Fitch Ratings Services recently affirmed the Issuer Default
Rating ("IDR") of
Newfield Exploration Company
) at 'BB+' along with senior subordinated notes at 'BB,'
signifying a low-to-moderate risk level. The outlook on the
company that is undergoing transition was kept stable by the
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Fitch's move on Newfield comes in the wake of the independent
energy company's steady move towards liquids and steps taken to
divest international assets for a deeper domestic focus. In the
near term, however, this would entail lower contribution from
both natural gas and international assets. The company is moving
ahead with its plans to divest its remaining offshore assets in
Malaysia and China, which accounted for 6% of proved reserves at
Additionally, Newfield's leveraged balance sheet and negative
free cash flow influenced the cautious rating on the company.
Newfield Exploration's diversified portfolio of assets provides
both flexibility and significant growth potential. We expect the
company's reserve potential in the Uinta, the Cana Woodford, the
Williston and the Eagle Ford plays to be liquid-rich catalysts
for the stock over the longer run.
Newfield remains committed to building its revenue base on oil
and NGL assets and generate at least 60% year-over-year growth
from their production during the first half of the ongoing fiscal
year. This, we feel is attainable, as the company's liquids
production increased 30% in the first quarter on an annualized
basis after adjusting the impact of asset sales.
However, we share Fitch's skepticism related to Newfield's
relatively debt-heavy balance sheet. At the end of the recently
reported first quarter, Newfield had a cash balance of $44
million and long-term debt of $3.05 billion, representing a
debt-to-capitalization ratio of 52.3%.
The picture nevertheless becomes sunnier for Newfield with full
availability of its $1.25 billion senior unsecured credit
facility. The leveraged balance sheet also has $1.75 billion in
senior unsecured notes and $1.3 billion in senior subordinated
notes outstanding, with no near-term maturity.
In 2012, the independent energy company reported a negative free
cash flow of $663 million. The rating agency expects the trend to
continue with the company having approximately $800 million of
negative free cash flow in 2013. Like in the past, the rating
agency feels that the imbalance with once again be plugged by a
combination of credit facility borrowings and offshore asset
We, however, feel using leverage is a smart move on the part of
the company which was recently hurt by lower gas volumes. In the
first quarter, Newfield's bottom line cascaded by half from the
prior-year quarter owing to its tilt towards liquids. The company
also missed the recent boom time in gas realizations and saw gas
volumes falling 23.3% year over year.
In order to avoid diluting the quantum of its outstanding shares,
the company is prudently focusing on stemming a fall in its
shareholder value over the longer run. This is amply reflected in
the Zacks Consensus Estimate for earnings per share which is
slated to fall to $1.47 in 2013 from $2.41 reported in 2012 given
the ongoing transition phase and gas boom time. However, the
estimates are expected to recover to $2.27 and $3.05 in 2014 and
2015, respectively, supported by liquids production growth in key
Though we remain positive on Newfield Exploration's emerging
resource plays' development program, we believe that its
sensitivity to gas price volatility, as well as drilling results,
costs, geo-political risks and project timing delays will weigh
on the stock. Increasing cost pressure in the highly competitive
shale plays is also a cause for concern.
Newfield Exploration shares currently retain a Zacks Rank #3,
which translates into a short-term Hold rating. But there are
other stocks among the domestic exploration and production
players that appear more attractive in the near term. These
Abraxas Petroleum Corp.
EPL Oil & Gas, Inc.
Sandridge Mississippian Trust II
). All the three stocks currently hold a Zacks Rank #1 (Strong