3 Reasons Newfield Exploration's Stock Could Fall

Newfield Exploration has made big and largely successful changes over the last few years, but that doesn't mean it's immune to the oil and gas industry's normal ebb and flow.

Aug 30, 2014 at 11:51AM

Newfield Exploration (NYSE:NFX) has made some major changes over the last few years. The results of this effort have been impressive. However, it is still an exploration and production company, and that means there are ongoing risks that Newfield simply can't avoid.

Over the last five years, Newfield has sold roughly $2 billion worth of foreign and non-core assets to facilitate and fund its business shift. Essentially, it has winnowed down its portfolio to four key plays. That has allowed it to focus on improving performance, including increasing oil and natural gas liquids production to around 50% of the business mix. And overall production is expected to continue along at an impressive 28% growth rate through 2016.

That's great, no question about it, and it helps explain why the shares have moved up notably this year. However, the current success doesn't change the basic business model inherent to E&P companies. 

NFX Chart

NFX data by YCharts.

Commodity price volatility

Like most drillers, Newfield hedges its oil and gas sales. At the end of the second quarter, it had oil hedges out to mid-2017 and gas hedges through 2015. That limits the impact of what have been historically volatile commodity prices. However, hedging has its downside.

Although it limits the damage a price drop will inflict, it also limits the upside potential from price increases. If oil or gas prices take off, Newfield's results would be left behind to some degree, which could lead to a stagnant share price, or worse.

However, the longer-term risk is what happens after prices change and hedges fall off. For example, if oil prices suffered a prolonged and material drop, Newfield would face a hedging cliff. As soon as its higher priced hedges rolled off, earnings would quickly fall. Don't overlook this key factor.

Drilling is uncertain

Another big thing to watch is the company's success at the drill bit. Although it has been doing a good job of increasing production and reducing costs, investors are increasingly aware of this. That means Newfield needs to keep putting up good numbers.

But drilling is inherently uncertain. For example, Royal Dutch Shell's (NYSE:RDS-B) projects and technology director, Matthias Bichsel, has noted that, "Not all fields are created equal." He was specifically speaking about shale gas plays, but the same thing is true of all energy drilling efforts. Some work, some don't.

Right now, Newfield's drilling programs are running at or above expected decline rates. If new drilling doesn't hold to these results, investors could sour on the shares. Which would make sense, because Newfield's prospects would be much less certain.

Source: LittleGun, via Wikimedia Commons.

Is fracking good or bad for Newfield?

One of the big reasons behind the U.S. energy renaissance has been hydraulic fracturing, a process Newfield uses. Hydraulic fracturing involves pumping water, chemicals, and sand underground to free up the oil and gas trapped below. The U.S. energy industry loves the technique.

However, environmentalists pretty much hate the idea of shoving chemicals into the Earth. It has been blamed for such woes as wasting water, polluting underground water reserves, releasing dangerous pollutants into the air, and earthquakes. In fact, the practice has been banned in many parts of the world, including some domestic locations. So there is some regulatory uncertainty there. 

At the end of the day, there's far more good news at Newfield than bad news. However, you can't simply ignore the ups and downs of an often-volatile industry because things are going well right now. Nor can you stop watching the developments in a key technology the company uses. Newfield is doing well right now and should continue to do so, but keep an eye on these issues since they could derail that progress.

Do you know this energy tax "loophole"?

You already know record oil and natural gas production is changing the lives of millions of Americans. But what you probably haven't heard is that the IRS is encouraging investors to support our growing energy renaissance, offering you a tax loophole to invest in some of America's greatest energy companies. Take advantage of this profitable opportunity by grabbing your brand-new special report, "The IRS Is Daring You to Make This Investment Now!," and you'll learn about the simple strategy to take advantage of a little-known IRS rule. Don't miss out on advice that could help you cut taxes for decades to come. Click here to learn more.

Reuben Brewer has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information