Domestic natural-gas resources are estimated to meet America's energy demand for the next hundred years, but drilling companies have a long way to go if these estimates are to be at all close to being realized. Let’s see whether Houston-based Newfield Exploration (NYSE: NFX) is well-positioned to exploit the situation, and therefore is worthy of the long term investor.

Fundamentals
Total production in 2010 stood at 283 billion cubic feet equivalent, or Bcfe -- a 12% increase from 2009. The last two years have actually seen healthy growth in terms of production.

Proved reserves stood at 3.7 trillion cubic feet equivalent, or Tcfe. In total, unconventional resource plays represent 82% of the company’s proved reserves, with the single largest investment being the Woodford shale play.

The Williston Basin in the oil-rich Bakken and Three Forks formation has also proved to be successful where production stood at 7,000 barrels of oil equivalent per day, or Boepd, at the end of 2010.

Newfield’s recent entry into the Marcellus shale play, through a joint exploration agreement with Hess Corp, (NYSE: HES) solidifies its presence in just about all the prolific shale plays.

A good strategy?
While natural gas makes up 67% of proved reserves, the company has started moving away from natural-gas drilling to oil-directed drilling, which is an interesting strategy right now. Newfield’s apparent approach is to consolidate and develop further its oil-rich properties.

Capital expenditure for 2011 has been pegged at $1.7 billion, with two-thirds of the capital investments allocated to oil projects. However, considering negative free cash flow of $627 million and a cash balance of only $56 million, financing these investments does not look like it will be terribly easy. A debt-to-equity at 73% does not look too pleasing, either.

Newfield’s assets look well-balanced. The company is consolidating its position in the oil sector, which will most likely continue to flourish. At the same time, its natural gas reserves could prove handy in the long run. This is all good.

How is the stock valued?
This is how Newfield stacks up compared to its peers:

Company P/E (TTM) EBITDA Margin (TTM) TEV/EBITDA (TTM) P/B
Newfield 19.4 60.6% 7.7 3.0

Petrohawk Energy

(NYSE: HK)

31.5 43.3% 10.1 2.1

Cabot Oil and Gas

(NYSE: COG)

54.1 60.9% 12.2 2.9

Range Resources

(NYSE: RRC)

NM 51.7% 18.9 4.1

SandRidge Energy

(NYSE: SD)

24.6 8.0% 22.9 3.3

Source: Capital IQ, a Standard & Poor's company. TTM = Trailing 12 months

Relatively speaking, Newfield definitely looks cheaper than its peers in terms of earnings. Its solid EBITDA margin (again, one of the best) shows that it has been able to convert revenues into solid operational earnings. The price-to-book value is again lower than the average value of 3.1.

Standardized future cash flows at the end of 2010, discounted 10% per annum, stand at $4.7 billion -- a healthy 66% hike from the previous year’s value. A major chunk of the growth -- around $1.4 billion -- has been due to additions to proved reserves.

Foolish bottom line
Newfield looks pretty good. Short term growth may look shaky given the negative free cash flow. However, as production increases (which the company expects to go up by 8%-12% this year) and current investments start bearing fruit, things could look promising. Having substantial natural gas reserves positions the company well for the future. The stock looks pretty safe for long term investing.