Newfield Exploration (OP/A): 4Q05 results weak, drilling results positive; buy on weakness -Goldman Sachs - February 09, 2006
While Newfield Exploration's 2005 year-end reserves and recent exploratory results were positive versus expectations, the company's 4Q 2005 earnings soundly disappointed estimates and its cash flow slightly disappointed estimates, a result of lower realized prices and higher per-unit costs. Production in the Gulf of Mexico remains constrained, and the timing of production restarts and rig availability could cause volatility in 2006 production. Nevertheless, because of the company's diversified growth drivers and recent positive drilling results in the Woodford Shale, South Texas and the Rockies, we would take advantage of any weakness as a buying opportunity. We rate Newfield OP/A.
Earnings, cash flow weaker than expected... Newfield reported adjusted EPS of $0.77 versus our expectation of $1.02 and First Call consensus of $1.12. Production of 547 MMcfe/d was slightly below expectations, but realized oil and natural gas prices were substantially below expectations. We believe the timing of hydrocarbon sales was the main contributor to the wider differentials. Because of Gulf of Mexico shut-in production, per-unit costs were worse than expected. Newfield received $22 million in business interruption insurance proceeds, which reduced the disappointment on a cash flow basis -- operating cash flow was $282 million versus our $292 million estimate. We believe that Gulf of Mexico shut-in production and the resulting impact on differentials and costs were virtually the sole contributors to the EPS miss.
... But drilling results positive Newfield's drilling update showed diversified success in the US. Production rates from the Woodford Shale are averaging 2 MMcfe/d, consistent for now with reserves per well of 2.2-2.4 Bcfe (and attractive F&D costs considering drilling and completion costs per well have averaged about $3.2-$3.3 million). Newfield's joint venture with ExxonMobil in South Texas seems to be producing highly successful wells, which could be a significant source of reserve additions and production growth in the future (most of the wells have not yet been fully completed). In the Rockies, Newfield was successful with its partner Gasco on its first deep exploration test, and management expects to drill an additional 4-6 wells this year in the area. We believe that further success from these areas can increase the sustainability of Newfield's growth.
Buy on weakness
We believe Newfield shares could be weak because of the disappointing earnings results. However, because we believe that much of the disappointment is because of seemingly temporary Gulf of Mexico downtime, as opposed to lost reserves (on the contrary, proved reserves were 2.0 Tcfe, in line with our estimate versus other E&Ps that have thus far generally been below expectations) or sustainable relative cost increases. The company reduced its production guidance due to Gulf of Mexico shut-in production and delays in development activity in the Gulf. We believe that these Gulf-related delays are temporary (though of course an active 2006 hurricane season could prolong them) and that the reduction in guidance is not a result of overreaching by management previously or because of asset underperformance. Outside of the Gulf of Mexico impact, momentum regarding the company's resource and its growth remain positive, and we would buy Newfield shares on weakness.
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. |
