In Hunt for Liquids, E&P Results Misfire
NEW YORK ( TheStreet) -- Every exploration and production company talks a big game about shifting from natural gas to liquids growth, but it's easier said than done. The latest results from the E&P universe show that company by company targets will be missed and costs will come in above expectations as these E&Ps rely more and more on increased oil production as the narrative with which they sell their stories to the market.
Take the latest results from Newfield Exploration (NFX) , down 10% on Wednesday after lowering its 2012 estimates significantly and raising costs. On a day when energy was leading the sector higher and during a period of time in which rising crude oil prices have buoyed all E&Ps, results from this company show that the details vary, and the devil inevitably surfaces.
In general, E&P investors are slaves to production growth and when production growth disappoints and costs come in higher than guidance, it's a close to scientific formula for a selloff.
Newfield Exploration missed the Wall Street consensus of $1.03 in the fourth quarter with earnings of 95 cents, but it is the increased costs as a reason for the miss and more so, as an evolving headwind, that will keep the shares under pressure.
"Newfield will likely disappoint investors, with cost escalation emerging as a key issue as the company transitions toward being a liquids-focused company. While it has an industry-leading position in the Uinta, the company will likely need to show strong drilling results across its Cana Woodford acreage in 2012 to convince investors it has a third viable liquids play," wrote Sterne Agee analyst Tim Rezvan in a note.
E&Ps are by and large expected to curtail natural gas production due to the uneconomic pricing. However, the hunt for liquids is supposed to lead to production increases even with the pullback in gas drilling. But that's not the case in the Newfield outlook. It guided overall production to be flat in 2012, with 20% liquids growth not enough to more than offset a decline in natural gas drilling. At the same time, Newfield expects spending of $1.5 billion to $1.7 billion in 2012.
A lackluster production story on higher costs makes investors walk, and they may not come back again until Newfield can show that its liquids spending is paying off, meaning during the second half of 2012 when it will have to show liquids growth, particularly in the Cana Woodford, where it is spending $500 million. The company guided to 20% growth in its leading Uinta position, meaning it's the other shale plays -- Cana Woodford and Williston -- where the pressure will be on to show bang for the company's buck.
Forest Oil (FST) showed a different version of this E&P story in its earnings and outlook.