NFX (OP/A): Growth visibility improved; report published - Goldman Sachs - October 05, 2005
We continue to rate Newfield Exploration stock Outperform relative to our Attractive coverage view. We consider valuation attractive and believe that increasing visibility of production growth into 2008 suggests Newfield?s discounted valuation on an EV/debt-adjusted cash flow basis is unwarranted. We see 26% potential upside to a $60 traditional peak value and 60% to a $76 super-spike-adjusted peak value.
Please see our detailed 31-page report, "Growth visibility improved." If you are on our e-mail distribution list, a .pdf will be sent today.
NEWFIELD IS OUR FAVORITE CONVENTIONAL E&P
* Conventional E&Ps more leveraged to super-spike potential. Though most of our Outperform-rated E&P stocks are unconventional natural gas producers, we believe that conventional E&Ps should be a part of an energy portfolio owing to the near-term cash flow exposure from higher commodity prices.
* We believe that Newfield has a strong, consistent management team. Newfield's management team has been very successful at spotting trends early on-the need to diversify away from the Gulf of Mexico, the rising value of the Mid-Continent in a higher-gas-price world, and the growing importance of the deepwater versus deep shelf. We believe that management is very conservative with reserve bookings and that Newfield's reserve life is understated versus its peers.
* Other conventional E&Ps look attractive, but we prefer Newfield for now. Newfield, Noble Energy, Talisman Energy, and Apache Corp. are each showing positive trends in organic growth and are trading at virtually the same 2006 EV/DACF multiple. We prefer Newfield because of the rate of change in its growth visibility, which we believe could provide momentum over the next year relative to its peers.
* Hurricane downtime is a risk to outperformance. Despite the diversification away from the Gulf of Mexico, the offshore United States still represents an estimated 40% of total production at present, almost all of which is currently shut in owing to the impact of Hurricanes Katrina and Rita. On an absolute basis, the positive impact to natural gas prices should almost entirely offset the reduced production. On a relative basis, we favor onshore US companies levered to natural gas such as XTO Energy, EnCana Corp., and Bill Barrett Corp., each rated Outperform, which could show better performance versus Newfield if hurricane downtime is prolonged. (Investment funds affiliated with The Goldman Sachs Group, Inc. have a principal investment in Bill Barrett Corp. (BBG). As a result of its position in BBG securities, The Goldman Sachs Group, Inc. may be deemed an affiliate of BBG.)
WE EXPECT OCTOBER 11 ANALYST MEETING TO FOCUS ON DIVERSE, VISIBLE GROWTH
* We believe that Newfield will use its analyst meeting to highlight its new-found visible production growth profile, the result of both acquisitions and exploration success, and to provide an update on hurricane-related downtime. * We see 4% production growth in 2006 and 15% production growth in 2007 before the impact of hurricane activity, 6% and 18% adjusted for the hurricane. We assume that the company's legacy Gulf of Mexico and Gulf Coast base will decline at about 4%-5% per year with significant growth expected to come through recent discoveries in the deepwater Gulf of Mexico and North Sea, project startups in Malaysia, and development drilling in the Rockies and Mid-Continent.
* The change in organic growth visibility has largely happened in the past 12 months. Other companies that have experienced a similar improvement have performed to a much better degree than Newfield, in our view. We see further upside potential for Newfield shares as the Street begins to believe in the sustainability of production over the next three years.
VALUATION LOOKS ATTRACTIVE
* Newfield trades at 4.4X 2006 EV/DACF versus 5.5X for other E&Ps. Because of the combination of greater growth visibility and an improved reserve life, we do not believe that Newfield should trade at a discount. While a peer-average cash flow multiple would imply a premium multiple on the basis of Newfield's proved reserves, we believe that this is warranted considering unbooked reserves from discoveries, Newfield's historic conservatism regarding reserve bookings, and drilling upside in the Rockies and Mid-Continent. * We see 26% potential upside to a $60 traditional peak value and 60% to a $76 super-spike adjusted peak value. The $60 traditional peak value implies a 5.4X 2006 EV/DACF multiple and $4.11-per-Mcfe expected year-end 2005 proved reserves. Although the reserve valuation appears high, we believe that this is warranted for two reasons. First, Newfield continues to have a shorter, more North-America-based reserve life versus peers. Second, we consider Newfield's reserve bookings to be conservative-backing out Monument Butte, Newfield's proved undeveloped reserves at year-end 2004 were just 13% versus a 29% average for E&Ps. * We are not assuming any success from exploration in the ultra deep shelf. If the Blackbeard West well is successful, we believe that Newfield shares can rise more than $7 per share.
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.
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NFX (OP/A): Updating estimates - Goldman Sachs - October 05, 2005
We are updating our EPS estimates for Newfield Exploration (OP/A) to reflect initial adjustments following hurricanes Katrina and Rita and other minor company adjustments. Our 3Q, 4Q, and full-year 2005 EPS estimates are $1.02 ($1.12 before), $1.26 ($1.51 before), and $4.06 ($4.40 before) respectively. Our 2006 and 2007 EPS are now $6.27 ($6.57 before) and $7.65 ($7.45 before) respectively. For 2008-10 (normalized), we now estimate $3.09 ($3.15 before), $3.28 ($3.34 before), and $3.48 ($3.56 before) respectively. We reiterate our Outperform rating on Newfield relative to an Attractive coverage view. Exhibit 1 shows our summary financial model for Newfield.
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.
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