cannot get oil and gas from reserves and cannot operate
smoothly without the support of suppliers. However, the high prices
will affect the production of Newfield, harming the profits of
suppliers.
Bargaining power of buyersOil and gas buyers have weak
bargaining power because the demands are inelastic. For example,
the demand of oil doesnt change dramatically after the falling oil
price. Moreover, oil and gas take 60 percent of energy consumption
in the world, meaning they are still the major energies. Although
people are consuming renewable energy resource and coal in the
daily life. These energies only take 29 percent of the energy
consumption in the world. In other word, no perfect substitutes for
oil and gas exist in the world, indicating a low bargaining power
of buyers.
Availability of substitutesCurrently, few substitutes for oil
and gas exist in the world. Although Gas Hydrate can be one of the
substitute, it is hard to explore and exploit. Wind power, nuclear
power, and water power are all the available substitutes for the
oil and gas. However, the power come from those energy cant meet
the large demand. Cars driven by electricity are becoming popular
nowadays. But such technology is not as mature as traditional
technology. Moreover, most of the equipment in the daily life are
driven by oil and gas. The oil and gas is still two major energy
consumptions in daily life, thus the availability of substitutes is
low.
Competitive rivalryThe competitive rivalry is high. Independent
oil and gas companies, individual producers and other national oil
and gas suppliers compete for potential reserves, human resources,
equipment and advanced drilling technologies. Apart from small
independent firms like Newfield, there are large corporation like
Exxon, BP, etc. These companies incorporate upstream, midstream,
and downstream fields together. Because of their large size, these
large corporations gain economics of scale. Small companies like
Newfield are overcoming by getting into joint ventures with these
corporation.
PEER ANALYSISNewfield Exploration is a company that focuses on
oil and gas exploration and production. Different from the peer
companies that only operate inside the United States, Newfield also
has international offshore operations. Because Newfield directs
about 80 percent of its investments to domestic drilling, companies
that only operate in North America are good comparable peers. Four
peer companies are chosen based on similar market capitalization,
drilling locations, products, and strategies.
Table 2: information of peer companies
Source: Thomson One as of April 20, 2015
SM Energy Company (SM/NYSE)SM Energy, founded in 1908 and
located in Denver, is an independent energy company that currently
focuses on oil and liquids exploration and production. The company
diversified its onshore operations in four major areas: South Texas
and Gulf Coast, Rocky Mountain region, Permian region and
Mid-continent region. Among these regions, SM focuses on developing
its Eagle Ford shale program and Bakken/ Three Forks in Williston
Basin. SM Energy has a market capitalization of 2.5 billion with
total proved reserves of 547.7 MMBOE for the year end 2014. The
strategy for SM is to expand its resource plays with a rather high
speed and a reasonable cost. For year-end 2012, the company shifted
its focus on gas reserves to liquids ones. SM has a smaller market
capitalization than Newfield but has higher numbers in other
metrics.
QEP Resources, Inc. (QEP/NYSE)QEP Resources, Inc., founded in
1922 and located in Denver, is a company that provides oil, natural
gas, and natural gas liquids exploration and production. QEP has
two major operating regions: the Northern Region (primarily in the
Williston Basin,the Pinedale Anticline, and the Uinta Basin), and
the Southern Region (mostly in the Anadarko Basin in Oklahoma,
Louisiana and the Texas Panhandle) of the United States. QEP is
different from Newfield, which focuses on E&P, also operates in
midstream service and energy marketing. With a low-cost structure,
QEPs strategy is to maximize project value by investing in the
highest potential resource plays. The company has a slightly higher
P/E ratio of 4.6x in 2014 than Newfield Exploration.
Rosetta Resources (ROSE/NYSE)Rosetta Resources, incorporated in
2005 in Houston, Texas, is a company focused on exploring domestic
onshore energy resources. As Newfield Explorations major production
from mid-continent, Rosetta Resources has highest oil and gas
production from mid-continent. Most of the oil and gas production
comes from Eagle Ford, which located in South Texas. The second
largest oil production region for the company is Permian Basin in
West Texas. At the end of December 31, 2014, the company has 64,000
net acres in South Texas and 57,000 net acres in West Texas. To
meet shareholders interests, ROSE keeps steady growth from its
unconventional onshore domestic basin. Compared to Newfield
Exploration, Rosetta Resources has a lower market cap but similar
P/E ratio.
