Newfield Exploration (NFX): Lowering rating to Neutral; better catalysts among other value E&Ps - Goldman Sachs - 09/12/07
What happened
We are lowering our rating on Newfield shares to Neutral from Buy as we increasingly see better opportunities among other E&P value stocks, most notably Apache. We had rated Newfield Buy since July 24 2003. Since then, Newfield shares are up 160% while the S&P 500 is up 48%. Newfield shares underperformed other energy stocks during much of 2006 and 2007. Recently, investor sentiment in our view has improved as the company has sold its Gulf of Mexico shelf properties, issued more realistic production guidance and has delivered better than expected results.
Current view
We continue to see room for Street sentiment to improve on Newfield as the company ramps up production in Malaysia and shows that its production guidance is indeed conservative. Additionally, we believe that there is still Street skepticism on the Woodford Shale which could lead to upside if drilling results are successful enough to lead to better-than-expected total company production. However, we increasingly see better opportunities among other E&P value stocks, most notably Apache which we are upgrading to Buy from Neutral (see separate note). We know longer view Newfield as having uniquely attractive valuation. Newfield trades at 5.2x 2008 EV/debt-adjusted cash flow versus 5.2x for Noble Energy, 4.7x for Forest Oil, 5.7x for Encore Acquisition, 5.4x for Anadarko Petroleum, 4.9x for EOG Resources and 4.8x for Apache, Devon Energy and Chesapeake Energy. There is no change to our $56 12-month discounted cash flow based target price or the key risks of commodity price volatility, drilling results, cost pressures and government pronouncements. |
