WPX Energy (WPX) still earned net income of $29 million in the third quarter of 2018 and has grown production 54% year over year despite seeing third-party processing disruptions and delays in bringing large multi-well pads on-line (due to poor weather).
These issues are temporary and should be resolved in the coming quarters. But it is encouraging to see these positive results for WPX, even with transitory issues weighing on the oil & gas sector, and points to its ability to execute in challenging times.
With optimizations in completions becoming more advanced, takeaway capacity being added, and the company's indifference to sub-$55 WTI prices, the recent pullback in shares is now posing a buying opportunity.
Cash Flow Will Double In Two Years Through More Advanced Completions Designs And Added Takeaway
WPX has always been concerned with finding the optimal completion techniques, i.e., experimenting with proppant types, proppant sources, perforations, fluid movement, and spacing strategies for its wells.
The company is continuing its evolution in the E&P space of finding better ways to stimulate rock. This knowledge, which is coming now in real-time from measurable data provided by fiber optics and tracers (as opposed to substantially longer lag times before using outdated methods), is understandably being closely guarded by WPX.
(Source: WPX Energy)
Investors will have to stay tuned for these results. But if WPX is correct in its assumptions on the viability of these completions and applies them to newer, larger pads, production should continue to rise in 2019 and 2020, and a double in cash flow will occur. These cash flow prospects are more than triple the amount that sectors outside of energy can offer, the company said. Here is how WPX phrased its ambitious cash flow goals for the future:
WPX has the capacity to deliver growth and a cash flow per share that's triple the projections of other sectors. Let me repeat that. WPX has the capacity to deliver growth in cash flow per share that's triple the projections of other sectors.
(Source: WPX Energy)
We fully expect to double our EBITDA and cash flow from operations over the next two years based on $65 oil and $3 Henry Hub prices. I think that bears repeating as well. We fully expect to double our EBITDA and cash flow from operations over the next two years based on $65 and $3 Henry Hub prices.
The company not only sounded bullish about its cash flow prospects compared to other market sectors, but had a few shots to send to the bears as well, who claimed that leverage was too high while cash flow prospects would be dim. WPX effectively warned the bears to change their skeptical tune:
Last year, during the same call, I made a similar comment. However the statement was made in regard to our leverage. That seemed to be the overhang to the WPX storyline. Well, we executed on the plan, and now, nobody asks questions about our leverage.
2019 is the year that we see cash flows from operations funding our base capital program. There were skeptics last year when we rolled out our plan to get our leverage down through the drill bit. And there will be skeptics this year on our free cash flow generation.
Not only did we hit our leverage goal, we exceeded it, that's what we do at WPX. With the team that we have here and the quality of the Delaware and Williston assets, not to mention our differentiating midstream strategy, I would be careful about the level of skepticism going forward.
Risks and Takeaway
The risks to WPX’s story are lower oil & gas prices, high leverage, and lack of takeaway capacity. However, these risks have been largely diminished due to a number of reasons. As we stated earlier, the company’s debt leverage has come down and its cash flow prospects are bullish.
Takeaway capacity in the Delaware Basin is also being addressed through the start-up of its new joint venture plant in Stateline, which will have 150 million cubic of processing capacity per day. This means 17,000 barrels of NGLs will be sent to Mont Belvieu, and they will be accompanied by an eventual 52,000 barrels of fractionation capacity there.
The new plant will also reduce flaring in the area, which is a problem many E&Ps have had trouble addressing, and will provide more flow assurance. Flow assurance is important because last September, for example, WPX had to store 165,000 barrels of NGLs that were postponed to be sold in November, since it did not have access to the processing plant. Because of this move, basis risk is more manageable.
As far as operating in a sub-$55 WTI environment, WPX remarked that even if it saw a $10-15 drop in oil prices, that activity wouldn’t change much. This is most likely due to the low breakevens that the company is receiving, which, if it is anything like EOG Resources (EOG), could be as low as $30 per barrel.
(Source: WPX Energy)
Hedges are off for 2020 at the moment, too, which adds more color to WPX’s level of bullishness. But the company also said that if oil prices jumped to $75, it wouldn’t necessarily add rigs either. All moves will be done responsibly with a focus to spend within cash flow.
It is important to note that as production rises, so will certain costs like depreciation. However, DD&A rates per barrel dropped from $18.72 last year to $17.01 in 2018 - proving that, ultimately, wells are being drilled at a lower cost, even when factoring in increased depreciation.
WPX has its processing capacity in place to grow production in the fourth quarter of 2018 and beyond. Cash flow is also expected to double in the next two years as a result of the increased production, which is enabled by the evolving drilling and completions techniques by WPX and added processing capacity for its volumes in the Delaware. As a result of the recent dip in shares, WPX is offering a unique opportunity to go long shares and grow alongside the company.
Disclosure: I am/we are long GUSH. 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.