Energy Prospectus

Former Sweet 16 member Newfield Exploration (NFX) reported 2nd quarter results last week. I have updated my forecast model which should be available under our Watch List tab on Monday. Per my forecast model, 3rd quarter earnings should be within a few cents of the current First Call EPS estimate of $1.26/share (excluding non-cash mark-to-market adjustmen on hedges). Cash flow per share should be around $3.25/share.

My Fair Value estimate for NFX is $85/share.

Newfield's liquids production is set to increase sharply in Q3 and again in Q4. 65% of natual gas production is hedged at over $6/mcf for 2011. Newfield's production is set to rise sharply in 2012 so it is near the top of my Watch List for a promotion back to the Sweet 16. I would rate it a STRONG BUY up to $75/share. - Dan
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Newfield Exploration Earnings Cheat Sheet for the Second Quarter

Results: Net income for the oil and gas company rose to $219 million ($1.62 per share) vs. $96 million (72 cents per share) in the same quarter a year earlier. This is a more than twofold rise from the year earlier quarter. [Keep in mind that EPS for Q2 2011 includes 60 cents of non-cash adjustment on their hedges.]

Revenue: Rose 38.6% to $621 million from the year earlier quarter.

Actual vs. Wall St. Expectations: NFX reported adjusted net income of $1.02 per share. By that measure, the company fell short of mean estimate of $1.35 per share. It fell short of the average revenue estimate of $658.4 million.

Key Stats:

The company has enjoyed double-digit year-over-year percentage revenue growth for the past five quarters. Over that span, the company has averaged growth of 32.2%, with the biggest boost coming in the second quarter of the last fiscal year when revenue rose 56.1% from the year earlier quarter.

The company has now fallen short of estimates in the last two quarters. In the first quarter, it missed expectations by 5 cents with net income of $1.02 versus a mean estimate of net income of $1.07 per share.

First Call currently has an $87.31 12-month price target on NFX. I certainly think that is reasonable. The forecast for 2012 looks very strong.

Dan,

NFX is being clobbered this morning because of the big miss in earnings and projections......what should we do .....hold on or get out.........a big loss currently.

Thanks,

BIll

Since I dropped it from the Sweet 16 I do not watch NFX as closely as I used to. I will update my forecast model this afternoon.

My initial response is that this market overreacts to everything, so I would not sell into this weakness.

For the third quarter of 2011, Newfield recorded net income of $269 million, or $1.99 per diluted share (all per share amounts are on a diluted basis). Net income for the third quarter includes a net unrealized gain on commodity derivatives of $201 million ($129 million after-tax), or $0.95 per share. Without the effect of this item, net income for the third quarter of 2011 would have been $140 million, or $1.04 per share.

It is the lower production guidance that is feeding the fear.

Newfield Exploration (NFX): An updated Net Income and Cash Flow Forecast has been posted under the Watch List tab. Our updated Fair Value estimate is shown at the bottom of the forecast model.

First Call's 12-month Target Price = $72.57
First Call's EPS Forecasts
2011 = $4.39
2012 = $5.30
First Call's Cash Flow per share Forecasts
2011 = $11.70
2012 = $13.63

My 2012 forecast is just slightly below what First Call now has for EPS and CFPS. My 2012 forecast uses realized prices of $4.50/mcf for natural gas and $85/bbl for oil ("realized prices" included hedges in place today). The forecast model, which EPG members can download, has macros built in. If you change the oil and gas prices at the bottom it changes the forecast above.

If you own NFX today you should listen to their conference call. The stock was hammered on Thursday because they missed Q3 EPS estimates (which do not include hedging gains) and they lowered their production forecast slightly. One reason they lowered the production forecast is that NFX has decided to push some Bakken completions from Q4 into early 2012. IMO the Market overreacted but you need to be the judge.

NFX shares are currently trading at less than 3X my CFPS forecast for 2012. Looks very cheap to me.

Citi on Newfield

Newfield Energy – Third quarter production was within but near the low-end of
guidance and below our forecast leading to the EPS miss (vs. consensus also)
while CFPS beat expectations on higher-than-anticipated deferred taxes.
Newfield lowered 2011 production guidance to 300-304 Bcfe from 312-316 Bcfe –
9 Bcfe due to intentional delayed completions and reduced drilling, 2 Bcfe for
asset sales and 1 Bcfe for Gulf of Mexico weather disruptions. We lowered our
2011 forecast to 301 Bcfe from 312 Bcfe. Also due to rising oil field services
costs, full-year LOE guidance was boosted by roughly 8%. Newfield plans to
perform the delayed completions in the first quarter of next year and will now not
accelerate activity in the Eagle Ford shale or Williston Basin but will look to
accelerate activity in the Uinta Basin. The company plans to limit expenditures in
the Southern Alberta Bakken next year also. But the start-up of Pyrenees and
East Piatu this quarter should add ~3% and ~5%, respectively, to total current
production while the planned ramp in the Uinta Basin should add ~4% year over
year in 2012. Thus, given our current CF projection we still model 10% production
growth in 2012 off this year’s lower base. Management plans to keep spending
within cash flow next year which we peg at ~$1.7bn (but ~$1.4bn in a downside
commodity price scenario). Newfield also disclosed that it plans to sell $400-
550mm of assets this year (said $200-300mm last quarter). Based on the revised
guidance and other fine tuning, we lowered 2011-13 EPS/CFPS estimates and
reduced our price target to $48 from $58/share while maintaining a Buy rating.