The US oil and gas industry has been in transition over the last decade or so. It is not that long ago that offshore oil and international exploration were the way forward. Conventional wisdom had it that in order to survive a company had to go deeper and further. As the technology for releasing oil and gas from rock improved, however, vast reserves of oil were opened up and the future shifted back to US soil.
In any industry, that complete change of direction would cause major disruption. Oil and gas exploration is no exception, but the flexibility that the business demands has served the industry well. Many firms have switched focus, but maybe none so completely as Newfield Exploration (NFX).
Not too long ago, Newfield was all about offshore drilling in the Gulf of Mexico and international operations, particularly in China and Malaysia. In September of 2012 they sold their remaining Gulf interests to W&T Offshore (WTI) and then last year began to divest themselves of their international operations. The company now focuses on Texas, Oklahoma, Utah and North Dakota.
A look at a 5 year chart for NFX reveals that that transition has not been painless.
Figure 1: 5 Year Chart NFX
As they shed previous operations they reduced production and the stock’s performance has reflected that. NFX has lost more than half of its value since the middle of 2011. This would be bad anywhere, but in an industry that is generally considered to be booming it is particularly noticeable.
There is no doubt that it has been a tough few years for Newfield, but after their Q1 2014 earnings release on Tuesday a case can be made that the worst of the disruption is over and the stock represents rare value as a play on the shale explosion in the US. That value is hard to see if you look at a shorter term (6 month) chart.
Figure 2: 6 Month Chart NFX
As an aside, do you notice how this demonstrates that you should be wary of analysts bearing charts? They, like most historical evidence, can be framed in certain ways and used to make almost any point you desire. If I were to show you Figure 1 I could use it to support the contention that NFX is in decline. Figure 2 would indicate that they are booming; so which is it?
The answer, of course, is “both.” They are a significantly smaller player than they were, but that reduced production capacity has been fully priced into the stock. When they announce on Tuesday that they had earned $0.44 per share, beating the $0.40 consensus forecast the stock jumped around 5%, but, maybe because of a “once bitten twice shy” mentality, still looks cheap in many ways.
It is cheap from a P/E ratio perspective, with a forward multiple of 13.11, nearly half the average for oil and gas P & E firms. It may also be cheap from an NAV perspective. At least one Wall Street firm (Stifel) values the company’s holdings in the Anadarko basin alone at around $35 per share. On Tuesday, Newfield revealed that production in that play was up around 20% and further de-risking of those assets could give the share price a significant boost in the coming months.
In that way, too, Newfield Exploration is indicative of the oil and gas exploration industry as a whole. After a tumultuous decade that has seen a complete re-focus, they seem to be back on track. Investors are aware of this, but the stock price has not yet caught up with the potential.
It is this dynamic that keeps me enthusiastic about the energy markets…there is always opportunities to be found, and even after reacting positively to good earnings numbers, NFX looks like an opportunity.