With OPEC agreeing to cut its production by 486,000 barrels per day to 10.1 million per day, oil prices have seen a positive movement and have become much more stable. As the supply-demand mismatch narrows, oil will continue to trend higher, and I expect oil to touch $60 per barrel in 2017.
With this view, I have discussed some oil and gas companies recently, and I am bullish on names like Anadarko Petroleum (APC, Financial) and Marathon Oil (MRO, Financial) to be medium- to long-term value creators. One company that has been able to position itself well to benefit from stabilizing oil prices is WPX Energy (WPX, Financial). The company’s operations in the Permian Basin would give it a competitive advantage and also sufficient upside in the next two to three years.
Company overview
WPX Energy is an independent oil and natural gas exploration and production company that is involved in the exploitation and development of unconventional properties in the U.S. The company operates primarily in the following three areas
- Permian Basin: In the Permian’s Delaware Basin WPX has an estimated 1.1 billion barrels of equivalent net resource potential. The Delaware has numerous stacked-play reservoirs in a column that’s almost two miles deep with layers of rock stacked up like a pile of pancakes. This makes it a rich resource play with an opportunity to increase its oil production tremendously.
- Williston Basin: The company works in the Bakken and three forks formation on the Fort Berthold Indian Reservation with approximately 80,000 net acres of assets since 2010.
- San Juan Basin: This was the first basin of WPX Energy, and it's one of the most prolific natural gas plays. The company is involved in oil discovery in the Gallup Sandstone formation.
Portfolio repositioning strategy
WPX Energy has a clear vision of repositioning its assets. The company aims to transition the portfolio away from natural gas to crude oil, and this is exactly what we see with some of the recent acquisitions. In 2014, the company finalized its strategy to start focusing on three of its prime asset bases instead of seven assets at that time. The company benefited from the fall of oil prices, which fetched it some really good opportunities for increasing its oil asset base. In the Bakken and San Juan basins, the company did not get access to core assets, but the Permian Basin was at its developing stage, and this helped it to get some core assets in its central basin. Thus, gradually the company’s portfolio repositioning started working and by first-quarter 2016, 62% of the company’s assets were oil weighted.
The RKI Exploration & Production LLC acquisition, which was completed in August 2015, did not receive positive feedback from investors, but the company’s current portfolio transition and ability to de-lever its balance sheet would convince investors that it was a good move. The acquisition helped it gain substantial presence in the core of the Permian’s Delaware Basin, which has a history of long-lived reserves and high drilling rates.
The transaction helped WPX Energy accelerate its portfolio transition to more liquids in addition to the advantage of accessing established infrastructure, which provides stronger realized commodity prices opportunity. The acquisition and the sale of some assets helped the company to de-lever its debt from $3.4 billion in third-quarter 2015 to $2.5 billion in third-quarter 2016.
Oil output to increase with added acreage
WPX Energy again has announced its increased presence in the Delaware Basin through the acquisition of assets from Panther Energy Co. and Carrier Energy Partners. The acquisition is estimated to add 32,000 net acres in the core of the Delaware Basin with a cost of about $18,600 per acre leading to a deal value of $775 million. It is estimated to add nearly $6,500boepd from 23 producing wells and the company expects the assets would be immediately accretive to its earnings. The assumptions are supported by the asset quality and robust development plan wherein Panther’s two-rig program would extend the number of operating rigs to seven and increase the gross drillable locations from 5,500 to 6,420. The acquisition synergies would also have a positive impact on the cash flow which would help the company to de-lever its debt and at the same time expand margins.
With the acquisition of assets from Panther Energy, the company’s opportunity in Delaware has grown significantly. The deal has added 823 gross drilling locations increasing it to 6,420-plus gross locations post acquisition. Thus, considering the addition of core assets of Permian Basin, the company has the potential to increase its oil output growth significantly. Since Permian Basin has low cost of drilling, the company has the advantage of increasing its margins as well.
Strong liquidity with smart capital allocation strategy
As of Sept. 30, 2016, WPX Energy had cash and cash equivalent of $623 million, undrawn revolving credit of $1.03 billion and 2017 note balance of $125 million, bringing its total liquidity to $1.5 billion.
With no current debt maturities (earliest being in 2020), the company has enough liquidity to meet its capex requirement of $905 million to $985 million. It is interesting to note that the capital allocation has been done keeping in mind the portfolio repositioning of the company and is focused more on oil assets of Permian Basin. Of the total of $985 million fiscal 2017 capex, around 56% is allocated to the Delaware Basin, 26% to Williston and 17% to San Juan assets. The company’s strategic approach toward asset transition will have significant impact on its growth.
Conclusion
In the past 2½ years and in really tough market conditions, the company has done well in terms of increasing its quality assets and strengthening its balance sheet. Moreover, the company aims to increase its oil growth by 25% in fiscal 2017 and by 50% in fiscal 2018 with the addition of one to three rigs per year. WPX Energy has a clear vision that would help it achieve its goals. This in turn will have a positive impact on its shareholders' wealth.
Disclosure: No positions in the stock discussed.
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