Newfield Exploration Is Not a Bad Buy

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A week before Newfield Exploration (NYS: NFX) came out with its second-quarter results, I wrote about the promising long-term growth prospects of the company. However, the latest results weren't too exciting, with flat production and escalating costs dampening the mood. Should Fools be concerned?

Little to smile about
Total production stood at 71.6 billion cubic feet equivalent compared to 71.8 BCFE in the year-ago quarter. Newfield has consciously moved away from natural gas, whose production fell 5%. At the same time, oil and natural gas liquids production increased by 9%. In fact, on the domestic front, liquids production grew by a phenomenal 24%, keeping the generally bullish oil market in perspective.

From an earnings standpoint, net income stood at $219 million, thanks to unrealized gains on derivatives worth $81 million. In other words, without the effect of this item, adjusted net income stands at $138 million, or $1.02 per share. This is a fall from adjusted earnings of $142 million, or $1.06 per share in the second quarter last year. Obviously, this is slightly concerning.

A small concern
While revenue saw a 39% jump -- thanks to higher oil price realizations -- operating expenses saw a simultaneous 32% surge, which is definitely a matter of concern. Service costs have gone up because of aggressive expansions and capital costs involved in the company's Granite Wash, Eagle Ford, and Williston Basin projects. But developing these plays comes at a cost because of their rising popularity in the E&P space.

The company intends to slash costs by "intentionally limiting activities in hot plays that have experienced rapid inflation." This means development might be hindered, which could have an effect in the long term. Newfield may end up paying the price later. Fellow competitors with a head start in operations in these hot plays will definitely have a massive advantage in terms of production. Companies such as Brigham Exploration (NAS: BEXP) , Petrohawk (NYS: HK) , and EOG Resources (NYS: EOG) could definitely see gains.

Foolish bottom line
Still, all is not lost. An astute management can always turn things around. Newfield's assets are valuable. Increased demand for natural gas, however, should definitely position the company well in the future. Foolish investors need not read too much into the latest results. I'm confident of a fine showing from Newfield in the future.

To stay up to speed on Newfield Exploration, click here to add it to My Watchlist.

At the time this article was published Fool contributor Isac Simon does not own shares of any of the companies mentioned in this article. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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