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April 18, 2016

NEWFIELD EXPLORATION COMPANY NFX/NYSE

Initiating Coverage: Little Chips Light Great Fires Investment Rating: Market Perform

PRICE: $ 36.54 S&P 500: 2094.34 DJIA: 18004.16 RUSSELL 2000: 1139.28 • Strong capital structure will protect balance sheet, and provide liquidity. • Enhanced hedging position will mitigate volatility of commodity price. • Concentrated investments will increase production and proved reserves. • Controlling costs to support its operations. • Our 12-month target price is $ 36.06.

Valuation 2015A 2016E 2017E

EPS -21.4 0.38 2.06 P/E NM NM NM CFPS 7.57 3.74 3.77 P/CFPS 4.8x 9.7x 9.7x

Company Information:

Location: Woodlands, Texas Industry: E&P Industry Description: Newfield is an independent energy company that committed to the research, manufacture, and development of natural gas, natural gas liquids, and crude oil. Key Products & Services: crude oil, natural gas, and natural gas liquids (NGLs) Web Site: http://newfield.com Freeman Analysts Tianhang Qi Yansong Tong Yifei Sun Leopoldo Jesus Javier Ferrer Arellano

Market Capitalization Stock Data Equity Market Cap (MM): 7098.20 52-Week Range: $20.84-$41.34 Enterprise Value (MM): 9444.40 12-Month Stock Performance: -2.51% Shares Outstanding (MM): 163.50 Dividend Yield: N/A Estimated Float (MM): 196.90 Book Value Per Share: 9.21 6-Mo. Avg. Daily Volume: 6,488,531 Beta: 1.61

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Please Note: Freeman Reports are produced solely as part of an educational program of Tulane University’s A.B. Freeman School of Business. The reports are not investment advice and you should not and may not rely on them for making any investment decisions. You should consult an investment professional and/or conduct your own primary research regarding any potential investment.

NEWFIELD EXPLORATION COMPANY April 18, 2016

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STOCK PRICE PERFORMANCE

Figure 1: 5-year Stock Price

Performance

Source:Yahoo! Finance

INVESTMENT SUMMARY

We gave Newfield a Market Perform rating and predicted the company’s stock price will increase 10 percent from $32.63 per share to $36.06 per share by the end of the year 2016. In order to calculate and weight the 12-month target price, we used three valuation methods, including Present Value-10 method, EV/EBITDA method and EV/Proved Reserve method. As an independent E&P company, the key drivers of the valuation of Newfield include production parameters, potential increases in future well production, exposure to commodity prices, and exposure to interest rate risk.

The main challenge that the company faces is the prices of its major products: crude oil, nature gas and NGL have all dropped significantly in recent years. Especially the currently low oil prices could result in the company’s failure to establish production on undeveloped acreage and the potential loss on Newfield’s proved reserves. Regardless of economic concerns, we believe Newfield is capable of enhancing future margins. Because the costs to find, develop and produce oil, natural gas and NGLs reduced in the previous year, the future long-term stockholder value has a great chance to increase.

INVESTMENT THESIS

To increase the value of shareholders, Newfield will continue to enhance its hedging position to protect the company from current low commodity prices. Newfield will focus on increasing its proved reserves, maintaining a strong and flexible capital structure, and controlling its production

Enhanced hedging position

will mitigate volatility of

commodity price.

The oil price has been fluctuating since 2014, ranging from $107 per barrel at June, 2014 to $26 per barrel at February, 2016. The low oil and natural gas prices make the discretional cash flow shrink and cause ceiling test and other impairments to Newfield’s proved reserves. Although the commodity price may not rebound enough for the company to realize a


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high discretional cash flow in 2016, Newfield has successfully hedged more than 40 percent of its production, and the revenue from its hedging position will reach $270 million. For 2016, the fixed-price swap with sold puts hedging of 10.06 MMBBLs will lock into a price range from $74.14 to $89.98 per barrel, the collars with sold puts hedging of 6.22 MMBBLs will set floors at $90.00 per barrel and ceilings at $96.15 per barrel, and the purchased calls hedging of 6.24 MMBBLs will lock into a strike price of $72.18 at which Newfield can sell its oil.

Concentrated investments will

increase production and proved

reserves.

In 2016, Newfield will invest 80 percent of its planned capital into the Anadarko Basin, which provided the highest return in the company’s portfolio in 2015. The Anadarko Basin is the company’s largest producing region, which is more than 315,000 net acres. The basin’s production in the fourth quarter of 2015 was approximately 75 MBOEPD. Newfield has more than two billion BOE net non-risked resource and more than 6,000 potential drilling locations in this operating location, and achieved a 50 percent year to year growth in proved reserves from 2012 to 2015. Figure 2 shows the proved reserve of Anadarko Basin from 2012 to 2015. With the rebound of commodity prices and the concentrated investment, the Anadarko Basin’s proved reserve and production will continue to increase in the future.

Figure 2: Proved Reserves of Anadarko Basin

Source: Newfield Exploration Company 2015 annual report

The strong capital structure

will protect balance sheet and liquidity.

Newfield will divest its non-strategic assets and issue stock to repay all its borrowings under its credit facility and money market lines of credit. Companies that have less fixed cost have better chances to survive under current market conditions and have great opportunities to recover when market environment becomes favorable. Thus, decreasing financial leverage and maintaining liquidity will remain central to Newfield’s business strategy. The company issued 25.3 million shares of common stock and received $815 million in the first quarter of 2015 for its credit

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FREEMAN Reports line repayment, and issue $700 million senior debt due 2026 to redeem the 700 million principle of its senior subordinated notes due 2020, which grants the company additional rooms to arrange its credit capacity. On February 25, 2016, Newfield issued 30 million shares and proceed approximate $700 million. The company will use those proceeds to fund its capital expenditure and working capital and to repay its credit line outstanding borrowings. Regarding to divesting its non-strategic assets, Newfield slowed its producing activities in Gulf Coast in 2015 and will continue to sell its non-strategic assets in Gulf Coast in 2016.

