NEWFIELDENERGY

ExecutiveSummary:
InearlySeptember2013,M.Griffin,theChairmanoftheboardandtheCEOofNewfieldEnergywasconsideringputtinga
financialproposalinfrontoftheboardofdirectors.NewfieldEnergyisoneoftheindependentandlargeenergycompaniesbased
inHouston,Texas&primarilyengagedintheexploration,developmentandproductionofcrudeoil,naturalgas&naturalgas
liquids(NGL).
Thecompanyhasalongprofitablehistoryandthesharepriceofthecompanyhasreachedthehighestofalltimeinthepast.The
companyhasalwayspaidhugedividendstoitsshareholders.However,recently,theearningsofthecompanyhadstartedto
declineandthesharepriceofthecompanyhaddeclinedfromahighlevelof$70persharein2007to$44.25pershareon
August30,2013.Themainreasonforthisdeclineintheperformanceofthecompanyanditsdecliningperformanceinthestock
marketwastheprolongeddeclineinthepricesofthenaturalgasaftertheyear2009.Thiswaspartlyduetonewtechnologies
beingintroducedfordevelopingandexploringthenaturalgasthatmadetheUSworldslargestnaturalgasproducer.
Therefore,inordertocountertheseissues,Mr.Griffinhadformulatedaproposalthroughwhich:
1.) Hewantedtolaunchapressreleaseandinformalltheinvestorsandthepublicthatthemanagementofthecompanywas
planningtodivestmostofitsnaturalgasplantsprobablyatsignificantbooklosses.
2.) Significantreductioninthecommonstockdividends.
3.) Hehadplannedanexchangeofferunderwhich20%ofthecommonstockshareswouldbeconvertedintopreferredstock
sharesofferingapreferreddividendof$2pershare.

Background:
GasPriceshadrisenrapidlybetween2002&2005from$20to$150andseeingthisuptrendMr.Griffindecidedto enhancethe
companysexposuretonaturalgasexplorationandproductionin2005.Bytheendof2008,Newfieldenergyhadabout80%of
itsproductioninNaturalGas.Bothcrudeoil&Naturalgaspricescrashedafterreachingpeakinmiddleof2008.Naturalgas
pricesexperiencedaprolongeddeclinein200912andtherewasasignificantdivergencefromthecrudeprices.Asaresultofthe
declineintheperformanceofthecompany,Griffinhadstartedtolosehisconfidenceinthegrowthofthecompanyandits
profitability,whichthecompanywasgeneratingfromits60%naturalgasproduction.Furthermore,thecompanyhaddivested
manynaturalgasassetsandhadstartedtomakesignificantinvestmentsinseveralNGLandoilassets.Moreplansweremadeto
investinliquidrichassetsanddivestthreemoreplantsassociatedwithnaturalgasproduction.
Overall,thecompanyhadfacedadramaticdeclineinitsearningsandstockprice.Also,thecompanywasfacingaheavydebt
load,whichthecompanywasfacingdifficulttofinancebecauseofthedecliningearnings.Therefore,inresponsetothishuge
declineintheperformanceofthecompany,Mr.Griffinhadformulatedtheaboveproposalconsistingofthreeparts. The most
critical of all the three proposals was the cutting of the dividend from $ 2 per share to around $ 1 per share. Eight large public
companies in oil and gas industry experienced large negative reactions from the stock market when they announced their dividend
reductions. A reduction in the dividend might discourage the potential investors from investing in the shares of the company in the
future.
ThoughNewfieldEnergyhadalsomadeareductioninthedividendintheyear2009anditdidnotcauseadeclineinthestock
priceduringthatperiodandtheonlyreasonforthatwasthatalltheinstitutionalinvestorswereinformedaboutthepotential
dividendcutandasaresultthedividendcutdidnotcausethesharepricetodecline.However,thesituationfacedbythecompany
wasnotsimilarandtheinvestorsofthecompanywerenotatallawareaboutthecurrentsituationandthereasonsforreducingthe
sharepriceofthecompany.Amongtheinvestorsofthecompany,20largestinstitutionalinvestors,whichincludedmutualfunds,
largecorporations,commercialbanks,held65%ofthetotaloutstandingsharesinvestmentbanksetc.
Within these 65%, the 20% of the investors, which comprised of three corporations and five fund managers, had clearly
mentionedthattheyreliedontheirdividendyieldwhichwastheirprimaryobjectiveofholdingthesharesinNewfield.Therefore,
nowifatthispointoftimeadividendcutisannounced,thenthese20%investorswouldbemorelikelytodivesttheirinvestment
inNewfield.Ifwelookattheperformanceofthecompanypriorto2009,thenitcouldbeseenfromthecommonsizeincome
statement, common size balance sheet and share price growth that it was followingan increasing trend, however, nowthe
situationhadworsenedandcuttingdividendwasoneofthebestoptionstocoverforthelossesthecompanywasfacing.The
naturalgasrevenuebetween2009and2010haddroppedsignificantlyasshownintheappendixinspreadsheet.Therefore,the
decisionwascriticalhowever,itwasallinthefavorofthefutureearnings,profitabilityandthesharepricegrowthofNewfield
Energy.

INCOMESTATEMENT,NEWFIELDENERGY20032012(MILLIONSOFDOLLARS)

Net Income
Number of
common Shares
(millions)
EPS
Cash dividend per
share
Payout Ratio
Dividend Yield

2003
720

2004
769

2005
934

2006
1282

2007
1628

2008
1236

2009
-211

2010
927

2011
535

2012
264

324

328

329

330

331

338

349

342

374

382

$2.22

$2.35

$2.84

$3.89

$4.92

$3.66

$-0.60

$2.71

$1.43

$0.69

$1.50

$1.50

$1.50

$1.50

$2.50

$2.50

$2.50

$2.00

$2.00

$2.00

67.50%
7.30%

63.90%
6.10%

52.90%
5.20%

38.60%
3.70%

50.80%
3.70%

68.40%
5.20%

4.70%

73.80%
4%

139.90%
5.10%

289.60%
4.80%

The Payout Ratio is calculated as follows:

The formula for calculating dividend yield may be represented as follows:

Current Problems :
1. Mr. Griffin was considering the consequences of announcing 3 simultaneous corporate decisions.
2. Need to convince board that the offer would be fair to all shareholder of the company, and the ability to swap
common for preferred should be appealing to those institutional investors who desired a high dividend yield.
Solution:
As it can be seen from the case facts that payout ratio is on continuous increasing trend due to falling income, hence a
cut in dividend is mandatory. But any cut in dividend will send a wrong signal in the market and could tank the
companys stock price, which are trading at $44.25 as the institutional investors (5 fund managers & 3 corporations)
who owned 20% of outstanding shares would sell off their shares in wake of falling dividends.
1. The best solution is to go with C.F.Os advice to convert / exchange these 20% shares, 76.4 million common
shares on a 1-to-1 basis with new preferred equity which will pay quarterly dividends of 50 cents.
2. Reduce the dividend payout to $1/year for common stock holders.
3. Redeem the preferred stocks after 3 years at which time Newfield Energy may be in a position to increase
common share dividends.