Cimarex Energy (XEC/NYSE)The company explores oil and gas mainly
in Oklahoma, Texas, and New Mexico. Climarex Energy made some
important events in 2014. For example, the company average total
production in 2014 is about 14.45 mmBOE and the company acquired
Cana-Woodford assets for $497.4 million in May 2014. The strategy
for Climarex Energy is to grow proved reserves and production for
profit and to maximize cash flow for profitable reinvesting. The
main business area for the company is Permian Basin, which covered
West Texas and New Mexico. Like Newfield Exploration, Cimarex
Energy has business in the mid-continent area, which included
Oklahoma, Southwest Kansas, and the Texas Panhandle. Although
Cimarex Energy has a small market cap, it has a higher P/E ratio
than Newfield Exploration.
MANAGEMENT PERFORMANCE & BACKGROUNDNewfields management team
consists of oil and gas professionals who are experts in the field.
Many of the executive team members have over 20 years of experience
in the industry and continue to successfully lead the Company
today. Collectively, the management team sees a great opportunity
for future growth by moving onshore.The return on invested capital
(ROIC) measures managements ability to allocate a company's capital
efficiently and to generate profitable returns. By comparing
after-tax operating income to a companys invested capital, ROIC
demonstrates the companys ability to convert capital into
returns.Newfield had an adverse return on invested capital in 2012.
The companys ROIC in 2014 was about 32 percent higher than it was
in 2012. It indicates that the business management team has made
efforts to improve its performance. In 2012, Newfield reduced its
capital investments, which were 26 percent lower than it was in
2011. The decreasing of its capital investments mainly came from
asset retirement obligation and capitalized interest and overhead.
Newfield decided to sell its international businesses in China and
Malaysia in February 2013. Because Newfield lifted and sold less
crude oil in these two region than previous years, its revenue
decreased. On the other hand, Newfield invested more capital than
previous years into its domestic exploitation and development. This
investment has just started generating profits. Newfield decided
not to sell its business in off-shore China in 2014. In addition,
the company improved its financial condition. So its ROIC
outperformed its peers in 2014.
Table 3: ROIC comparable
Source: Thomson One as of April 20, 2015
Management compensationNewfield offers incentive-based
compensation packages to management that include competitive base
salary, annual bonus plans based on company, team, and individual
performance, and employee stock purchase program. The company also
offers an employee savings and protection plan that is a defined
contribution plan with a profit sharing component, a stock bonus
component, and a 40lK.
Lee K. BoothbyChairman, President and Chief Executive OfficerLee
K. Boothby got his bachelors degree in petroleum engineering form
LSU and M.B.A from Rice University. He joined Newfield in 1999,
served as Managing Director in Newfield Exploration Australia Ltd.
and managed the companys operations in the Timor Sea from
1999-2001. Before 1999, he worked for Cockrell Oil Corporation,
British Gas and Tenneco Oil Company. From 2002-2007, Boothby was
Vice President, leading the Newfields development of the growing
Woodford Shale Play in southeast Oklahoma. In 2009, he started
serving as a member of the Companys Board of Directors by Newfields
shareholders and the Board nominated him as the Chief Executive
Officer. In 2010, Boothby became Chairman at the Companys annual
meeting.
Gary D. PackerExecutive Vice President and Chief Operating
OfficerGary D. Packer graduated with a bachelors degree of
petroleum and natural gas engineering form Penn State University.
Packer joined Newfield in 1995 as a manager of Acquisitions and
Development in the Gulf of Mexico and was instrumental in the
success of the Company's Gulf operations. Then, the Board named
Packer as Vice President who founded Newfields business in Denver
around Rocky Mountains. Since 2009, he has been Executive Vice
President and Chief Operating Officer.