Controlling costs will support operations.

Newfield Reduced domestic lease operating expenses per barrel of equivalent by more than 25 percent and gross general and administrative expenses per barrel of equivalent by 20% in 2015. Controlling production related cost and service cost is crucial for Newfield because it will generate long-term value for shareholders. For 2016, Newfield will accelerate drilling times and create innovative optimizations of its completions to continuously improve operations and returns.

VALUATION Our forecasted 12-month target price for Newfield is $36.06. This target price shows a 10 percent increase from $32.63, giving the company a Market Perform rating. We calculated this number using the following valuation methods: PV-10, EV/EBITDA, and EV/Proved Reserve.

Figure 3: Valuation

PV-10 Valuation

The PV-10 valuation method shows a result of $33.69 per share. The amount of assets on the balance sheet of Newfield is the capitalized costs and does not necessarily indicate the potential economic benefits Newfield can derive from operations. The proved reserves of the company, however, directly decides the future cash flows, stock price, and economic value of Newfield. Hence, the PV-10 method is an appropriate approach to valuate Newfield and other EP companies. Although PV-10 is a non-GAAP


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FREEMAN Reports number, it indicates the net present value that a company’s reserves can generate in the future. The valuation process involves getting PV-10 from Newfield’s annual report and adjusting it for unproved reserves and other balance sheet items. The current stock price is $32.66, and the $1.03 price differential can be a premium of the good condition of Newfield’s balance sheet, or a result of market inefficiency showing that the price of the stock is below the current price.

EV/EBITDA The enterprise value for the EBITDA ratio measures the price that a stockholder pays for the profit of Newfield’s cash flow. Under this method, input includes forecasted industry average, forecasted peer group value-weighted average, and forecasted consensus average of the EV/EBITDA at the end of 2016. Using the company’s forecasted EBITDA and multiplying it by the three types of average EV/EBITDA, the company’s enterprise value was found. After subtracting long-term debt, adding the value of cash, and finally dividing by the outstanding number of shares, the three types of forecast prices were acquired. After calculating the average number of the three different prices acquired, the 12-month target price came to $44.717.

EV/Proved Reserved

The enterprise value to proved reserved ratio equals Newfield’s EV divided by the proved reserved. It evaluates the price of Newfield’s stock relative to how much cash flow the company is generating. Under this method, input includes forecasted industry average, forecasted peer group value-weighted average, and forecasted consensus average of EV/Proved Reserved at the end of 2016. Using the company’s forecasted discretional cash flow and multiplying it by the three types of average EV/Proved Reserved, three types of the company’s enterprise value were found. After subtracting long-term debt, adding the value of cash, and finally dividing by the outstanding number of shares, we acquire the three types of forecast prices. Calculating the average number of the three different prices acquired, the 12-month target price came to $50.038

COMPANY DESCRIPTION & PROPERTY OVERVIEW

Newfield Exploration (NFX/NYSE) functions as an independent energy company. The company’s headquarters are in the Woodlands, Texas. Newfield is committed to the research, manufacture, and development of natural gas, natural gas liquids, and crude oil. The company experienced phenomenal growth, shifting from an offshore natural gas producer to an onshore domestic producer of liquids-rich resources. In 2015, the proved reserves of Newfield are approximately $509 million barrels of oil equivalent, 98 percent of which were located onshore in the U.S. The domestic production increased six percent to 50.6 MMBOE. In 2015, The company reported a net loss of $3.36 billion because the ceiling test and other impairments expenses increased $4.91 billion. Proceeds of $815 million from a public equity offering in 2015 helped repay facility and money market credit lines. To create a strong financial structure, the company’s budget dropped by 26 percent compared to 2014.


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History

Joe B. Foster founded the company in 1988 through the use of endowment funds from the University of Texas. Newfield operates in mid-continent, offshore Texas, and the Rocky Mountains. The company also focuses on offshore development of China. The company was private for five years and eleven months until Newfield completed its IPO in November of 1993 on the New York Stock Exchange (NYSE) under the ticker symbol “NFX.” In early 2001, Newfield finished its largest acquisition in the history, acquiring Lariat Petroleum and establishing a new focus area in the Anadarko Basin. From 2007 to 2009, the company acquired assets in the Rocky Mountains and the Marcellus Shale of Pennsylvania and entered its third decade of operation. From 2010 to 2015, Newfield continued to transform to an oil company with its investment entirely focus on oil.

Products and Pricing

Newfield provides customers three major products: crude oil, natural gas, and natural gas liquids (NGLs). The company mainly operates in the U.S. In 2015, the company’s production of oil hits 26.7 million barrels, or 48.9 percent of total production. Newfield’s production of natural gas was 19.4 million barrels of oil equivalent, or 35.5 percent of total production. Newfield’s production of NGLs was 8.5 million barrels of oil equivalent, or 15.6 percent of total production. The 2016 estimated production is between 53.3 MMBOE and 55.3 MMBOE. Figure 4 shows NFX’s 2015 production.

Figure 4: 2015 Production (MMBOE)


Because of the inadequate demand in emerging markets, such as China, the WTI crude oil price dropped from $90 per barrel in September 2014 to $42.95 per barrel in December 2015. Furthermore, as of February 19, 2016, the three-year forward curve average was $41 per barrel. The low oil price will have a constant negative effect on Newfield’s revenue and profits. To offset the low oil price, Newfield is improving the cost structure. In 2015, the company’s lease operating expense per BOE decreased 27 percent from 2014.

Oil,26.75,49%

NaturalGas,19.38,35%

NGLs,8.53,16%

Oil NaturalGas NGLs


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PROPERTY OVERVIEW

Newfield is engaged in exploration, production and development of crude oil and natural gas properties. The company is primary focused on operations in the North American region including the Anadarko and Arkoma basins of Oklahoma, the Williston Basin of North Dakota, the Uinta Basin of Utah and the Maverick and Gulf Coast basins of Texas. The company also has offshore oil developments in China. At the year 2015, the company’s oil, gas, and NGL revenues are $ 1557 million. And Newfield’s proved reserves were 509 MMBOE.

