Newfield Exploration (NFX): Positive earnings impact from resource plays needed for revaluation - Goldman Sachs - 10/25/07
What's changed
Newfield reported 3Q 2007 adjusted EPS of $0.76, same as First Call consensus estimate, but lower than our estimate of $0.79. Total production was 664 MMcfe/d versus our estimate of 667 MMcfe/d. All-in costs of $4.71 per Mcfe were inline with our estimates. Operating cash flow was $280 million versus our $324 million estimate. The company expects its full-year 2007 capital expenditure to be about $2.5 billion.
Implications
We believe Newfield’s production remains on track, led by better-than-expected production levels in the Woodford Shale. We believe the Woodford is being discounted somewhat which could change if Newfield and other operators are able to lower costs. Ultimately, if the combination of better than expected production growth from the Woodford and the Monument Butte fields is material enough where Newfield can beat its production guidance, there would be further upside for the stock. That being said, we view the underperformance on October 25 as overdone. Newfield’s shift out of the Gulf of Mexico shelf is having a greater than expected impact to production taxes.
Valuation
As a result of recent sales of short reserve life assets, Newfield’s multiple no longer appears uniquely cheap. Newfield trades at 5.5x 2008E EV/debt-adjusted cash flow, versus 6.3x for Noble Energy, 5.0x for Forest Oil, 5.7x for Bill Barrett and 5.6x for Encore Acquisition. We see 24% upside to a $64 12-month DCF-based target price for Newfield versus 20% upside for E&P stocks, and we continue to rate Newfield Neutral relative to an Attractive coverage view as we see better catalysts at present in other E&P stocks. Our 2007/2008 EPS is $3.23/$3.73 from $3.29/$3.82.
Key risks
Commodity price volatility, drilling results, cost pressures and regulatory pronouncements are key risks. |
