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WPX Energy (WPX) is an American natural gas exploration and production company with significant ownership of a South American energy company, Apco.

In January 2012, WPX was spun off by Williams (WMB). This is good news because spin-outs generally tend to outperform the market by 22% in their first year. In addition, WPX appears cheap relative to the broader natural gas sector on a fundamental basis. WPX is trading below its fair value and the valuations of peer companies. This is one case where it's cheaper to buy natural gas on the stock market than to get it out of the ground. Additionally, I believe natural gas may be cheap, albeit on a long term view.

The attractiveness of spin-offs

A spin off is where a company separates part of its business and lists it on the stock market as a separate company. Spin-off companies often outperform the broader market as historical analysis by Credit Suisse shows 22% outperformance of spin offs in the year after the spin-off. As a result of the general attractiveness of spin-offs, it's worth looking at WPX Energy, which as I mentioned is the E&P business spun out of Williams on January 3, 2012.

WPX is relatively cheap on price to book

WPX appears cheap relative to similar E&P companies. Here are the WPX's fundamentals based on Yahoo Finance data:

CompanyPrice/Book
WPX Energy0.57
Linn Energy LLC (LINE)1.89
Chesapeake Energy Corp (CHK)0.89
SM Energy Co (SM)2.13
EV Energy Partners L.P. (EVEP)1.98

Other metrics for WPX:
EV/EBITDAX - 3.6x
Price/Sales - 0.84x
Price/Earnings - na (due to negative earnings)
Dividend Yield - 0%

Clearly, WPX Energy is extremely cheap on a book value basis, which is encouraging.

Risk Factors

  • Unlike just about all other commodities, the natural gas price has been low, but has rebounded strongly in recent months. There is a risk that the price of gas falls below the cost at which WPX can produce it (this cost was $1.72 in 2010 before general and administrative costs, the current natural gas price is around $3).
  • The same research that shows spin-outs can outperform by 22% in the year after issuance shows that on average that outperformance can take 6 months to occur, and only 70% of spin-outs outperform.
  • WPX is unproven as a separate of company, the caliber and capital discipline of management is as yet unproven.
  • WPX own 69% of the South American E&P company Apco (APAGF) at current valuation levels, this Apco stake is 10% of the value of WPX. Therefore, any change in the valuation of Apco will impact WPX. The Argentine government's recent seizure of YPFassets is a concern given Apco is also an Argentinian oil and gas producer, however, Apco has traded down to about a third of its former value in part because of this risk and has suspended its dividend to fund capital investment.
  • Poor momentum - WPX has drifted lower by ~5% in its first week of trading; it may take time for the fundamental value to be realized.

Recommendation
Acquire WPX as it appears cheap relative to the natural gas sector, especially if you are bullish on natural gas prices for the long-term. The price is volatile and patient investors may want to wait for a price closer to $13 rather than the current $16; nonetheless, there is upside at either price on a long term basis. WPX's Apco stake may also present reasonable upside if the Argentinian government does not seize the assets of further Argentinian oil and gas companies and Apco's equity has already been marked down significantly because of that risk.

Source: WPX Energy - A Natural Gas E&P Spin-Off At A Discount