Figure 5: 2015 Proved Reserves- 509 MMBOE


Mid-Continent (Oil and NGLs)

The Mid-Continent region has operated in 2001. The area holds nearly 66 percent of the company’s 2015 proved reserves, which is 333 MMBOE. The area costs 81 percent of the company’s 2016 estimated capital budget. The 469,000 net acres of Newfield’s acreage include two key positions: The Anadarko Basin, and the Arkoma Basin Woodford.

Anadarko Basin The company has 323,000 net acres in the Anadarko Basin. The SCOOP and STACK are the fastest growing plays in the past three years. At the end of 2015, the company produced oil of 26,250 BOEPD and NGLs of 19,500 BOEPD from the Anadarko Basin, representing more than half of Newfield’s production.

Arkoma Basin Woodford The company has 146,000 net acres in Arkoma Basin Woodford. At the end of 2015, the company produced dry gas of 18,000 BOEPD. Because of low natural gas prices in the past several years, the company reduced the investment in this area. Production held a substantial amount of the company’s acreage in this region.


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Rocky Mountains (Oil)

The Rocky Mountain region’s main focus is long-lived oil. The area holds 26 percent of the company’s proved reserves, which is 133 MMBOE. The area costs 10 percent of the company’s 2016 estimated capital budget. The 301,000 net acres of Newfield operations are in the Uinta Basin of Utah and the Williston Basin of North Dakota.

Uinta Basin The company invests in the Uinta Basin consist of 215,000 net acres divided into two areas: The Greater Monument Butte Unit (GMBU) Waterflood, and the Central Basin. At year-end of 2015, the company produced oil of 16,500 BOEPD, 3,070 BOEPD of gas, and NGLs of 500 BOEPD. Because of poor results in the Central Basin in 2015 and lower crude oil prices, Newfield suspended its drilling operations in the Uinta Basin in early 2015. To date, the company not actively drilling development wells.

Williston Basin The company’s investment in North Dakota and Montana consist of 85,000 net acres. Today, the company’s main activities focus on drilling multi-well pads with super extended lateral lengths as long as 10,000 feet. At the year-end of 2015, the company produced 13,290 BOEPD of oil, 3,600 BOEPD of gas, and 2,960BOEPD of NGLs.

Figure 6: Areas of Operation

Source: Newfield Exploration Company official website

Onshore Gulf Coast (Natural

Gas)

The amount of proved reserves in Onshore Gulf Coast accounts for 48 MMBOE, which is seven percent of the company’s total proved reserve. Among the current developing 25,000 net acres’ areas, most come from Dimmit, and Atascosa counties in Texas. The production of the company’s acreage in the Eagle Ford play is nearly 11,000 BOEPD (52 percent oil, and 24 percent NGLs) in the fourth quarter of 2014.

China (Oil) China is where four percent of Newfield’s proved reserves come from. The company’s main oil producing asset in this area, the Pearl facility,


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INDUSTRY ANALYSIS

Newfield Exploration is an independent upstream E&P company that focuses on the onshore production in the United States, which is the leading producer in the region and is responsible for almost two-thirds of North America’s total production. The North American region generates 22.1 percent of the world's oil and gas (on an oil-equivalent basis). The E&P industry’s revenue in 2015 was $3.7 trillion. Considering the recent price weakness and the sluggish production levels, the industry’s revenues projection will approach $4.6 trillion in 2020. The dominant countries of E&P industry are Russia, Saudi Arabia, and Iran, which are rich in hydrocarbons.

Production Process and Key

Inputs

The production process of E&P companies contains five parts: exploration, leasing and permitting, drilling, production, and abandonment. Figure 7 shows the production process of E&P companies. First, E&P companies have to do geological and geographical explorations to identify the location, age, pressure, and source of deposits. Second, E&P companies should sign leasing contracts with private owners or the government to obtain the legal rights to drill and produce hydrocarbons. Meanwhile, the E&P companies should obtain permits from the regulatory bodies that oversee petroleum operations. Third, the E&P companies should use drilling rigs to drill oil wells and recover oil from the bottom of oil wells. The kind of drilling rigs that E&P companies use depend on the locations and conditions of the reserves. Fourth, the production process involves three stages of recoveries because only a portion of oil and natural gas will recover initially. The E&P companies often exploit production enhancement measures such as drilling additional wells, installing surface pumps, and drilling water or gas injection wells to maximize the total amount of oil and natural gas they can drill from reserves. Finally, the E&P companies usually abandon the production sites because of production limitations or economic limitations.

Figure 7: Production Process

The key inputs in the production process of oil and gas include the property plant and equipment that Newfield uses to drill. All of these inputs depend on the location of the onshore or offshore drilling. Another key input is human capital, it depends on the location and represents the burden on the production and operation costs.

Leasing & Permitting ProductionExploration Drilling Abandonment


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Drivers of the Industry

The drivers of the E&P industry contain two categories: external drivers and internal drivers. External drivers of the E&P industry are crude oil prices and natural gas prices. In February, 2016, the WTI crude oil price reached a historical low point of $26.12 per barrel, affecting the profits of the E&P companies. The natural gas price fluctuates seasonally due to the demand of natural gas surges in summer and winter. However, the overall price level of natural gas is relatively low because of the aggregate natural gas glut. Internal drivers of the E&P industry are locations of wells, quantities and qualities of products, and technologies. More wells will realize more production. High qualities of oil can realize a high price in the market. Advanced technologies can reduce expenses and increase productivity and efficiency.

Macroeconomic Factors

The industry reacts to different macroeconomic factors, which include supply, demand, expectation, and interest rate. The supply, demand and market expectation influence the volatility in the industry. When supply exceeds demand, the price level will fall. When demand exceeds supply, the price level will raise. Expectation will have an influence on E&P companies’ hedging contracts, which are important for the companies to hedge price risk. The industry reacts to changes in interest rates. When interest rate falls, additional money supply can make the dollar index decrease, and the dollar-denominated crude oil price may rise.

