WPX Energy (WPX) is a natural gas and oil gas exploration and production company in the United States (Piceance Basin, Bakken Shale, Marcellus Shale, Powder River Basin, and San Juan Basin regions). The company was spun-of of Williams Companies (WMB) in December 2011.
I stumbled on it reading the first quarter portfolio manager’s letter for one of my favorite mutual funds Aegis Value Fund (AVALX). WPX was the largest fund purchase and now comprises over 3.9% of the fund’s assets. Here are their comments on the company:
“WPX possesses low-cost natural gas reserves predominantly located in the Piceance Basin of northern Colorado and is currently developing oil reserves on its acreage in the Williston Basin of the Bakken shale play in North Dakota. In WPX, we were attracted to a company with four trillion cubic feet of gas reserves located on held-by-production acreage, giving the company a strong, stable land pipeline for future development. The $3.1 billion market cap company trades at approximately 60 percent of an understated book value. With net debt of only $1.35 billion, the enterprise trades at a modest multiple to our $1.1 billion 2013 EBITDAX estimate. Furthermore, EBITDAX is likely to grow by $150 million as wet gas processing capabilities come online and unfavorable pipeline transportation contracts expire over the next two years. In addition, we believe the company’s valuable Piceance-area acreage is highly prospective for additional unbooked reserves located in the Niobrara/Mancos shale. WPX’s initial Niobrara/Mancos well produced a stunning initial flow rate of 16 million cubic feet per day of dry gas, and one billion cubic feet of gas over its first 100 days. The new Niobrara find has the potential to double the company’s 18 trillion cubic feet of proved, probable and potential (“3P”) gas reserves. We believe WPX, as a low-cost producer, has significant upside exposure to improving natural gas prices, with each $0.25 per mcf increase in the value of its gas reserves enhancing equity value by roughly $5.00 per share. Fundamentals, fortunately, seem to be providing some tailwind, with natural gas prices increasing nearly a dollar to approximately $4.39 over the last three months as a cold spring depleted gas in storage faster than expected.”
When those comments were written at the end of April, WPX was trading around $16. Recently, the stock has shot up to around $19+ as natural gas prices have recovered. However, there are still catalysts ahead that might put the stock higher:
- Higher natural gas prices has lead the company to increase drilling in the Piceance Basin region. This should boost production and ultimately profits. However, natural gas prices could turn due to weather fluctuations. So, the company is a bit risky in this regard.
- Taconic Capital, a hedge fund, reported a 6.39%+ stake in late May and will engage with management in order to increase shareholder value.
- WPX is considering disposing its 69 percent interest in Apco Oil and Gas International, Inc. (APAGF). The company has filed a 13D and management says this disposition could happen in early 2014. It is worth almost $250 million or $1.25/share.
- “WPX has completed a data room process for its holdings in Wyoming’s Powder River Basin, including the deep rights on its acreage. WPX is evaluating bids submitted by interested third parties and remains engaged with the process to explore the potential monetization of these assets.” On the conference call, management said that a deal could be announce in sometime June.
- The company is also looking at MLP possibilities in the San Juan or the Piceance regions.
I will initiate a position soon, but am still wary of the fact that the valuation is so greatly affected by natural gas prices.
Disclosure: I do not own WPX.