Just like many of the other players in the oil and gas E&P (exploration and production) space, WPX Energy Inc. (NYSE:WPX) has endured its share of a crisis of confidence from market participants. Despite significant levels of pessimism circling around it and players like it, however, the fact of the matter is that management continues to surprise investors, showing them just what kind of upside exists so long as the company keeps pushing forward with its current plans. Not only that, but a bold new decision by the board has helped to add yet one more (rather big) reason to the list of why investors should consider a stake in a quality operator like WPX.
Right now, there’s a lot of data that suggests a slowdown is occurring in the oil and gas space. Between the rig count, as measured by Baker Hughes, a GE Company (BHGE), continuing to drop more weeks than not, and the fact that the EIA’s (Energy Information Administration’s) DPR (Drilling Productivity Report) is showing smaller region-specific production increases than we have seen in years, it looks like the industry as a whole might be nearing a turning point that could result in less production (or at least less production growth) than what the market as a whole might be anticipating. Having said that, it seems that the management team at WPX has not received any sort of memo indicating any of this to be the case, because, in its second quarter earnings release for its 2019 fiscal year, the firm shared with investors a bullish truth: the party is only getting started.
According to management, the company has recently decided to increase its guidance for its current fiscal year when it comes to oil and gas production. Instead of the 56.58 million boe (barrels of oil equivalent) the business intended to produce for 2019 when it announced guidance earlier this year, it now believes output will be about 4.8% higher than this at 59.31 million boe. What’s most exciting about this is that this uptick in guidance is coming despite management’s expectation that capex will remain unchanged at between $1.10 billion and $1.275 billion.
As a result of this revision, the company now is forecasting positive free cash flow for the third and fourth quarters of this year, as well as for 2019 as a whole. In all, free cash flow in the second half of 2019 should range between $100 million and $150 million. There is one caveat here. In order for management’s guidance for the full year to be accurate, they are either factoring in proceeds from asset sales (which I believe is inappropriate) or they are assuming that second-half free cash flow will come in toward the high end of their range. This is because, in the first half of 2019, operating cash flow was $634 million, while capex was $774 million, giving us a deficit in this time frame of $140 million. To be free cash flow positive for the year, the company will have to see free cash flow in the second half of $141 million or higher.
Irrespective of what this situation ends up looking like, investors in the company should be pleased, because the fact of the matter is that things are progressing quite well for the business. In the first half of 2019, EBITDAX totaled $651 million, while EBITDA itself was $603 million (both on an adjusted basis). To put this in perspective, EBITDAX in the first two quarters of the company’s 2018 fiscal year was only $487 million, while EBITDA totaled $451 million. This kind of growth has only been possible thanks (at least in large part) to the firm’s growth ambitions. Last year, production for the firm was only 46.40 million boe if you exclude 2.20 million boe associated with discontinued operations. This year’s projected figure implies a nearly 28% increase over the amount produced in 2018. That’s a hard growth rate to beat.
Except for the major oil and gas firms out there today, it’s nearly unheard of for a player to be engaging in stock buybacks. Instead, all capital seems to be split in some manner between growing organically, acquiring attractive assets, and/or paying down debt. WPX doesn’t want to be like these other firms though, so because of the improvement in their own operations and because management views the market as being ‘irrational’ right now with regards to how players in the space are being treated, the firm has elected to announce the launch of a $400 million share buyback.
Over the next 24 months, management intends to allocate up to the full $400 million target toward buying back stock, though the actual amount purchased will probably depend on both where WPX’s share price moves and will be determined by market conditions that impact the company’s cash flow picture. Based on the firm’s current market cap of about $4 billion, if shares don’t move materially from here, the company should be able to buy back around 10% of their outstanding shares between now and the time the plan is completed, but the actual percent will likely be smaller. Either way, with how low shares have drifted in recent months, a buyback may be one of the best things the company could be doing with its capital at this time.
At this moment, WPX continues to strike me as an interesting player in the oil and gas space. In my Marketplace Service, Crude Value Insights, I made the case that the firm offers attractive upside, but not as much as some of the other prospects I have covered over time. To be fair, at the time of that article’s publication, WPX was trading for $12.34, and as I type this, shares have dropped to $8.93, so with a likely price range of $18 to $25, I would re-evaluate my stance today to make it considered more attractive.
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This article was written by
Daniel is currently the manager of Avaring Capital Advisors, LLC, a registered investment advisor that oversees one hedge fund, and he runs Crude Value Insights, a value-oriented newsletter aimed at analyzing the cash flows and assessing the value of companies in the oil and gas space. His primary focus is on finding businesses that are trading at a significant discount to their intrinsic value by employing a combination of Benjamin Graham's investment philosophy and a contrarian approach to the market and the securities therein.
Disclosure: I/we 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 (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.