Regulatory Environment

Newfield’s major operating states include Texas, Oklahoma, Nevada, North Dakota, and Montana. The company is subject to state and federal laws affecting United States’ environment quality, oil well drilling and operating, and the desertion of oil and gas wells. The Environmental Protection Agency (EPA) is the agency that has the primary federal authority to enforce federal environmental laws. The state government also plays important roles in regulations that affect the oil and gas industry activities. The Railroad Commission of Texas (RCT) and the Oklahoma Corporation Commission are state authorities that enforce state oil and gas environmental laws which Newfield has to observe. In December 2011, Texas adopted laws to disclose all chemicals use in the hydraulic-fracturing process and Newfield volunteered to implement this law through FracFocus. Pollution, waste management, and gas emissions are the key factors in enacting environmental laws and regulations.

The Scores of Porter’s Five

Forces

The scores of Porter’s Five Forces combine the quantitative analysis with Porter’s Five Forces analysis. A score of five indicates certain power is relatively high and a score of one indicates certain power is relatively low. Figure 8 shows scores of Porter’s Five Forces for the E&P industry.


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Figure 8: Porter’s Five Forces

Threat of Entry (Low)

The threat of entry is low. Although new entrants are able to exploit their positions by adopting advanced technologies immediately rather than by replacing outdated equipment gradually, the intensive capital requirement of E&P companies is still the largest barrier for potential new entrants. New entrants need to invest billions of dollars of capital in exploration and production equipment and hire experienced engineers and managers for operation. In addition, to hedge the risk of oil and gas prices, companies in the E&P industry tend to enter a long-term contract and build a long-term relationship with their suppliers and customers. Therefore, new entrants will spend large quantities of time and money to find a long-term partner.

Bargain Power of Buyers (Low)

The bargaining power of buyers is low. E&P companies’ buyers are midstream companies and refineries. For instance, Newfield’s customers are Tesoro Corp and Sunoco Logistics Partner. Tesoro Corp is a Fortune Global 500 company focuses on petroleum refining and marketing. Sunoco Logistics Partner is principally involved in logistic business which includes the storage of crude oil, refined products, and NGL products. The aggregate supply and demand of oil and natural gas in commodity markets is the key to determine the prices of oil and natural gas. Therefore, both upstream and midstream companies are price takers and midstream companies have little bargaining power compared to the E&P companies. However, the E&P companies often lock in prices via long-term supply contracts and hedging contracts with midstream companies, especially when the price of oil and natural gas fluctuate dramatically. In this situation, both the E&P companies and their buyers have the bargaining power to determine the contract’s price of oil and natural gas.

Bargain Power of Suppliers

(Low)

The bargain power of suppliers is low. The suppliers of the industry are oilfield service companies which provide information and technology services to the E&P companies. For instance, Newfield has seven major suppliers, Schlumberger Ltd, McDermott International, Subsea 7 SA, Seadrill Ltd, Ensco PLC, Open Text Corp and National Energy Services Inc. When the price of oil and natural gas and the revenues of E&P companies increase, oilfield service companies will


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Threat of Substitutes (Low) The threat of substitutes is low. First, Figure 9 shows that oil and gas remain to be the primary type of energy sources. In 2013, 36 percent of energy consumption was petroleum and other liquids. According to the annual energy outlook from 2015, the Energy Information Agency (EIA) projects that petroleum and other liquids will contribute to a 33 percent of energy consumption in 2040. Throughout 2013 to 2040, the EIA projects that natural gas will contribute 27 to 29 percent of energy consumption, making natural gas the secondary component of energy consumption. Second, the substitutes of oil and natural gas are renewables and nuclear. The total of those two sources of energy only contribute 26 percent to total energy consumption in 2040. Because the development and use of renewables and nuclear are still in the embryonic stage, the alternative forms of energy have no price advantage and no superior product performance. As a result, the alternative energy does not currently pose a threat to oil and natural gas.

Figure 9: U.S. Primary Energy Consumption by Fuel, 1980-2040

Source: EIA annual energy outlook 2015

Competitive Rivalry (High) The threat of competitive rivalry is high. First, companies are price takers because the market determines the price. Thus, low cost and high quality of production are the two factors to improve the company's competitive ranking. Second, all of the companies in North America are mining the same type of oil and natural gas, forcing the E&P companies to develop relationships with buyers for contracts. Third, the industry has a low level of market share concentration and is large and geographically diverse. Therefore, controlling a tiny part of worldwide production is difficult even for the giant of the U.S E&P industry.


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PEER ANALYSIS To determine Newfield Exploration’s peers, the analysis focuses on the E&P companies with similar market capitalization and operation areas. The four peer groups are: QEP Resource Co., SM Energy Co., WPX Energy Inc., and Cimarex Energy Co. All of the companies are public and sufficient financial data is available. Newfield differentiates from its peers through keeping a diversified portfolio of core North American oil and liquids, and through upholding a strong capital structure. Among the peer group, Newfield is a mid-cap company that sits in the middle of peers regarding to production and proved reserves.

Table 1 : Peer Group Metrics

Source: Bloomberg, 2016

QEP Resources Inc. (NYSE: QEP)

QEP Resources, Inc. (QEP) is an independent oil and natural gas E&P company that focuses on two geographic regions, the Northern Region and the Southern Region of United States. The company’s headquarters is in Denver, Colorado. At the end of 2015, QEP had proved reserves of 603.4 MMBOE, consisting of 363.5 MMBOE of gas, 193.1 MMBOE of oil, and 58.8 MMBOE of NGLs. For the year 2016, QEP will continue to reduce drilling and completion activities, show production growth, reduce costs and preserve its liquidity. The company will invest $475 million in its business to achieve a relatively flat production.

