Newfield Exploration (NFX +0.00%) continues its exceptional run and is looking much better than it was a year ago. YTD the stock is up more than 30%. The company is in the last stage of executing its strategic decision to sell all of its overseas assets in order to concentrate on its U.S. operations. The sale of the company's Chinese assets, the last leg of transformation, is expected at the end of 2014. Another U.S. energy company Hess Corp (HES +0.00%) is also selling its Asian assets to concentrate on its U.S. operations.
After the sale of the Newfield's China asset it will become a 100% domestic operator, focusing all of its efforts and capital on its U.S. operations. The company is already reporting its international operations as discontinued. CNQ expects its U.S. assets to yield 28% compound annual production growth through 2016. Newfield's impressive production growth outlook is expected to come largely from its liquids-rich resource plays, with Cana and Uinta being the largest drivers. While it is still in the early stages and much work remains to be done, the SCOOP and STACK opportunities seem to be bearing fruit. These assets have the potential to play the role of game-changer for the company.
Strong production growth profile
Newfield has a successful track record of executing its production targets, with the company meeting and even exceeding its 2013 targets. Going forward, the company is well positioned to deliver on its 3-year plan of 85% increase in liquids production between 2013 and 2016. The majority of the growth is expected to come from the Anadarko Basin, which will be the company's main growth engine over the next several years. NFX continues to grow inventory in the area. The company is now focused on development drilling in areas which have been de-risked, with 48 operated wells in the SCOOP and 18 in the STACK.
It is expected that the net un-risked recoverable resources from the play could be 800-1,400 mmboe. The ongoing level of the activity, which is attracting nearly half of the total capital this year, implies running room of 30-60 year (Barclays estimates). In view of the increased production volumes in the future, the company is also actively working on expanding its compression capacity through its midstream provider.
Existing projects providing near-term growth
In addition to the new projects, the company's existing Williston Basin and Eagle Ford operations also seem to be well oiled machines, hence providing the company with near-term growth opportunities. Newfield has delivered solid results from these operations in the past and 2014 is expected to be another strong year. The company has budgeted 51 gross operated wells and also plans to again focus on the Middle Bakken, which should make the results relatively predictable.
Moreover, the Uinta Basin also provides a long-term scalable opportunity for Newfield. Uinta is expected to be a relatively modest contributor to growth in 2014 and 2015, as the company awaits refining expansions in Salt Lake City and continues to test and optimize its SXL well concept in the Uteland Butte and Wasatch plays. The program is still in its early stages, which could result in some variability in results. However, it should not significantly impact overall results. The additional refining capacity is expected to come online by the end of 2015 and ramp-up through 2016.
Financials and valuations
Newfield is expected to report negative free cash flow for the next couple of years; however, this can be explained by the company's ambitious growth plan currently in place. Despite the expected decline in EBITDA and gross margin in 2014, the company's net margin is increasing. The company's net margin registered an impressive growth last year, from a negative 43.8% in 2012 to a positive 6.9% in 2013. Moreover, the net margin is expected to increase further to 10.6% in 2014.
Despite strong near-term and long-term prospects, the company is trading at a discount compared to its peers. The company has a price/earnings ratio of 39.2 compared to 51.0 of Cabot Oil & Gas (COG +0.00%). It has a forward price/earnings of 12.1 compared to 17.9 of Cabot. Newfield has a price/sales ratio of 2.4 compared to an industry average of 2.5. It has a price/book ratio of 1.4 compared to the industry average of 1.9. Finally, it has a price/cash flow ratio of 3.0, again lower than the industry average of 5.3.
Bottom line
Newfield had a strong 2013 and 2014 is also looking promising. Newfield's long transformation to a U.S. onshore liquids focused company is almost complete. The company is well positioned to deliver on its ambitious three-year plan of 85% increase in liquids production. Almost 2/3 of the production growth is expected to come from the Anadarko Basin, and more importantly from the areas that have been de-risked. The continued improvements in well results along with drilling and completion efficiencies could also provide significant upside. Finally, keeping in mind the long-term prospects of the company, it continues to trade at a discount.