George T. DunnSenior Vice President of DevelopmentGeorge T. Dunn
has devoted himself to Newfield for over twenty years. Now, he is
responsible of managing the Land, Drilling, Production and
Reservoir functions. Dunn is a member of the board of directors of
the Oklahoma Independent Petroleum Association (OIPA). Dunn
graduated from the Colorado School of Mines, where he got a degree
in Petroleum Engineering. Before Dunn became the senior vice
president of development, he was the vice president of
Mid-Continent and the vice president of Gulf Coast region. Before
taking these positions, Dunn was the general manager of the Gulf
Coast. Dunn was the general manager of Newfields Western Gulf of
Mexico division. Dunn was an employee of Meridian Oil Company and
Tenneco Oil Company before he joined Newfield in 1992.
Matthew R. VezzaVice President of Rocky MountainsMatthew R.
Vezza became the vice president of Rocky Mountains in June 2014,
responsible for planning the development of Newfields assets in the
Uinta Basin. Vezza is a member of the Society of Petroleum
Engineers. Vezza was a member of Marathon Oil Company for 16 years,
where he served as a engineer before he became the general manager
of the Rockies Business Unit in 2012. Vezza graduated with a B.S.
in Petroleum and Natural Gas Engineering from Penn State
University.
Stephen C. CampbellVice President of Investor RelationsCampbell
is a member of the Petroleum Investor Relations Association, the
National Investor Relations Institute, the Public Relations Society
of America and the Texas Public Relations Association. Campbell
worked as the manager of investor relations when he joined Newfield
in 1999. Before he joined Newfield, he worked for Anadarko
Petroleum Corporation. Campbell graduated from Texas A&M
University.
John D. MarziottiCorporate Secretary and General
CounselMarziotti is a member of the State Bar of Texas, the
Association of Corporate Counsel and the Texas General Counsel
Forum. He became the legal adviser of Newfield in 2013. In August
2007, he became the general counsel. In May 2008, he became the
corporate secretary of Newfield. Marziotti was a partner of
Strasburger & Price L.L.P in its Houston office. Marziotti got
a B.A. from the College of Charleston and a J.D. from Southern
Methodist University.
RISK ANALYSIS & INVESTMENT CAVEATSNewfield has many industry
related risks as many other E&P companies, as well as company
specific risks. These risks mainly come from three aspects:
operation, regulation, and financial statements. Different risk
factors may affect the companies in different degrees, but they all
will influence Newfield in the short and long term.
Operational riskSeveral factors can contributes to companys
operational activities and performances.
Commodity prices volatility and exchange rate riskNewfield
Explorations profitability and future growth potential depend
largely on market prices of oil, gas, and NGLs. Commodity prices
can affect the companys cash flows and ability to borrow capitals.
Long-term lower market prices of oil, gas, and NGLs will adversely
affect E&P companies profitability and revenue. Newfield cannot
control the market price fluctuations, but it can focus its
business on currently profitable commodities. Historical data shows
that the commodity prices for oil, gas, and NGLs are always
volatile. Because the continuous high global supply over demand,
oil prices have drop dramatically since September 2014. The prices
for crude oil are $47 per barrel (WTI) in January 2015, while last
year the prices were $95 per barrel.Exchange rate adds risk to
unsure commodity prices. Newfield has operations outside the United
States. It needs to exchange foreign currencies to get the local
prices of oil, gas, and NGLs. In addition, a large amount of
capital mandatory purchases are denominated in foreign currencies.
An unfavorable exchange rate can worsen the companys financial
situation in a lower commodity prices environment.
Drilling riskDrilling is a high risk activity. Newfields
technology to collect data cannot report a well comprehensively
until the company really develops the well. Before that, people
cannot clearly know whether oil or gas is present and economically
productive. Also, the future cost and timing of drilling is hard to
estimate. Drilling activities can be delayed or even cancelled,
which depend on many factors, including costs of drilling
equipment, volatile oil or gas prices, adverse weather patterns,
equipment failure and accidents, and availability of required
government permits. If the future drilling activities are
unsuccessful, it can impose adverse impact on Newfields revenue and
operations.
