Newfield Exploration (OP/A): Credible and conservative in Woodford Shale _ Goldman Sachs - May 10, 2006
We believe that for the Street to deem Newfield Exploration's Woodford Shale analyst tour successful, the company would only have to reestablish the credibility of the play, which was called into question by other industry players and the Street during 1Q 2006. Following the first day of the two-day tour, we believe Newfield has not only shown its competence in drilling and that the Woodford is a credible play, but we also believe production rates are better than previously discussed type curves. With the company increasing drilling rigs to 10 by yearend, total company production growth seems increasingly visible and guidance conservative (barring hurricane disruptions). We continue to rate Newfield Outperform relative to an Attractive coverage view.
WOODFORD RESULTS SEEM ABOVE TYPE CURVE WITH PRODUCTION ESTABLISHED IN SOUTHERN PART OF ACREAGE BLOCK
Newfield was set to tie its first horizontal well to sales in its southern acreage hours after our visit to the well site on May 10. At the time of our visit, the company was flaring an estimated 2.7 MMcfe/d of gas, though production engineers estimated greater than 3.0 MMcfe/d once the well was flowed to sales. We believe the apparent success of this well increases the prospectivity of Newfield's southern acreage position. The second day of the trip should focus on more quantitative data, and we believe management could show that cumulative horizontal well results could be above company's type curve unveiled in October 2005. Because of the combination of better-than-expected production rates with an expected rampup in rigs to 10 from 6 by yearend, Newfield could be producing at meaningful cumulative levels yearend 2006. The company also indicated it expects to reduce drilling and completion costs to closer to $3.0 million per well through scale and efficiency. We believe this could be a medium-term catalyst for Newfield stock if the company can show greater evidence of cost reductions from future drilling.
PRODUCTION GROWTH REMAINS HIGHLY VISIBLE
Rising production from the Woodford highlights our argument that Newfield's growth over the next 2 years is much more visible than what is built into the stock. We have confidence in growth from the Monument Butte oil field in the Rockies, from the startups of the Grove field in the North Sea and the Wrigley field in the Gulf of Mexico, from onshore South Texas joint venture acreage with Exxon Mobil, from development startups in Malaysia and China and further confidence from the Woodford Shale. All this should highlights Newfield's early move to diversify its production away from solely the Gulf of Mexico, for which we still do not believe Newfield shares are afforded full credit.
STOCK HAS BEEN STRONG, THOUGH MUCH OF OUTPERFORMANCE REPRESENTS A RECOVERY FROM FEBRUARY OVERREACTION
Newfield shares have rallied over the last month, though we would attribute much of the rally to offsetting concerns regarding the Woodford and the company's overall production potential during February 2006. We believe these concerns were driven principally by Newfield decreasing production guidance and introducing a higher-than-expected capital budget as well as more muted commentary on the Woodford from Chesapeake Energy. We believe that Newfield's recent Woodford well performance should offset Street concerns (and Chesapeake has already toned down its language). The reaction to Newfield's guidance reduction and capital spending was highly overdone in our view. Given spending for the startup of Grove and Wrigley as well as infrastructure building at Woodford, it is acceptable to us that Newfield's 2006 capital spending be high. Guidance reductions were solely due to lingering delays in the Gulf of Mexico, resulting from Hurricanes Katrina and Rita. While Newfield is a top performing E&P in the last month, it is still in the fourth quartile year to date, and we believe there is greater room for the stock to rally.
Each of the analysts named below hereby certifies that, with respect to each subject company and its securities for which the analyst is responsible in this report, (1) all of the views expressed in this report accurately reflect his or her personal views about the subject companies and securities, and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific recommendations or views expressed in this report: Brian Singer, Arjun Murti |
