stifel on nfx

[bigtex]

STACK Continues to Beat Expectations, Confirmed by State Production Data
Based on our analysis of public data from the Oklahoma Tax Commission and the Oklahoma Corporation Commission, we
believe our STACK type curve remains conservative. Both the oil and natural gas curves from recent vintages are trending
above our 950 MBoe type curve. While we are not yet adjusting our type curve, we believe continued outperformance
could cause us to increase our estimates. Incorporating lower well costs of $6.5 million per well (above management's
development estimate of <$6 million per well and a recent well that came in at $6.2 million) causes us to increase our NAV
5% to $48/share (Exhibit 1). As such, we are increasing our target 9% to $48/share.
Digging Through the Data Provides Confirmation of Oil and Natural Gas
Outperformance: Monthly state production data released by the OTC (used by
many subscription services) continues to be incomplete or missing altogether. The
poor reporting of production data motivated us to comb through the OCC data,
which enabled us to expand our monthly oil production data points:
16%/37%/64%/64% for 1H14/2H14/1H15/2H15. Incremental data includes
production from 1H16 and numerous months in 2015. We feel our new data set is
more comprehensive and provides a much clearer picture of NFX's STACK results.
Oil Performance: Based on 62 NFX wells completed from 2H14-2H15, oil
production is trending 8% above our 950 MBoe type curve (380 MBbl oil curve)
(Exhibits 2-4). The 2H15 vintage, which focused its drilling in the gassier 'Zone 1'
(Exhibits 5-6), is beating our oil type curve by 5%.
Natural Gas/NGL Performance: Based on the same 62 wells, natural gas/NGL
production is trending 17% above our 950 MBoe type curve (570 MBoe gas/NGL
curve) (Exhibits 7-9).
Well Costs Trending Lower: NFX recently announced a best-in-class STACK
well that had been drilled and completed for $6.2mm (Exhibit 10). As such, we are
lowering our CWC 7% to $6.5mm, causing us to raise our NAV 5% to $48/share.
Full-field development in 2H17 is likely to drive future costs below $6mm.
Incorporating a $5.5/$6.0mm CWC would cause us to increase our NAV by
8%/4%.
NAV Upside Potential Visible: Should we increase our STACK type curve 5% to
1 MMBoe, in line with NFX's newer vintages, our NAV would increase 6% to
$51/share. Combining a 1 MMBoe type curve and $6mm CWC would increase our
NAV by a total of 10% to $53/share. Continued strong well performance and
movement toward development mode could leave our estimates conservative.
Balance Sheet Strong: We project net YE16/YE17 debt/TTM EBITDA of 1.8x/1.6x
(Exhibit 11), and believe potential asset sales could further strengthen an already
strong balance sheet.
Changes Previous Current
Rating — Buy
Target Price $44.00 $48.00
FY16E EPS (Net) — $1.16
FY17E EPS (Net) — $2.17
FY16E Production — 158.0
FY17E Production — 166.0
Price (06/27/16): $40.41
52-Week Range: $44 – $21
Market Cap.(mm): 8,106.2

[dan_s]

This is significant because if the Stack wells continue to produce at rates above the type curves it will raise estimated proven reserves for all of the Stack companies we follow (CLR, DVN, GST, NFX and XEC). Combined with expected higher oil & gas prices at year-end, we should see BIG increases in their proven reserves. This will lower the DD&A rates going forward and increase EPS in future periods.

Marathon Oil (MRO) recent acquisition in the Stack Play also raises awareness of STACK on Wall Street.