Investors Wait for Lightning to Strike Twice at WPX Energy

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Written by John Egan for Industrial Info Resources (Sugar Land, Texas)--Could lightning strike twice? Investors in WPX Energy Incorporated (NYSE:WPX) (Tulsa, Oklahoma) certainly hope so. Last May, WPX hired longtime Continental executive Rick Muncrief as president and chief executive officer. As a senior executive with Continental Resources Incorporated (NYSE:CLR) (Oklahoma City, Oklahoma) between 2009 and 2014, Muncrief helped grow that company's Oil & Gas reserves, production and share price more than four-fold, while lowering production expense by more than 15%.

Muncrief's arrival at WPX last May helped to push up the stock by about 10% that summer. But the collapse of crude oil prices has cut WPX's share price in half over the last six months. And despite higher production and a series of strategic moves--selling peripheral assets, shifting to an oil-heavy portfolio, trimming capital spending, and consolidating staffing--investors remain unimpressed.

WPX, which The Williams Companies Incorporated (NYSE:WMB) (Tulsa, Oklahoma) spun off as an independent exploration & production company in 2012, reported strong full-year 2014 results last month, including:

• a 74% increase in cash margins
• a 56% increase in crude-oil production
• a $190 million surge in crude oil sales
• a $106 million jump in natural gas sales
• a 421% proved oil replacement ratio

Net income of $164 million for 2014 was a dramatic improvement over a $1.185 billion net loss in 2013, though that year's results were hurt by $1.2 billion in non-cash charges. WPX's proved reserves as of December 31, 2014, totaled 4.36 trillion cubic feet of gas equivalent (Tcfe), or 727 million barrels of crude oil equivalent (boe).

Still, investors were unimpressed, for two reasons: WPX cut its 2015 capital budget about 50%, to approximately $725 million, and the company forecast a slight reduction in hydrocarbon production on a boe basis.

"Our capital plan is prudent, disciplined and consistent with our long-term focus," Muncrief said last month in announcing the company's reduction in capital spending. "At the same time, we have financial and operational flexibility because of how well we executed over the past year, completing asset sales, increasing oil volumes and heavily hedging our 2015 production at very favorable prices. We'll stay primed to accelerate development, even as we take appropriate steps to respond to current prices."

Over the last year, WPX entered into six agreements to sell non-core assets worth more than $1 billion that will narrow the company's focus and strengthen its balance sheet. WPX is still trying to sell its properties in Wyoming's Powder River basin and the last of its assets in Pennsylvania's Marcellus Shale.

If those deals close, WPX will emerge as a more focused company with operations in three areas: Colorado's Piceance Basin, New Mexico's San Juan Basin and North Dakota's Bakken Shale. The company operates more than 5,800 wells in those three areas.

The company expects to increase crude-oil production 15% to 20% this year, despite the cutback in capital outlays. The growth in production is expected to come largely from operational improvements and efficiencies in the field. WPX said it is building an inventory of wells that it will complete when commodity prices are more favorable. But reduced development activity will lower overall production of crude oil, natural gas and natural gas liquids (NGLs) this year by about 4% on a boe basis, it forecast.

WPX said it has hedged approximately 75% of its anticipated 2015 natural gas production at a weighted average price of $4.10 per million British thermal units (MMbtu) and approximately 66% of expected oil production this year at an average price of $94.88 per barrel. Both prices are significantly above the daily cash prices for their respective commodities.

This year, WPX plans to invest about $275 million to $300 million in development activities in the San Juan Basin; $200 million to $225 million to develop assets in the Williston Basin; and $200 million to $225 million for Piceance Basin development. An additional $25 million is earmarked for land and exploration.

WPX started 2015 with five rigs in the Williston Basin, but that will fall to one rig by late Spring, where it will remain for the rest of 2015. In the San Juan Basin, the company started the year with three rigs, but it already has ramped down to two rigs, where it will stay for the remainder of 2015. And in the Piceance Basin, WPX's rig activity will fall to three from eight this year.

Earlier this month, WPX reduced its staff by 9%, about 83 employees, and moved to bring nearly all employees to its Tulsa headquarters. These moves followed a voluntary retirement program in 2014 that reduced staff by about 100 positions.

In a statement announcing the staff cuts earlier this month, CEO Moncrief said: "These are tough decisions that impact good people--people who have worked hard and done their best for WPX. We've evaluated many options to adjust our cost structure, and no solution is perfect. Decisions are especially difficult when they affect people's lives."

"Like nearly all of its brethren Oil & Gas producers, WPX has had to make difficult choices as crude-oil prices fell by more than 50% and gas prices softened," said Jesus Davis, Industrial Info's vice president of research for the Oil & Gas Production, Pipelines and Terminals industries. "Investors want dramatic results, and they typically want them yesterday. We think WPX has a bright future, led by a first-class operator like Rick Muncrief. He's doing all the right things to position the company for a turn. We expect Wall Street will change its mind about WPX when oil and gas prices increase."

Industrial Info Resources (IIR), with global headquarters in Sugar Land, Texas, three offices in North America and 10 international offices, is the leading provider of global market intelligence specializing in the industrial process, heavy manufacturing and energy markets. Industrial Info's quality-assurance philosophy, the Living Forward Reporting Principle™, provides up-to-the-minute intelligence on what's happening now, while constantly keeping track of future opportunities.