Capital supplyNewfield has substantial capital requirements to
support its operation. Thus, the company needs capital to support
its high-risk drilling activities, explore and acquire new
reserves, maintain equipment, and develop existing reserves. A part
of the capital comes from operating cash flow, and another part
comes from outside fund-raising activities, for example, issuing
debt and stocks. When cash flow cannot meet demand, or Newfield
does not have access to the outside fund raising, a gap will exist
between capital demand and supply, which will cause trouble for the
business.
Reserve EstimatesThe reserve estimation process is complicated.
Many factors may affect the quality and quantity of the reserve
data, including geography, engineering methods, and production.
Additionally, people, who estimate, show different judgment.
Because of these factors, actual production and cash flows of oil,
gas, and NGL reserves largely differ from Newfields estimation.
Misleading estimates can lead to incorrect proved reserve
information in the companys database.
Reserve DepletionE&P production companies will always face
the challenge of the natural decline of reserves. Oil and gas
volumes decline sharply after the first year operation, and will
continue to decline in the economic life. Whether the company can
find or acquire new reserves at reasonable costs largely determines
the success of drilling oil and gas in the future. The failure to
replace reserves can damage Newfields revenue and cash flows. Based
on 2014 production, Newfield managers think that the current
reserve life is thirteen years. Compared to its peer companies,
which SM Energy has a reserve life of 9.9 years, and QEP Resource
of 12.2 years, Newfield has a slightly higher number but can
fluctuate based on yearly production. Newfield must continue to
find, develop, and acquire new reserves against such reserve
depletion risk.
Cyber SecurityNewfield completes transactions with third parties
through software, telecommunications, and other information
technology. The company also uses third-party licensed software to
manage its business. Cyber-attacks and computer viruses can
interrupt normal operations and lead to a breakdown of the entire
information system.
Regulation riskIndustry regulations, including domestic and
foreign governmental regulations, taxation and environmental
legislations, significantly impact energy companies. Some complex
laws and regulations can influence companys operation manner,
increase operation cost, reduce liquidity, and delay business
cycle. Companies must spend a large portion of their budgets on
complying with environmental and governmental regulations. For
example, regulations restrict the amounts and types of substances
and materials released into the environment and require companies
to report exploration, production, drilling and other activities.
In addition, companies are also responsible for oil spill, property
damage, personal injuries, and other accidents.
Clean Air ActIndustry legislation changes heavily impact oil and
gas industry, including suppliers and customers. Governments, all
over the world, have become focused on greenhouse gas emissions and
have made some changes to control the climate change influence on
mitigation and adaptation. Under the existing provisions of Clean
Air Act, the Environmental Protection Agency has made some changes
to ease greenhouse gas emissions. The new legislations cover
certain onshore oil and natural gas production, processing,
transmission, storage, and distribution facilities.
Clean Water Act and Safe Drinking Water ActBoth acts regulate
and restrict discharges of wastewater, oil, and pollutants into
waters of the U.S. territory. Newfield should prepare and implement
equipment to dispose the waste during the development of oil and
gas, which can incur large costs, especially when those acts
change.
Hydraulic Fracturing RegulationsAll wells in the tight sand and
shale should use hydraulic fracturing to make the production
economically visible. Newfield also applies hydraulic fracturing
technique to almost all U.S. onshore oil and gas assets. Although
now Newfield does not use hydraulic fracturing in its diesel fuels,
the company can face the regulation if the fracturing formula
changes in the future. In the past several years, some states have
adopted new opposition rules on hydraulic fracturing. The potential
to accept new restrictions can impose Newfield additional
operational expenses and delays in the development of wells.
Dodd-Frank Wall Street Reform and Consumer Protection ActThe
Dodd-Frank Act includes significant derivatives regulations, which
require that certain transactions be cleared through exchanges. The
Act may requires margin for unclear swaps, and may post trading
limits on certain oil and gas related derivative contracts. The
implementation of the Dodd-Frank Act significantly increases the
cost of derivative contracts, and thus reduces Newfields
availability to hedge its commercial risks. The reduction in
hedging can adversely affect Newfields operations and cash
flows.
