Recently, Newfield Exploration Co. (NFX) – an independent energy firm – announced plans to cut back its third quarter natural gas production by about 2.5 billion cubic feet equivalent (Bcfe), on wells in the company’s Mid-Continent division. The curtailments (roughly 4% of the company’s production guidance of 62.9–70.0 Bcfe) are in response to current low natural gas prices. Newfield, however, maintained its 2009 production guidance of 250–260 Bcfe, a 6% to 10% increase over 2008 production of approximately 236 Bcfe

In recent months, natural gas prices have remained weak as a result of recession-related reduction in demand and abundant U.S. production. Prices rallied earlier last year, reaching over $13 per million Btu (MMBtu) in July 2008, before trending down. They have since dropped sharply to the current level of $3.02 per MMBtu (Henry Hub spot price). Since most of Newfield’s reserves (roughly 70%) are tied up in natural gas, the company’s results are particularly exposed to fluctuations in this market.

Despite these headwinds, the company managed to post better-than-expected second-quarter earnings (topping the Zacks Consensus Estimate by 20 cents), driven by a combination of effective cost reductions and improving efficiencies in drilling and completions. Newfield’s strong hedge position in 2009–2010 also gives it an advantage in this challenging environment.

However, the company is unlikely to outperform its peer group given its traditional high-cost asset base and relatively weak balance sheet. The company’s domestic asset base is centered on the Rockies and Gulf Coast regions and has limited exposure to the more desirable shale plays. The lack of meaningful exposure to the emerging shale plays is a competitive disadvantage, in our view. Therefore, our Neutral recommendation remains unchanged.

Zacks Investment Research
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