Newfield Exploration (NFX): Strong 1Q 2008 shows focus on beating production guidance - Goldman Sachs - April 24, 2008
What's changed
Newfield reported 1Q 2008 adjusted EPS of $0.87 vs. consensus of $0.73 and our $0.77. Total production was 605 MMcfe/d, above our estimate and the top of management’s guidance range. Operating cash flow was $316 million versus our $295 million. After accounting for the announced South Texas acquisition, management raised capital spending by about $175 million, reflecting two additional onshore rigs, participation at the recent Gulf of Mexico lease sale and development capital for new deepwater discoveries (startup in late 2009). Our estimates/PT are under review.
Implications
Newfield's very strong 1Q 2008 results shows increasingly conservative production guidance and Newfield's more concerted effort to set a low bar, dating back to a year ago. Strong performance from the Woodford Shale, new deepwater discoveries, and greater oil growth visibility at Monument Butte each boost confidence in short- and longer-term growth trends. Technically, management reduced pro forma production guidance for 2Q-4Q 2008, although we are not convinced this was an intentional message. We believe concern over guidance would represent a buying opportunity, though it will likely now be of greater necessity for Newfield's production to be at or above the top end of the range. On the cost side, evidence of further unit cost decreases for Woodford Shale drilling is positive.
Valuation
Newfield trades at 6.5x 2008 EV/debt-adjusted cash flow versus 6.3x for peers. We are increasingly more positive on the stock due to greater confidence that the company will surprise to the upside in future quarters, though we continue to rate the stock Neutral relative to our Attractive coverage view. Our 12-month DCF- based target price is $7320.
Key risks
Commodity price volatility, drilling results, cost pressures and gov’t pronouncements. |