Financial riskTo develop reserves, the Newfield Exploration
needs to borrow large amount of money to cover its cost such as
equipment cost. The debt can raise companys financial risk.
Credit RiskDebt is an important part in Newfield Explorations
operation and investing activities. The Newfield Exploration issued
$1 billion dollars of 5 percent senior notes, which is due 2024, in
2012. As of December 31, 2013, the company had total indebtedness
of $3.7 billion. In October 2014, Newfield repaid $600 million
principal of Senior Subordinated Notes, which due 2018. As of
December 31, 2015, the company had $2196 million of senior
unsecured debt and $700 million of senior subordinated notes
outstanding. According to Moody, the company has a Ba2 rating.
Nevertheless, the rating on Fitch is BB+. In conclusion, the
company has high credit risk because of high debt, and any
downgrade in rating can increase its cost of debt.
Liquidity risk Liquidity ratio is the ratio to measure the
companys ability to pay off the short-terms debt. Newfield
Exploration uses three ratios to measure liquidity risk. First,
current ratio, which measures companys short-term solvency.
Newfield Exploration has a current ratio of 0.85, showing company
has an ability to pay back when the notes is due. Moreover, the
industry current ratio is 1.03, which is much higher than Newfield
Explorations current ratio. Second, quick ratio, which excludes
inventories from assets. The Newfield Exploration has a quick ratio
of 0.01, showing the company has only $0.01 of liquid assets
available to cover each $1 of current liabilities. The industry
quick ratio is 0.81, which is higher than the companys quick ratio.
The large gaps show the company may not have enough liquidity
assets to cover the current liability when the notes are due.
Third, cash flow ratio, which measure companys ability to use
operating cash flow to pay back current liabilities. The Newfield
Exploration has a cash flow ratio of 1.16, which is much lower than
the industry average cash flow ratio. The industry cash flow ratio
is 2.07. Therefore, the company may not able to meet its short-term
liabilities in the future.
Leverage riskA leverage is a method to help a company increase
its potential return. An appropriate debt amount can bring taxation
benefits. However, the imbalance between debt and equity can
increase the risk on investment because company may not able to pay
off all the debt. One way to measure the leverage risk is using
operating cash flow to total liability ratio. According to the
report, Newfield Company has an operating cash flow to total
liability ratio of 24.31. The industry average operating cash flow
to total liability ratio is 32.08. This ratio is higher than the
Newfield Explorations operating cash flow to total liability ratio,
showing Newfield Exploration has less operating cash flow to cover
the debt. Therefore, Newfield Exploration has high leverage
risk.
Table 4: Peer ratio comparison
Source: Bloomberg peer ratios comparison as of April 20,
2015
Hedging riskNewfield Exploration uses price hedging against
commodity prices volatility. In 2015, Newfields hedged portfolio
value will be about $750 mm, and will hedge approximately 80
percent of domestic oil production in 2015 and 2016. Newfield uses
swaps, short puts, and 3-way structures as its main derivative
method in 2015, and will increase the portion of 3-way structures
in 2016. Those oil hedging contracts in 2015 can effectively reach
a price $15.00 per barrel higher than the market value if the oil
price is below $75.00. In addition, Newfield has entered into swap
contracts that hedge 14.64 MMMBTU of 2016 gas production. These
hedging contracts protect Newfield Exploration from oil and gas
price volatility, but limit its potential profits from commodity
price increases. Furthermore, if using derivatives unwisely,
without understanding the derivative products and the underlying
production, reserve, and timing risks, Newfield can multiply losses
in its production.
SHAREHOLDER ANALYSIS & CORPORATE GOVERNANCENewfield has
137.million shares outstanding as of April 20, 2015, of which 136
million shares are float (99 percent). Institutions hold 95 percent
of the shares, and insiders hold 0.78 percent.
