WPX Energy: This Oil Stock's Operational Improvements Are Impressive

WPX Energy (WPX, Financial) has more than halved in the past one year, which is quite normal considering the decline in oil and gas prices. The stock was near its 52-week low few days back but since then rose around 30% in past few trading session. Now the question is whether the stock has actually changed its direction or was this yet another short term rally supported by some technical indicators. The company posted its fourth quarter results in February, which not only surpassed the street expectations but also reported significant growth on a year over year basis. Starting with its numbers, let's see in detail what should be our stance on WPX.

Strong operational growth

Its revenue for the quarter nearly doubled from a year ago period to $1.12 billion, while the company turned to an adjusted profit of 3 cents a share compared to a loss of 34 cents last year. These are outstanding numbers reflecting the strong initiatives taken by the management, which has started yielding solid results and the company is swiftly moving to its 2020 vision.

In addition, its cost reduction initiatives have been very fruitful as the company managed to save around $1 million to $2 million until now and expects to add another $1 million in saving. These efforts will add significant value to its business especially at a time when the commodity prices are weak. While these initiatives will bring down costs, its strategic investments will enhance its top line. For 2015, the company intends to run 6 rigs. The developments are quite encouraging and point towards further growth in the coming years.

A look at the oil market

If we look at the global scenario prevailing in the commodity market there seems to be no immediate turnaround. According to a recent report from the U.S. Energy Information Administration (EIA) “the Brent crude oil price will average $59/bbl in 2015, unchanged from last month's STEO, with prices rising from an average of $56/bbl in the second quarter to an average of $67/bbl in the fourth quarter. The Brent crude oil price is projected to average $75/bbl in 2016.”

But it also cautioned about the uncertainties prevailing in the geopolitical environment such as the negotiations going on with Iran and possible lifting of sanctions, which could also impact these prices. It will be a matter of time how things turn out in this space.

Although the EIA cites of other factors that could affect the future price movement but one thing we haven’t considered is that, almost every company in the industry is slashing its capital expenditure for the current fiscal. WPX curtailed These cutback will result in a decline in production, which could be another factor boosting the fuel price.

Conclusion

Whatever be it, one thing is sure that in spite of strong performance in its quarterly results an oil turnaround is mandatory for the stock to perform. But the question is what should be our current take on WPX? From fundamental point of view the company looks undervalued with P/S and P/B ratio of 0.89 and 0.69 respectively, which is quite decent, compared to its peers coupled with a moderate debt/equity ratio of 51.49.

Although it does not have any forward P/E but these numbers look quite attractive. Moreover, as the oil prices rise in the future WPX will be in a strong position to further deliver strong results. Therefore in the light of these facts WPX seems to be a good bet from long term perspective.