Newfield Exploration Co. (NFX) reported adjusted fourth-quarter 2010 earnings of $1.16 per share, way below the Zacks Consensus Estimate of $1.25 and the year-earlier profit of $1.40. The quarter’s decline was due to higher operating expenses (up nearly 32% on an annualized basis) and lower price realizations.

Revenues in the quarter were $528 million, up nearly 28% year over year. However, the quarterly figure fell short of the Zacks Consensus Estimate of $609 million.

Operational Performance

Total quarterly production of 77.3 billion cubic feet equivalent (Bcfe) climbed nearly 20% year over year with 67% natural gas. Natural gas volumes in the company’s operations were up more than 12% from the year-earlier level at 51.5 Bcf. Oil and condensate volume expanded 38.7% year over year to 4.3 million barrels (MMBbls) during the quarter.

Newfield’s oil and natural gas price realizations (including the effect of hedges) averaged $8.37 per thousand cubic feet equivalent (Mcfe), down 9.7% from the year-earlier level. Natural gas prices decreased 20% to $5.37 per Mcf. Liquid prices also fell 7.8% to $84.16 per barrel.

Newfield’s recurring lease operating expenses (LOE) during the quarter were 80 cents per Mcfe, down 12% from the year-ago level. However, production and other taxes increased significantly to 65 cents per Mcfe from the year-earlier level of 39 cents per Mcfe. General and administrative expenses decreased 15% year over year to 51 cents per Mcfe.

At the end of the quarter, Newfield had a cash balance of $39 million. Debt balance stood at $2.3 billion, representing a debt-to-capitalization ratio of 40.8% (versus 40.0% at the end of the previous quarter).

Guidance

For the first quarter of 2011, Newfield projected output in the 68–75 Bcfe range, which is lower than 77.3 Bcfe in the reported quarter. Lease operating expenses are expected to range between 80 and 89 cents per Mcfe.  

For 2011, management increased its production volume guidance by 8–12% to 312–323 Bcfe and expects LOE per Mcfe to range between 76 cents and 85 cents. Newfield’s domestic oil production is expected to increase about 50% and natural gas production to remain flat in the year, even with a considerable cutback in natural gas investments.

The company projected $17 billion in the capital expenditure (capex) for 2011, which it will draw prudently from its cash flow. Two-thirds of the 2011 capex is assigned to oil projects and the remainder to liquids rich gas play.

Outlook

The fourth quarter remained fairly uneventful, made apparent by its stock performance. Newfield’s stock price dropped approximately 3% since the beginning of the month and closed at $71.57 yesterday. However, the company’s increasing focus on liquids is commendable in a favorable price environment.

Newfield’s high quality gas plays, unconventional acreage in the Marcellus play, growing oil volumes in Monument Butte and additional potential in the Bakken play are also appreciated. Results from the company’s Maverick Basin Eagle Ford drilling program keep us optimistic on Newfield. It appears that Newfield’s exposure to the emerging resource plays and shifting money away from natural gas into liquids will help it in the E&P (exploration and production) space.

However, we remain on sidelines owing to the cost escalation as well as lower production expectation in the near term. The company also faces competition from its peer such as Cabot Oil & Gas Corporation (COG) and Forest Oil Corp. (FST).

We maintain our long-term Neutral recommendation on the company, which is supported by a Zacks #3 Rank (short-term Hold rating).

 
CABOT OIL & GAS (COG): Free Stock Analysis Report
 
FOREST OIL CORP (FST): Free Stock Analysis Report
 
NEWFIELD EXPL (NFX): Free Stock Analysis Report
 
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