The prime beneficiaries of the Organization of Petroleum Exporting Countries decision to cut production are domestic producers in the Permian Basin. One such firm is WPX Energy (NYSE:WPX) that made a risky acquisition in the area back in 2015 that is starting to pay off big time.
The stock is up over 25% today to new multi-year highs. Other stocks focused on the area are at new all-time highs, suggesting some more upside might exist in WPX Energy.
OPEC agreed to cut oil production by roughly 1.3 million bbl/d. Other non-OPEC members like Russia agreed to cut another 600,000 bbl/d, putting the total cut near 2.0 million bbl/d. The big question is whether the cuts will actually hold considering domestic drilling in the U.S. will ramp up production with oil prices at $50/bbl.
Back in 2015, WPX Energy bought privately-held RKI Exploration & Production, LLC for $2.35 billion. The deal was transformative, but highly risky as the company was forced to sell assets into a very weak market. My investment thesis correctly told people to avoid the stock that eventually collapsed another 50% to below $4.
RKI had production of approximately 22,000 boe/d and 92,000 acres in the core Permian's Delaware Basin. The company suggested the purchase price was $50,000 per flowing barrel and $12,500 per acre for the undeveloped acres. WPX Energy assumed $400 million in debt along with the deal that in essence covered the midstream assets purchased in the deal.
Since this transformative deal, WPX Energy purchased another 12,500 acres for an average price of $7,900 per acre. The total portfolio equals 102,500 acres and substantial drilling sites in multiple zones.
Source: WPX Energy 3Q16 presentation
The company has increased the drilling sites by over 50% since the RKI deal to over 5,500 sites now. The net resource is over 2.4 Bboe. These amounts don't even include the Williston and San Juan Basin resources.
Deutsche Bank made an incredible call on WPX Energy only on Monday. The analyst raised the target on the stock to $17 as the companies with the biggest rate of change in the Permian Basin were the projected best stocks to own. The call included Callon Petroleum (NYSE:CPE) that is up a similar amount today.
The investment thesis is really whether one believes the projected growth rates and hence huge jumps in forecasted EBITDAX. WPX Energy forecasts the ability to double oil production by 2018 and nearly again by 2020. The end result is EBITDAX approaching $1.2 billion by 2018 for a stock with an enterprise value of roughly $7.5 billion after the run today.
Source: WPX Energy 3Q16 presentation
Other stocks focused on the Permian Basin are up sharply over the last three years. Diamondback Energy (NASDAQ:FANG) and Callon Petroleum are up over 100% during the time period while WPX Energy is still down.
The key investor takeaway is that despite the big gains today, WPX Energy appears poised to head higher. The oil producer benefits from the OPEC production cut and the perfectly timed move into the Permian Basin that isn't fully appreciated by the market.
Disclosure: I am/we are long WPX.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: The information contained herein is for informational purposes only. Nothing in this article should be taken as a solicitation to purchase or sell securities. Before buying or selling any stock you should do your own research and reach your own conclusion or consult a financial advisor. Investing includes risks, including loss of principal.