SM Energy Company

(NYSE:SM)

SM Energy Company (SM Energy) is an independent energy company, engaged in the acquisition, exploration, development, and production of oil, gas, and NGLs. The company is headquartered in Denver, Colorado. The main operations of the company are in the South Texas, Rocky Mountain, Permian, Mid-Continent, and Gulf Coast regions. At the end of 2015, SM had proved reserves of 471.3 MMBOE, consisting of 145.3 MMBOE of oil, 210.7 MMBOE of gas, and 115.4 MMBOE of NGLs. The proved reserve of the company is the lowest among the peer group, however, SM produced 64.23 MMBOE in 2015, which is the second highest among the peer group. Thus SM Energy may have to acquire additional proved reserves to support its operation in the future. At the beginning of 2016, SM Energy approved a capital budget plan of approximately $705 million.

WPX Energy, Inc. (NYSE: WPX)

WPX Energy, Inc. (WPX) is an independent natural gas and oil E&P company which focuses on the exploitation and development of long-life unconventional properties. The headquarters of the company is in Tulsa,


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Oklahoma. WPX exploits natural gas and NGLs primarily in the Rocky Mountain region. The company develops oil mainly in the Williston Basin in North Dakota and the San Juan Basin in the southwestern United States. As of December 31, 2015, the company had proved reserves of 583.04 MMBOE, consisting of 142.72 MMBOE of oil, 365.03MMBOE of gas, and 75.29 MMBOE of NGLs. At the beginning of 2016, WPX approved a capital expenditure plan between $350 million and $450 million. WPX has focused on long-term portfolio management since mid-2014, divesting approximately $5.5 billion of non-core asset.

Cimarex Energy Co.

(NYSE:XEC)

Cimarex Energy Co. (XEC) is an independent oil and natural gas E&P company that operates in the Mid-Continent and Permian Basin areas of the U.S. Cimarex’s headquarters is in Denver, Colorado. The company’s oil and NGLs reserves are primarily located in the Permian Basin and Mid-Continent regions. As of December 31, 2015, the company had proved reserves of 484.90 MMBOE, consisting of 252.8 MMBOE of natural gas, 107.8 MMBOE of oil, and 124.3 MMMBOE of NGLs. The Debt to equity ratio of XEC, which is the lowest among the peer group, indicates that Cimarex holds a conservative capital structure and enjoys low default risk. In 2016, Cimarex plans to invest $600 million to $650 million in the Permian Basin and Mid-Continent regions.

MANAGEMENT PERFORMANCE & BACKGROUND

Because of the diversity in Newfield’s management, the company views problems from different perspectives, thus differentiates the company from its peer group in the highly competitive energy industry.

Return on Invested Capital

Newfield’s recent performance is a measure of the Return on Invested Capital (ROIC). The ROIC shows how efficiently Newfield uses equity and debt in operations. ROIC gives information about how much cash the company generates by the amount of cash investment of the company. Table 2 shows Newfield’s ROIC and the change that the company had over the last five years.

Table 2: ROIC

Source: Bloomberg 2016

The average ROIC among the recent five years is negative 9.29 percent, partially because of the significant drop of oil and natural gas prices in 2015. However, the high operational cost and the low oil and gas prices are the main reasons that the company not adding value for the shareholders. Oil and gas prices fell drastically in recent years, causing the company’s cost of capital to increase as the price of goods decreased. The constant drop of commodity prices creates an inefficient market as a result of inaccurate market prices with critical outcomes such as rating

Year 2011 2012 2013 2014 2015 AverageROIC 8.37% -10.94% 2.53% 4.14% -50.57% -9.29%


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FREEMAN Reports downgrades and bankruptcy within the industry. These results are available in Newfield’s credit ratings. In the last five years, Newfield had an average ROIC of 3 percent andan average WACC of 10 percent. ROIC is an important measurement for investors and if the company continues to have a higher cost of capital than ROIC, investors will seek out companies who can use capital efficiently. Newfield needs to find strategic investment opportunities

Management Incentives

Newfield’s management team consists of individuals with diverse backgrounds in various fields and professional experience, especially in the energy and investment industries.

Lee K. Boothby Chairman and Chief Executive Officer Before Lee K. Boothby joined the company, Boothby finished his M.B.A at Rice University and worked for different oil corporations, accumulating adequate working experience. In 1999, as the managing director, Boothby successfully managed Newfield Exploration Australia Ltd.’s operations in Perth. From 2002-2007, as the Vice President-Mid-Continent, he organized the company’s development in different resource plays and contributed to Newfield’s growth. Because of his previous contributions to the company and his professional working experience, Boothby became CEO in May 2009. One year later, he became the Chairman of the company.

Larry S. Massaro

Chief Financial Officer Larry S. Massaro joined the company in 2011 as Vice President of Corporate Development. He used to work at various companies including JP Morgan’s oil and gas investment banking group. Massaro’s experience in holding a number of management positions helped him achieve great success in Newfield’s business development, acquisitions and divestitures, and commodity hedging.

Gary D. Packer Executive Vice President and Chief Operating Officer After Gary D. Packer graduated from Penn State University, he worked in the Rocky Mountain and Gulf of Mexico regions for Amerada Hess. In 1995, he joined Newfield as Manager of Acquisitions and Development in the Gulf of Mexico and successfully managed the company’s Gulf operations. Packer founded Newfield’s business in Denver, CO and became Executive Vice President and Chief Operating Officer in May 2009.

Edward L. Haas Vice President - Production At the beginning of Edward L. Haas’s career, he held different positions in the technical and management department of Anadarko Petroleum. After Haas joined Newfield in 2000, he achieved success in promoting production growth of the company’s assets and implementing efficient use of organization and safety operations.


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George T. Dunn Senior Vice President – Development During George T. Dunn’s 20-year work experience with the company, his responsibility mainly focused on managing the land, drilling, production, and reservoir functions. Before he joined Newfield in 1992, Dunn worked for Meridian Oil Company and Tenneco Oil Company. He served as General Manager – Gulf Coast and Vice President - Mid-Continent before he became the company’s Senior Vice President – Development.

