Whiting Petroleum (NYSE:WLL) is a Bakken-focused company with two catalyst plays in the Permian and DJ Basins and an ancillary enhanced oil recovery (EOR) project in West Texas. While the company has been operating in North Dakota since the 1950s (legacy production is from the Madison formation in Billings County), it burst onto the scene in 2008 with a number of banger wells in Mountrail County. Its Behr 11-34H well, spudded in April of 2008, has already produced 846k barrels of oil and 495 million cubic feet of natural gas (929 BOE) as of August, 2012. The Behr well wasn't alone, as the company seemed to drill gusher after gusher in Mountrail County's Sanish field through 2010, sending its stock price soaring nearly 250% to $74.50 when it peaked in April of 2011.
Since its peak, lower production rates in the Sanish combined with a lack of (investor) enthusiasm regarding its other acreage plays led to an effective crash in its stock price throughout the latter half of 2011 (see graph below). WLL's stock price has since recovered value, but remained 36% lower than its peak when it closed at $48.02 on October 16, 2012. Was Whiting's stock overvalued when it peaked? Maybe. Is it undervalued now? That's the question I hope to sufficiently answer throughout the balance of this article.
Whiting-WTI Stock Price Graph
Source: EIA / Yahoo Finance.
*Adjusted for 2:1 stock split in February, 2011.
Source: North Dakota Oil and Gas Commission.
In my analysis of Whiting's acreage, I looked at 59 wells it had drilled in Mountrail County where the company has 83k net acres and has drilled more than 250 wells. These 59 wells had an average 29-day IP rate of 718 barrels of oil per day (BOPD). This IP rate projects to an average daily rate during the first year of production of approximately 368 BOPD and a 43% decline in production during the second year. The decline I calculated was lower than expected and probably lower than Whiting would tell you. Declines ranged from 22% to 59% in the wells I looked at in this IP rate range (see table above), meaning well size varied. To be conservative, we could easily use the upper bound as a decline for this prospect.
(Note regarding methodology: To determine expected production and decline rates, I first looked at a large peer group to determine average production of the entire program and then looked at a smaller, more specified group with rates that I felt would be representative of the entire group average. From this smaller group (shown in table above), I determined initial production and decline rates. Economics do not include natural gas sales which vary due to lack of infrastructure in the area. When calculating payback period, I assumed each well drilled for 328 days in its first year and 344 days in its second year, averages consistent with the wells I looked at.)
Prior to 2011, we could expect WLL's average Mountrail County well to net approximately $8.4 million (assumes $85 oil and 82% NRI) or 40% more than its average well cost of $6 million, and $5.0 million in its second year assuming a 43% decline or $3.6 million assuming a 59% decline. These are the robust economics that WLL's stock price soared under, so what changed? Well for starters, the company only has about two years left of inventory in Sanish. Whiting expects to keep nine rigs active in the area, which would imply an upper bound of 216 additional locations assuming each of its rigs drill 12 wells per year which is their maximum rate.
While that's a lot of Bakken wells, they will only fuel growth for another two years, and adding fuel to the fire, the company's completions in Sanish have gotten worse over time. During 2011, the company's average well produced at a 30-day production rate of 521 BOPD based on the 14 well sample size I looked at, 27% less than the production rate of its entire Sanish program.
Sanish Declines (2011)
Source: North Dakota Oil and Gas Commission.
The table directly above might be a more accurate depiction of the company's production rates in the Sanish moving forward. Under this assumption, Whiting would still pay for its well costs in year one with an average revenue of $6.2 million per well (26% lower than average revenue for the total program). In year two, the well would net an additional $3.7 million assuming a 43% decline or $2.7 million assuming a 59% decline. While these economics aren't as robust as the total program economics, the company is still paying for its well costs within a year which is competitive with the operators in its peer group.
Sanish has been Whiting's most important asset during the last five years. That's going to change soon, as the company finishes development of the prospect and ramps-up on its Lewis and Clark/Pronghorn prospect which WLL will speak just as highly of as it does of Sanish.
In Lewis & Clark/Pronghorn, the company holds 261k net acres or 214% more than at Sanish. I've looked at 27 Stark/Billings County wells that Whiting has drilled and the economics appear similar to Whiting's recent result in the Sanish field, with an average 30-day production rate of 482 BOEPD or 7% less than the rate the company's Sanish wells produced at during 2011. While none of the wells in the table below have enough data to determine a one-year decline, I looked at three wells in the prospect that did have enough data, Buckhorn Ranch 31-16H, Froehlich 44-9TFH and Kubas 11-13TFH and extrapolated a 59% decline rate for the entire program. Average well costs for this program are $7 million per well, from which we can estimate a payback period between one and two years.
Lewis & Clark/Pronghorn Rates (2011)
Source: North Dakota Oil and Gas Commission.
Outside of the Bakken, Whiting has 79k net acres in its Redtail play in Colorado's DJ Basin. While WLL has sounded optimistic about its Redtail acreage on conference calls, the reality is it hasn't had much success in the DJ Basin. Its well costs, between $4 and $5 million per well, are less than in the Bakken, but its average 30-day production rate is only 229 BOEPD (82% oil) per well. Whiting is still tweaking its drilling and completion techniques here, but both Noble (NYSE:NBL) and Carrizo (NASDAQ:CRZO) have had more consistent rates in this field. The Niobrara is a difficult formation to operate in, just ask Chesapeake (NYSE:CHK) and GMX Resources (GMXR), who have both put their acreage up for sale. WLL might be better off doing the same or entering into a JV with an experienced Niobrara operator.
Whiting's Big Tex prospect in the Permian Basin could be a catalyst for the company as it has 87k net acres in the play. Its results here have been stronger than in the Niobrara, meaning it might have a new play from which it can increase its reserve life and provide cash flow for the development of its Bakken acreage. The company's EOR project in Texas is another nice cash flow piece for the company, but it's not going to provide much of a stock price catalyst moving forward.
Whiting Valuation Table
(click to enlarge)
On an EV/Production and EV/Reserves basis, Whiting is undervalued with respect to its peer group by a long-shot. The market is valuing its production and reserves by approximately 60% and 40% less than the peer group average, respectively. The market is not only questioning the quality of its reserves, but also the quantity as the table shows. Its reserve life is much lower than the peer group, which indirectly affects its production valuation. To give you an idea of how undervalued Whiting is, its production rivals Continental's (NYSE:CLR), while its enterprise value is 43% of CLR's. Is the market correct in its assessment or has Whiting's stock been oversold?
Whiting has one major hole in its story, and that's reserve growth. I believe the market is undervaluing its Lewis & Clark/Pronghorn assets which should provide stable growth for the company moving forward. With its Starbuck, Missouri Breaks and Big Island prospects, it has several other acreage positions in the Bakken which could serve as catalysts for the company down the road. I view its prospects in Colorado and Texas as ancillary to its Bakken acreage, but nothing to get too excited about. Additionally, it's a company who has been mentioned in M&A talks recently and it could provide oil weighted production for a gassy major or an Asian company looking to bring oil back East. The bottom line is these guys are an experienced operator that produces a lot of oil from one of the better basins on the planet. Whiting might not make you rich, but it's cheap right now, which makes it an attractive buy despite its deficiencies.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.