Institutional investorsThe largest institutional investor of
Newfield is Vanguard Group Inc., which holds more than 11 million
shares. Newfields top institutional shareholders engaged in several
large transactions. As of April 20, 2015, four top ten
institutional investors made large position changes (over 50
percent). Citadel LLC increased its investment by purchasing 3.569
million shares, increasing its percentage by 71.45 percent.
Millennium Management LLC bought 6.9 million shares, which is about
131.79 percent of its previous holding. Systematic Financial
Management, L.P. increased its position by 3 million shares, which
accounts for 100 percent increase. AQR Capital Management, LLC
increased its position by purchasing 1.66 million, which is 142.6
percent of previous holding. These transactions indicates that
institutional investors have great confidence in Newfields future
performance. However, Fidelity Management & Research Company
decreased its shares by 26.53 percent, which means Fidelity
Management & Research Company sold about 2.7 million
shares.
Table 5: Top 10 institutional investors
Source: Thomson One as of April 20, 2015
Insider transactionsUntil the most recent transactions on April,
20, 2015, 27 insiders hold the total insider holdings, 1.5 million
shares. Most recent transactions show that the insiders are
exercising their options, which means that the insiders are
confident about the companys future performance.The growth rate of
the total insider holdings in 2014 was -5.22 percent. Several main
factors led to this decline. Four major insiders sold holdings
worth more than 10,000 dollars during 2014. In addition, two other
insider shareholders sent their holdings as gifts of more than
20,000 dollars. However, 13 insiders increased their shares in
2014, among which three raised the amount more than 10,000 dollars.
These three increased their holdings primarily because of the
conversion. The other ten insiders increased their holdings because
of the acquisitions.
Corporate GovernanceTo ensure the trust of investors, Newfield
has critical corporate governance principles. The majority of its
directors are independent as defined by the NYSE and its three
primary board committees are comprised exclusively of independent
directors.Newfield has established an Ethics Line, so that
investors, employees and other interested parties can anonymously
report through a third party any practices thought to be in
violation of its corporate governance policies. This Ethics Line
can also be used to make concerns known to their non-management
directors on a direct and confidential basis.
Table 6:Member of the Board of Directors
Source: Newfield official website, 2015
CompensationNewfield Exploration has Compensation &
Management Development Committee. The committee includes five
people who are board members. The committee recommended a new
annual cash incentive compensation plan for employees, approved in
2010. The company gives not only domestic employees and but also
other employees of foreign subsidiaries a 401(k) profit sharing
plan. Newfield Exploration also sponsors a highly compensated
employee deferred compensation plan. These two compensation plans
contributed $10 million at the end of 2013. The company uses
performancebased compensation to encourage employees to develop and
maintain high quality performance.
Table 7:Compensation & Management Development Committee
Source: Newfield Exploration 10K, 2014
Financial PErformance & PROJECTIONSThe analysis teams
projections for Newfield Explorations financial performance and
projections are closely related to Newfields production in Anadarko
Basin. The new company decision of focusing on the operation of
Anadarko Basin makes the area extremely important for the companys
future production and revenue growth. Thus the efficiency and
success of drilling plans in this area is critical. Based on the
teams estimate of commodity prices in 2015-2018, the team got the
companys future cash flows. Because Newfield strengthened its
ability to finance its operation, the team also consider the
companys future risk level and liquidity condition.
ProductionThe analysis team forecasted Newfields oil and gas
production in three major areas: Anadarko Basin, Williston Basin
and off-shore China based on Newfields press release. Depend on the
operation guidance for the companys production in 2015, the team
was able to forecast new wells in each of the three areas. In the
teams assumption, the time for each new wells to start producing is
25 percent each quarter in Anadarko Basin area and Williston Basin
area, and 50 percent each quarter in off-shore China area. The team
assumed that each new well can produce 2 mmcf and 500 bbl per day,
with 49 percent of natural decline rate every year. The annual
decline rate for existing wells are 30 percent. Based on historical
data, the team assumed that the proportion of oil and gas
production are similar to previous year in each area. Thus in
Anadarko Basin, the proportion of oil and gas is 50/50, and in
Williston Basin the proportion of oil and gas is 90/10. The
analysis team assumed that Newfield would maintain similar drilling
plan in 2016-2018. With strengthened financial condition and more
capital expense in coming years, the teams model predicts annual
production will increase 41 percent by 2018.