W. Allen Donaldson

Vice President-Exploration W. Allen Donaldson originally was the resource manager for the Arkoma Asset in Oklahoma. After working at several leadership positions in BP America, Donaldson joined Newfield in 2009 as the exploration manager for the Mid-Continent Business Unit.

RISK ANALYSIS & INVESTMENT CAVEATS

Newfield faces variety of risks in its day-to-day business, including operation risks, regulation risks, and financial risks. Those risks may negatively relate to Newfield’s business, financial situation, operating activities, or cash flows.

Operational Risks

The operational risks of E&P companies are higher than the operational risks in other companies. Commodity price risks, environmental risks, reserve estimation risks, technology risks, and drilling risks are the main operational risks that Newfield often encounters.

Commodity Price Risks Oil and natural gas prices will continue to fluctuate as they have in the past. Factors, such as the aggregate demand and supply of oil and natural gas, global economic conditions, and political and military conditions in the Middle East, have influences on the price of oil. Newfield’s ability to make profits, to generate cash flow from operations, and to access additional capital depends heavily on the current oil and natural gas price. A low oil and natural gas price will prohibit Newfield from profitably recovering oil, natural gas, and NGLs. Low price of oil will result in proved reserves impairment and proved undeveloped reserves reduction. Newfield will use derivatives to hedge a substantial portion of production for the next 24 months to combat this commodity price risks. However, if oil and natural gas prices increase in the future, Newfield will lose value on its derivatives contracts. If Newfield’s production fails to reach the amount that the contracts require, financial charges will apply.

Environmental Issues The Environment and E&P companies influence each other. First, Newfield’s onshore and offshore operations are subject to severe weather conditions. Newfield’s offshore operations in China rely upon the gathering and processing systems which the company does not own. The offshore production can stop if adverse weather damages the gathering and processing facilities. The onshore areas where Newfield operates


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FREEMAN Reports have experienced drought conditions in the past, which may prohibit the company from accessing the water used in the hydraulic fracturing. These drought conditions may disturb and interrupt Newfield’s onshore operations. Second, Newfield’s operations may cause pollution and other damage to the environment. The company may face sustainable costs if the operation violates the government’s environmental regulations.

Reserve Estimation Risks�E&P companies break down reserves into three categories: possible, probable, and proved. Proved reserves are crucial to managers and investors because E&P companies can recover proved reserves with a high degree of certainty. Newfield estimates proved reserves according to management reviews and computer evaluation models. The company hires two third party agencies, DeGolyer and MacNaughton and Ryder Scott Company, to perform an audit of the estimation. Uncertainty in the procedure of estimation, however, may still exist because of the multiple inputs in the computer evaluation model and inaccurate reviews of management. On December 31, 2015, the price of natural gas decreased by 40 percent compared to December 31, 2014. The price of oil decreased by 47 percent compared to December 31, 2014. As a result, Newfield encountered a 286 MMBOE proved reserve impairment at the end of 2015. Therefore, Newfield faces reserve estimation risks. �

Technology Risks �The E&P industry relies on the use of computer and telecommunications systems to process routine operations. Incorporated with third parties, Newfield developed software, hardware, telecommunications, and other IT services. The company relies on digital technology not only to estimate oil and gas reserves, trace and record data, and evaluate seismic and drilling information, but also to communicate with the business partners. Therefore, any cyber security attacks or disconnections in the company’s computing and communications infrastructure or information system will lead to serious issues. These issues include data incompletion, communication interference, unapproved release, gathering, monitoring, and the misuse or destruction of information. As a result, the company may need to acquire additional capital to modify or improve these systems. �

Drilling Risks Drilling is a risky and costly activity. Drilling risks occur because of inaccurate exploration date. Newfield relies on exploration data to determine the presence and the economic properties of oil and natural gas. The exploration data, however, does not always show the whole frame of the deposit. The company can only collect reliable data about the deposit during the spot’s drilling process. E&P companies’ drilling schedules fail because of the complexity of using the drilling equipment, the uncertainty of the geologic formation, and extreme weather conditions. Any failure, such as recycling the water for drilling inefficiently, will cause drilling


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Regulatory Risks

Federal, state and local regulations in the U.S. play an important role in the E&P industry’s operations. The industry also relies on permits and concessions from governments to explore and produce oil and gas resources worldwide. However, regulatory efforts are likely to increase risks and costs for E&P companies.

The approval of new federal rules or regulations that relate to hydraulic fracturing could lead to increased operating costs, postponements and limitations in exploration, developments, and production activities, which sequentially could reduce Newfield’s operations. Because fracturing can cause pollution to underground water supplies is still debatable, bills such as the Fracturing Responsibility and Awareness of Chemicals (FRAC) Act require the annulment of the exemption for companies using the fracturing techniques. In addition, important regulations, such as The Interstate Commerce Act, allow the Federal Energy Regulatory Commission to build new standards for transportation services on certain fuel pipelines products. In 2014, the U.S. Department of Transportation enacted additional restrictions on the shipment of crude oil by rail from the Bakken Shale, which increased the costs of oil delivery for Newfield.

Financial Risks Financial risks are the contingencies of financial loss to firms. These risks arise from the relationship between a company’s business model and capital structure. Newfield has three funding sources for capital budget: internal cash flow, cash flow from issuing debt, and issuing equity. If the company cannot generate enough cash flow to payback debts, it faces a default risk. Three metrics can help to analyze the financial health of the company and the ability to repay debt: credit risks, liquidity risks, and hedging risks.

Credit Risks Credit risks measures Newfield’s ability to pay creditors. Table 3 shows that Newfield has a negative 27.78 Interest Coverage ratio, which is considerably lower than negative 15.89 average of its Peer Group. The significant difference shows that Newfield had difficulty in paying interest on its debt. The company has a Debt-to-Capital ratio of 64.14 percent while the average Debt-to-Capital of its peer group 47.97 percent. This ratio indicates Newfield’s level of indebtedness and other financial obligations. In addition, U.S major credit rating agencies posted a downgrade in Newfield’s credit rating, negatively influencing the ability to access capital and to increase the cost of future debt. As a result, Newfield has a higher level of credit risk than the overall industry level. The level of obligation and the restrictive covenants in the agreements may reduce the company’s operating flexibility.


