WPX (WPX, Financial) had a good year, and began to reap the benefits of its extensive reorganization, its purchase of very valuable RKI in the Permian Basin, and a material recovery in the prices of oil and natural gas. While the investment community seems split as to whether prices will rise further or decline, our expectation is for limited downside and reasonable upside due to: a deep and pervasive decline in capital spending across the oil and gas industry over the last two years; the lowest rate of new oil discoveries in seventy years (according to consultant Wood McKenzie); producer nations whose economies are deeply stressed at lower price levels; a recent OPEC agreement to limit production; and domestic inventories that, while still high, appear to have peaked.
WPX weathered the staggeringly large decline in oil prices (from over $100 per barrel in mid-2014 to less than $30 per barrel in early-2016) with some dings, but emerging as a much better business. In early 2014, natural gas dominated the business and it had holdings in the eastern and western United States and Argentina, which included a bloated overhead structure, large and fixed natural gas transportation agreements, and other onerous expenses. After consummating a number of tough dispositions at reasonable prices during a difficult period, the company acquired a sizeable position in the Permian basin in mid-2015 – a deal our research suggests has added billions of dollars of value to the company.6
As a result, WPX has streamlined its holdings into three main areas – the Permian, the Bakken, and the San Juan – focused primarily on oil rather than gas. All of these properties are among the most productive and lowest cost within these basins. Under the leadership of Rick Muncrief, the company has cleverly reallocated capital and sharply reduced its overhead and drilling costs. With oil prices now above $50 per barrel and a decent hedge book for 2017 and part of 2018, the company is well positioned to take advantage of the opportunities it has created in recent years. According to a recent corporate presentation, WPX is projecting that its oil output will almost double in the next two years.
From Larry Pitkowski's GoodHaven Fund 2016 annual letter.
