While Whiting Petroleum (NYSE:WLL) posted solid EPS and CFPS beats in 3Q, headline production was disrupted due to unplanned downtime at a third-party processing plant and asset sales. As a result, WLL lowered full-year production guidance by ~2.4% at the mid-point. The updated range is 117-118 MBoe/ d vs. the prior guidance of 119-121 MBoe/d. As we'll discuss in more detail, the bright spot in the release was the company's Redtail program, as its completion schedule came in ahead of schedule, which led to noticeable sequential growth. Although Whiting has its challenges ahead (stemming primarily from the Niobrara), I believe through the implementation of management's plans in the Niobrara coupled with improved crude pricing and basin differentials in the Bakken, WLL will find its way through the rubble and back into the good graces of the Street.
Redtail Program Creating Value:
Looking back into last quarter, WLL dropped its only rig in the Niobrara as a result of the 14% decrease in capital spending, with the intention to focus solely on completing DUCs. The company began the year with 105 DUCs and planned to drill 82 over 2H17. Since its revised development plan focused heavily within the Bakken acreage, Whiting indicated that it would incur deficiency charges related to shortfalls in delivering the minimum committed production volumes. At 2Q, the two contracts had remaining delivery commitments of 10.1 MMBbl for 2H17 and 21.5 MMBbl, 23.3 MMBbl and 6.6 MMBbl for YE’18-20, respectively. Whiting was ~3,000 boe/d short in 2Q, and it cost it ~$19mm which had a ~$2.80 effect on the company-wide differential. The company also has other contractual obligations in the Redtail such as a $129mm water disposal agreement, $26mm purchase obligation and $59mm transportation agreement all containing deficiency payments in the event minimum commitments are not met. This left a bad taste in the mouths of investors. However, although an overhang in recent quarters, the Redtail proved to be the bright spot in the 3Q release. Production in the area increased 78% Q/Q, driven by 58 gross completed wells. The company also indicated the potential to add a rig back into the Niobrara if crude prices reached around $55/bbl, which, at current prices, seems likely. And further, management indicated a potential sale of the Redtail Gas Plant, which I believe to be a strong possibility given the prior sale of the Robinson Lake and Belfield natural gas processing plants earlier this year, which fetched $375mm. So, while the Redtail is still fraught with issues, management has acknowledged them and creating potential solutions to those problems.
Consistent Performance in the Bakken:
Over the last few quarters, the company has produced outsized well returns in the Bakken through the use of enhanced completions (higher proppant loadings of 9MM lbs., diverters, tighter stage spacing, increased frac entry points, etc.), and these results continued through 3Q. Driven by its enhanced completion program, WLL’s Bakken wells continue to track its type curves. Following the success of the first Koala well which came on at ~4,300 Boe/d, the six-well pad continues to track a 1.5 MMBoe type curve. The wells were completed utilizing 9.8m lbs. of sand and 40 stages. In addition, the two-well Nelson pad completed in the Three Forks formation are tracking a 1.5 MMBoe type curve, utilizing 10.0m lbs. of sand and 44 stages. The company has shown marked improvement in the performance of its wells as a result of its enhanced completion program. With ~89% of total production and ~91% of potential drilling locations located in the area, the Bakken continues to be the value driver of the company.
Differentials & Capital Efficiency Improving:
As a result of improving differentials in the Bakken, WLL realized a $0.91 gain in crude price in 3Q relative to the previous quarter, despite a $1.25 drop in benchmark prices over that same period. Further, the company believes that at $46/bbl crude, it can generate growth into 2018, while executing close to a cash-flow neutral program. With well costs projected to be flat due to various pricing commitments and only $650mm in maintenance capital required to maintain ~126 MMBoe/d in production, I believe WLL’s efficiency in the Bakken will continue to improve.
While concerns mounted over the inefficiencies in the Niobrara, the company seemed to address those concerns by indicating the possibility to either increase the activity in the area with another rig or by monetizing it. Additional takeaway capacity in the Bakken continues to drive down basin differentials and well results continue to track type curves. With a current net debt of ~$3.3B (including AROs) and a YE17 net debt/EBITDAX ratio of ~4.1x (based on my calculation), I would not be surprised to see asset sales in the Niobrara or non-core Bakken area in the upcoming quarters. While stock performance has lingered recently, I believe investors are in show-me mode, waiting for the company to implement some sort of mitigation plan in the Niobrara. I find myself in a similar position, and believe that once management gets the ball rolling in Redtail, investors will have more confidence towards the direction the company is headed and be more willing to pull the proverbial trigger on the stock.
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