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Table 3: Credit Ratio

Source: Bloomberg

Liquidity risk With a modification to the credit arrangement in March 2015, Newfield increased the borrowing capacity from $1.4 billion to $1.8 billion. On December 31, 2015, Newfield maintained the total credit line of $195 million and had a total available line of credit of $156 million. Newfield had an entire indebtedness of $2.5 billion including $39 million in borrowings under the money market lines of credit. In the past ten years, the available line of credit was sufficient for the company, which reflects that the company’s operating activity does not rely on credit. In addition, as an E&P company with high capital intensity, Newfield has a large amount of capital requirements to fulfill the capital budget. The company’s capital investment amounts may exceed the operating cash flows. As a result, limited liquidity may adversely impact the company’s ability to execute the business plan.

Hedging Risks As of December 31, 2015, Newfield applied five types of derivative strategies: fixed-price swaps, collars, fixed-price swaps with sold puts, collars with sold puts, and purchased calls. The net derivative assets cost $367 million. The company uses those instruments to manage the instability in cash flows which relates to the projected revenue of oil and natural gas production. Although the use of these derivatives decreases the downside risks of commodity price downward movements, it also limits potential gains from commodity price upward movements. The risk of counterparty default is high on the growing deteriorated commodity environments. Any inability to retain the company’s existing derivative positions in the future could cause financial losses or revenue reductions.

SHAREHOLDER ANALYSIS & CORPORATE GOVERNANCE

As of April 15, 2016, Newfield had 198.14 million shares outstanding, which consist of 196.94 million float shares, or 99.39 percent of shares outstanding, and 1.20 million shares restricted stock, or 0.61 percent of shares outstanding. The institutional investors, insiders, and individual investors hold 90.58, 0.61, and 8.81 percent of the shares outstanding, respectively.

Institutional Investors

Institutional investors hold the majority of shares outstanding at 90.58 percent, which indicates a increase in shorting activities and a decrease in oil and natural prices. Table 4 shows Newfield’s top ten institutional shareholders as of April 15, 2016.

Totaldebt/capital EBIT/InterestExpenseNewfield 64.14% -27.78PeerGroup 47.97% -15.89


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Table 4: Top Ten Institutional Investors


Vanguard Group remains the largest shareholder with 6.95 percent of total shares outstanding, or 13.8 million shares. The sum of latest change of top ten institutional shareholders is 2.7 million shares. The positive change shows that the major institutional shareholders see value in Newfield.

Insiders

Newfield’s insiders, holding 0 .61 percent of shares outstanding on April, 2016, are uncertain about the company’s performance. Table 5 shows Newfield’s major insiders. Newfield director Howard Newman holds the largest amount of shares among insiders at 0.13 percent of shares outstanding. The drop of oil prices has cut the value of Newman’s shares by more than half. The drop of the oil price is challenging to shareholders, because the market volatility and uncertainty within the industry have made the value of Newfield’s stock drop constantly.

Table 5: Major Insider Holders


Transactions of Newfield’s major insiders indicate their concerns about the industry’s performance and the company’s performance. Table 6 shows insiders’ major transactions. Gary Packer, Newfield’s Chief Operating Officer, had the largest transaction. Both the company’s CEO and COO sold their shares, which may be a result of dropping oil price. Newfield’s CFO and CAO, however, increased their position, which may indicate that they hold an optimistic attitude to the company’s financial position.

Holder Name Position Percent Outstanding Latest ChangeVanguard Group 13,762,032 6.95% 357,589Wellington Management 12,703,081 6.41% 677,651RMR Llc. 11,865,493 5.99% -788,741Blackrock 10,462,110 5.28% 1,751,410Clearbridge Investment Llc. 10,081,309 5.09% 18,928State Street Crop. 7,215,713 3.64% 528,689Millennium Management Llc. 6,685,409 3.37% 2,616,873Southernsun Asset Management Llc. 4,896,634 2.47% -551,597Citadel Advisors Llc. 4,097,293 2.07% -1,896,816Van Eck Associates Corporation 3,983,322 2.01% -1,364

Holder Name Title Position Percent OutstandingHoward H. Newman Director 207,202 0.10%

Gary D. Packer Chief Operating Officer 188,079 0.09%Lee K. Boothby Chief Executive Officer 176,534 0.09%George T. Dunn Officer 98,598 0.05%John H. Jasek Officer 56,457 0.03%

Lawrence S. Massaro Chief Financial Officer 55,358 0.03%


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Table 6: Insider Major Transactions


Corporate Governance

Newfield currently has nine board members, including one executive on the Board. Leading the company’s governance are Lee K. Boothby, the Chairman of the Board and Chief Executive Officer, and Steven W. Nance, the Lead Independent Director. Table 7 shows the members of the board.

Table 7: The Board Memeber

Source: Newfield Official Website

Audit Committee The Audit Committee has the authority to select, retain, and terminate the company’s independent auditors. This committee is responsible for the compensation, oversight, and evaluation of the independent auditors for preparing or issuing audit reports. In addition, this committee monitors the company’s compliance with legal and regulatory requirements. The Board has also appointed George W. Fairchild Jr., a certified public accountant, to work as the Chief Accounting Officer and Asset Secretary.

Compensation and Management Development Committee The purpose of the Compensation and Management Development Committee is to evaluate and approve the compensation of the CEO, other executive officers, and employees, as well as to forecast the valuation and development of the company. Each year, the committee reviews and considers the company’s performance to determine the equity-based plan and stockholder returns.

