Newfield Exploration (OP/A): Growth visibility intact; Street concerns regarding resource quality unwarranted - Goldman sachs - April 27, 2006
Newfield Exploration shares (OP/A) have bounced off of February lows created by Street concerns over the company's onshore resource base and Gulf of Mexico exposure, concerns which we believe the April 26 operational update show remain overdone. Woodford Shale results continue to be positive, conventional drilling in South and Central Texas has yielded high- rate wells and Gulf of Mexico shelf drilling was very successful. We expect oil production delays in Malaysia and the Rockies to abate and for oil production to increase 10,000 bpd by yearend. Newfield has significant growth visibility and diversification unrecognized by the Street, and we see 33% upside to a $60 traditional peak value.
PRODUCTION ON TRACK WITH VISIBLE GROWTH AHEAD
We continue to believe that Newfield's early transformation from a Gulf of Mexico pureplay to a diversified E&P has not been fully recognized by the Street. While other E&Ps such as Pioneer Natural Resources, The Houston Exploration, Pogo Producing and Forest Oil have divested offshore assets quite publicly over the last year, Newfield began making onshore acquisitions in 2001 (Newfield acquired Lariat Petroleum in 2001 from the same team that subsequently started Latigo Petroleum that Pogo announced on April 17, 2006 it plans to acquire), and Gulf of Mexico proved reserves represent about 20% of total proved reserves.
Even with increased onshore diversification, Newfield has been successful in offshore exploration. Recent successes at Wrigley and Anduin in the deepwater Gulf of Mexico and Grove in the North Sea (which is larger than initially expected) should contribute to production growth in 2007, and during 1Q 2006 the company drilled 8 of 9 Gulf of Mexico shelf wells successfully. We expect new oil production in China and Malaysia to increase total company oil production by 10,000 bpd before yearend. Onshore we see low-risk cookie-cutter development in the Mid-Continent and Rockies, and conventional drilling in South Texas and Central Texas was very successful during 1Q 2006. We are assuming production towards the low end of the company's 250-265 Bcfe guidance range this year, but see 24% production growth in 2007.
KEY COMPANY-SPECIFIC CATALYSTS
(1) Woodford Shale production results. Newfield's Woodford Shale (Oklahoma) production results continue to perform in line-to-better than expected, in spite of more neutral/negative comments from others testing the play such as Chesapeake Energy (IL/A). Newfield's first three horizontal wells averaged 2-4 MMcf/d over the first month, and the last two have shown similar initial results. Management is hosting an analyst meeting and field trip in Oklahoma May 10 and 11 which could be a catalyst for Newfield shares if it can further boost confidence not just in production results but in the potential to optimize drilling and completion costs, currently between $4-$5 million per well.
(2) Offshore production startups. Newfield's highly successful 2005 deepwater drilling program should bear fruit in 2007, with the startups of Wrigley in the Gulf of Mexico and Grove in the North Sea. We expect these two fields to add 85 MMcf/d to 2007 net production. Expectations for ultimate recovery from the Grove field have risen with a successful appraisal well drilled in 1Q 2006, and the West Grove exploration well is expected to spud in 2Q 2006. New offshore production in Malaysia in early 2007 is expected to add 7,000-9,000 bpd of oil to net production. The combination of startups of these Gulf of Mexico, North Sea and Malaysia fields along with the late 2006 startup of production in Bohai Bay, China are the key drivers of 24% expected total company production growth in 2007. In the Gulf of Mexico, Newfield plans to spud two deepwater exploration wells with operator Kerr-McGee in 2Q 2006.
(3) Gulf Coast conventional drilling, especially in South Texas. Newfield's Sarita field joint venture with Exxon Mobil has already yielded three successful producing wells at a cumulative gross rate of 30 MMcf/d (Newfield has a 50% interest), which could add 10 Bcf or so net to Newfield's 2006 proved reserves. Additionally, Newfield indicated that an additional two wells are being brought online this quarter that should add another 20 MMcf/d, and 2 further wells are being drilled. Newfield plans to keep 2-3 rigs in the field for the next 2-3 years, which should lead to 7-10 wells per year. We believe continued this level of medium-term onshore Gulf Coast production increases are not being factored into Newfield shares. Elsewhere in conventional drilling, the company drilled high rate wells in central Texas and in the Texas Panhandle that are areas to watch for future upside.
(4) Treasure Island ultra deep shelf well. The Exxon Mobil-led ultra deep shelf well at Treasure Island continues to be a catalyst if successful, though a wily one in terms of timing. Currently we expect results towards late summer/early fall, which we believe would be transformational for Newfield considering the ultimate potential from additional ultra deep prospects Newfield owns in the Treasure Island and Treasure Bay areas. While the drilling and completion costs of the well are much greater than expected, Newfield's exposure is expected to be $15-$20 million.
ADJUSTED EPS HIGHER THAN OUR ESTIMATE ON NATURAL GAS PRICES, PROCEEDS FROM BUSINESS INTERRUPTION INSURANCE
Newfield reported adjusted 1Q 2006 EPS of $1.13, higher than our estimate of $0.89 and First Call consensus estimate of $1.03. Newfield's total production was slightly lower than expected from worldwide oil production of 17.7 Mb/d versus our estimate of 22.0 Mb/d. This was offset by higher than expected U.S. natural gas prices of $7.79 per Mcf versus our $7.35 per Mcf and proceeds from business interruption insurance.
UPDATED ESTIMATES
We are updating our 2Q, 3Q, 4Q, and full-year 2006-2007 EPS estimates on slightly higher costs, lower production in 2006, and minor other company adjustments. Our new estimates are $0.98 ($1.08 previously), $1.13 ($1.32 previously), $1.47 ($1.53 previously), $4.72 ($4.82 previously) and $6.93 ($7.33 previously) respectively. We are also updating our 2008-2010 (normalized) EPS estimate to $2.75 ($2.81 previously), $2.92 ($2.98 previously), and $3.11 ($3.16 previously) respectively.
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 |