Commodity pricesThe analysis team set NYMEX gas price and WTI
oil price of 2015-2018 as the benchmark. In the assumption, the
team assumed that Newfields oil price is $2 lower than the
benchmark, the companys gas price is $0.5 lower than the benchmark
in 2015-2017, and in 2018, the price is $0.25 lower than 2017. In
addition, the team assumed that NGL prices would have similar
proportion to the oil prices because of the seasonality of NGL
prices. Thus, the team assumed the proportion of 40 percent, 30
percent, 33 percent, and 35 percent in each quarter of 2015, 35
percent in 2016, and 40 percent in 2017 and 2018.
Table 8: Price estimates
OperationLifting cost, depreciation, depletion, and amortization
(DD&A), general, and administrative expenses (G&A), and
production taxes are major expenses related to operation. Because
Newfield didnt separate transportation cost from lifting cost in
previous years, the analysis team put transportation cost into the
lifting cost.The analysis team believe that lifting cost/ BOE will
be lower in 2015-2017, because of the massive production in the
Anadarko Basin and the reduced transportation cost from fewer
international business left over than previous years.DD&A
measures the expensing of Newfields investment in oil and gas
properties, and the depletion of its proved reserves. Because
Newfield has sold its business in Malaysia, the team believes that
it will reduce DD&A cost.The team estimates that the G&A
cost will be slightly lower than prior because of the sales of
Malaysia business and reduced production in Williston Basin, which
reduced Newfield employees in these areas.According to historical
data, the production cost is about 5 percent of Newfields revenue.
Thus, the team choose 5 percent for the measurement of future
production taxes.
InvestingNewfield Exploration provides a budget guidance of $1.2
billion planned capital spending in 2015. Compared to last years
level, the company reduces the budget by about 40 percent because
of the uncertain commodity prices environment. Newfield plans to
allocate about 70 percent of 2015s budget to its high-return
Anadarko Basin. The team assumed that the capital investment will
continuously increase in the next three years following 2015, as
long as Newfield insists on its strategy of funding the capital
investment with cash flows from productions in focused areas.
Because Newfield allocates its budget to high-performance Anadarko
Basin, and acquired oil and gas properties in focused areas, the
team assume that the company can produce oil and gas economically,
and reduce service cost to further enhance its production. In this
way, the company can make profits by increasing the capital
spending.
FinancingIn its latest presentation, Newfield announces that it
will issue $815 MM common stock, and repay borrowings of $446 MM
under the credit facility. The analysis team assumed that the
issuance of common stock and repayment of borrowings will happen in
the first quarter of 2015. In 2014, Newfield sold its Granite Wash
and other non-strategic assets, and used derivative instruments
against the commodity prices volatility. The divestitures and
hedging activities ensure the company to finance its core drilling
programs. Newfield used the divested proceeds about $700 million to
redeem the same amount of 71/8 percent Senior Subordinated Notes
due 2018. The team assumed that Newfield will continue to redeem
further its debt obligations through divestitures and productions,
and the team didnt see a problem in repayment of extended credit
facility of $1.8 billion at current production levels.
LAGNIAPPE / independent outside researchOur team used various
methods to conduct the report and get different perspectives about
Newfield Exploration. The primary resources include latest SEC
filings, company presentations, and press releases. Those documents
provide helpful guidance about official financial and operational
data, giving us thorough insights into the company. In addition, we
used secondary sources such as Bloomberg, Yahoo Finance, Thomson
One, and Capital IQ database to facilitate our data gathering
process.
In order to have a better understanding of the company, we also
had a direct conference call with Newfield Explorations CFO, with
the help of our professor Kenneth Carroll. In the conference call,
we clarified our questions about the companys 2015 outlook and
valuation model.
FREEMANReports
Newfield Exploration (NFX)April 20, 2015
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