Nominating and Corporate Governance Committee The Nominating and Corporate Governance Committee is responsible for preparing and recommending appropriate corporate governance

Holder Title 1-Year Net Changes in SharesPercent ChangeGary D. Packer Chief Operating Officer -34,388 -15.46%Lee K. Boothby Chief Executive Officer -23,488 -11.74%

Lawrence S. Massaro Chief Financial Officer 20,199 57.45%George W. Fairchild Jr. Chief Accounting Officer 10,715 94.36%

Name Position IndependenceLee K. Boothby President, CEO and Board Chairman EmployeeSteven W. Nance Lead Director and Board Director IndependentThomas G. Ricks Board Director IndependentJ. Terry Strange Board Director Independent

John W. Schanck Board Director IndependentPamela J. Gardner Board Director Independent

Roger B. Plank Board Director IndependentJuanita M. Romans Board Director IndependentJames Kent Wells Board Director Independent


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FREEMAN Reports guidelines and modifications. The Nominating Committee also works on the authorization of the entire Board of Directors, and nominates potential candidates for the Board.

Operations and Reserves Committee The Operations and Reserves Committee is responsible for managing and evaluating Newfield’s daily operations as well as analyzing and reviewing the company’s reserves. All four members of this committee have at least 30 years of working experience in the energy industry. Overall, Newfield has effective governance with independent board members and controlled board committee structures

Table 8: The Sub-committee

Source: Newfield Official Website

FINANCIAL PERFORMANCE & PROJECTIONS

When evaluating Newfield’s financial performance, our team considered economic trends, the industry outlook, future oil price, operating activities, and financing activities into assumptions and projections, our 12-months target price is $ 36.06.

Economic Outlook

The E&P industry has been considerably affected by lower crude oil and natural gas prices. From 2010 through 2014, oil prices began falling in late 2014 and averaged around $49 per barrel (NYMEX WTI) in 2015. In respond to the commodity price uncertainty, Newfield implemented its short-term business plan to preserve liquidity and financial strength. The outlook for oil prices in 2016 has not improved. As of February 19, 2016, NYMEX WTI was about $30 per barrel, and NYMEX Henry Hub was approximately $1.80 per MMBtu. We expect that industry budgets will be significantly lower in 2016 and will remain so until commodity prices strengthen and profit margins improve.

Commodity Price& Hedging

Contract

When forecasting oil and gas prices, we take WTI Crude Oil, which is the oil price benchmark in North America, and TAPIS, which is the oil price benchmark in Asia in to consideration because Newfield operates in the United States and China. Considering that limitations exists when we forecast WTI Crude Oil and TAPIS, we bring Bloomberg’s forecasts of WTI Crude Oil and TAPIS into our model to get a relatively accurate outcome. Newfield’s realized price before hedging depends on both the benchmark and the price differentials of the company. Thus, we assume

Names Audit Compensation & Management Development

Nominating & Corporate Governance

Operations & Reserves

Chairman Thomas G. Ricks J. Terry Strange Steven W. Nance John W. Schanck Member Pamela J. Gardner Pamela J. Gardner Pamela J. Gardner Steven W. NanceMember John W. Schanck Steven W. Nance Thomas G. Ricks Roger B. PlankMember J. Terry Strange Juanita M. Romans Juanita M. Romans James Kent WellsMember Roger B. Plank Juanita M. Romans John W. SchanckMember James Kent Wells J. Terry Strange

Board Sub-Committees


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FREEMAN Reports that Newfield will continue to apply the historical average price differentials from 2016 to 2019.

Hedging contracts are important for Newfield because the current oil price is at a historical low point. Newfield can mitigate the negative effects of fluctuating oil price by hedging contracts. However, no hedging contracts are available for Newfield to hedge its China oil and domestic NGLs. Regarding to domestic oil production, Newfield has 22.5 MMBbls and 12.2 MMBbls positions outstanding respectively for 2016 and 2017. And we assume that, from 2018 to 2019, the hedging positions for domestic oil will be the same as 2017. Although 12.2 MMBbls is relatively small in quantities, this assumption is reasonable because Federal legislation regarding swaps could adversely affect Newfield’s ability to enter into those transactions in the future. Furthermore, the default possibility of the company’s counterparty is high and few counterparties may participate in derivative transactions, especially when the economic environment is poor and the financial markets is tight.

Financing Activities

In response to the poor commodity price, we have reduced capital budget in 2016 to approximately $625-$675. This range of number decreased of more than 50% from 2015 investment levels. We expect to fund the 2016 investments through cash flows from operations, borrowings under our credit facility, non-strategic asset sales or potentially accessing the public debt and/or equity markets.

Investing Activities

The company’s investing activities are closely correlated with the oil and gas prices. We collected oil prices and capital expenditures data of 15 E&P companies from 2010 to 2016, create a dummy variable for Newfield’s peer group, and set the capital expenditures and the WTI Crude Oil as the dependent variable and the independent variable respectively. We lag capital expenditure data for one period because the management make investment decisions according to the forecasted price. For instance, the 2012 capital expenditure of the company is correlated with the WTI Crude Oil of 2013. For lagging capital expenditure data one lag, we should assume that the management can forecast next year’s oil price exactly as the price in the next year and that the management can manage cash efficiently. Therefore, we get the 2017 investment in PP&E of $1205.1 million, 2018 investment in PP&E of $1306.9 million, and 2019 investment in PP&E of $1306.9 million.

Operating Activities

Production is the most important operating activities for E&P companies. The historical production in the last year and new production coming online in the current year jointly determine current year’s production. We discount last year’s production by the natural decline rate to get the historical portion of current year’s production. Then we calculated capital expenditure per well in 2016, and combined it with the capital expenditure after 2016 to get the number of wells each year after 2016. According to the outlook of Newfield, the company will mainly invest in


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FREEMAN Reports STACK and SCOOP. Thus, we use operation data of STACK and SCOOP to get the production forecast. Regarding to ceiling test and other impairment, the company encountered a significant amount of impairment of $4904 million in 2015 because the drop in oil and natural gas prices. We assume, however, Newfield will not incur any impairment from 2016 to 2019 because the market believe that oil and natural gas prices will rebound in the future.

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