NFX: Credit Suisse analyst report

[dan_s]

Maintaining Flexibility Through the Cycle
■ Maintain Outperform: We maintain our Outperform rating and lower our TP
to $42/sh (from $43/sh) following NFX's 4Q15 earnings release and
subsequent equity issuance. We raise our 2016/2017 EPS estimates to
($0.24)/$0.99 from ($1.03)/$0.58 primarily reflecting lower DD&A expense,
and introduce our 2018 estimate of $2.07/sh.
■ Slowing Down but Keeping STACK Focus: NFX plans to execute a $725-
$775MM budget in 2016, below its previous $900MM maintenance capex
scenario and maintains focus on its core STACK operations. We project a
2% annual production decline, toward the high-end of the company's 2-5%
decline guidance, which implies ~8% U.S. onshore decline 4Q16/4Q15. NFX
raised its 30-day IP rate expectations to 1,122 boe/d (68% oil) and noted
continued outperformance from its 2015 STACK wells relative to its type
curve (See Figure 1). NFX now expects to exit 2016 with ~65% of its STACK
acreage HBP'ed, and exit 2017 with ~75% of the STACK HBP'ed, versus the
previous target of 100% HBP in 2017.
■ Shoring Up the Balance Sheet: The company raised ~$700MM of
proceeds via a 30MM share offering last week, giving the company additional
flexibility to manage through the cycle. Assuming the current strip, we
anticipate the company will exit 2016 with leverage at 2.6x TTM EBITDA, and
the company can resume growth (4Q17/4Q16) while maintaining leverage at
roughly 3x, without further capital infusion. The company continues to pursue
non-core asset sales to enhance liquidity.
■ Valuation: Our $42 TP implies 32% potential upside to the current price. On
multiples, NFX trades 15.7x 2016 and 12.1x 2017 (unhedged at the strip),
compared to the group at 17.1x and 13.1x, respectively.