For investors who wish to invest in oil and exploration companies, the best way to choose a company is to find out a leader in a particular play. The largest play today is the Permian basin with Pioneer Natural Resources being the largest producer. The company operates more than 7,000 wells here. The second largest play is the Eagle Ford with EOG Resources being the biggest player with plans to drill 520 wells here this year. However, I have chosen to discuss the growth of Whiting Petroleum, which after the acquisition of Kodiak Oil and Gas has become the largest producer of Bakken shale, the third largest play.
Whiting Petroleum Corporation (WLL, Financial) is an independent oil and gas company that acquires, explores, develops and produces crude oil, natural gas liquids and natural gas in the United States. The company’s largest projects are in the Bakken and Three Forks play in North Dakota, the Redtail Niobara play in northeast Colorado and its enhanced oil recovery field in Texas.
In this article I will discuss the company’s focus in Bakken shale, its recent acquisition and why I consider the stock to be a good buy in spite of 76% gain in the last year.
Kodiak and Whiting Together
I believe that the acquisition of Kodiak Oil and Gas (KOG, Financial) will have a tremendous impact on Whiting’s growth. This is because Kodiak has a net acreage of ~170,000 net acres in the Bakken and the company has been focusing on its down-spacing initiatives. These initiatives have helped Kodiak to reduce its well costs from over $10.5 million per well to $9 million in 2014.
Thus, down-spacing initiatives of KOG and superior well completion technology of WLL could help in driving down the overall well cost to a great extent. Also, post the acquisition the company has over 855,000 net acres acreage position in Williston Basin and is expected to increase the net drilling location by 158% from 1,339 as on 31st December 2013 to 3,460 as of 30 June 2014.
This strategic position in the central and eastern Williston Basin is likely to drive production and reserve growth. I therefore believe the company is now in a better bargaining position wherein the expertise of both the company can be used to achieve a better operational efficiency.
Financials
EBITDAX has been increasing since 2009 and there has been 65% CAGR of EBITDAX from $576 million in 2009 to $1,863 million in 2013. Second quarter 2014 has delivered strong EBITDA margins of 71% which suggests good management of operating expenses by the company.
Cash flows are also impressive as the company has delivered positive operating cash flows since 2009. There has been 26% CAGR in cash flow per share along with a healthy balance sheet as the net debt to EBITDAX has decreased by 21% over the same time span.
Overall, the company has strong fundamentals with strong improvement in key metrics.
Grossly undervalued
In spite of a 71% increase in stock price in the past one year, Whiting Petroleum is still grossly undervalued. The company is currently trading at a trailing twelve months EV/EBITDA of 6.6 against Bakken competitor Continental Resources (CLR, Financial) 13.1 and Cimarex Energy’s (XEC, Financial) 8.5. Forward estimates are also attractive with Whiting’s 2015 EV/EBITDA of 3.1 against Continental’s 7.4 and Cimarex Energy’s 6.0.
Analyst estimate earnings growth of 27.3% for the current year and 15% for the next year more than the industry average of 14.3% and 14% respectively. Strong earnings growth is primarily based on the focussed plan of exploiting the resources in the Williston basin of Bakken and Three Fork shale. High growth coupled with low valuation suggests that the company has huge upside potential.
