1 Stock to Gain From the Niobrara Beast

Nearly two years after being spun off from Williams Companies (NYSE: WMB  ) , WPX Energy (NYSE: WPX  ) is finally seeing decent stock gains. The large natural gas producer has been pushing toward drilling for oil, but ironically a massive natural gas find places this stock on a path to huge reserve growth.

Compared to other natural gas producers such as Range Resources (NYSE: RRC  ) and Southwestern Energy (NYSE: SWN  ) , the stock trades at sub-par multiples. Due to the massive well in the Niobrara shale called the 'beast,' it could finally be back on a growth trajectory. 

Niobrara beast
WPX drilled a well in the Niobrara shale that produces so much natural gas it is being called the 'beast.' The well in western Colorado produced an initial high of 16 MMcf/d and averaged an incredible 12 MMcf/d over the first 30 days. In total, the beast generated 1.4 Bcf in the first 180 days. After eight months, it was still generating an amazing 4.4 MMcf/d. The discovery was so massive that the CEO made claims that the potential existed to more than double their current 18 Tcfe of 3P reserves. The company has over 4.6 Tcfe of proved reserves on 1.6 million acres.

While obtaining limited attention, the stock has continuously gained since that announcement back in January. A major advantage of this production is the advantageous location to under-utilized gathering and processing resources built up during the last natural gas boom. Further increases in production will not require any material capital expenditures to get the product to market unlike the bottlenecks that continuously pop up in new shale areas such as the Bakken and Marcellus.

More than just gas and the Niobrara
While the Piceance Basin, which includes the Niobrara, makes up around 65% of its existing proved and unproved reserves, the company has large land positions in the Marcellus Shale, San Juan Basin, and Power River Basin that each provide over 1 Tcfe of potential reserves focused on natural gas.

In addition, the recent focus on improving oil production has allowed the company to build a position of 80 Mboe of proved reserves in the Bakken and a 69% ownership of Apco in Argentina, which has 25 Mboe proved reserves.

How does WPX compare?
Though WPX has made inroads into oil production via assets acquired in the Bakken, the vast asset base continues to be focused on natural gas regions. A couple of interesting comparable stocks are Range Resources and Southwestern Energy, which have considerably higher valuations. Due to consistent production growth and profits, investors have rewarded these stocks with these higher valuations despite having similar production capabilities and reserves.

At the end of 2012, Range Resources proved reserves increased 29% to 6.5 Tcfe. It lists an incredible unproven resource potential of 48 to 68 Tcfe, including 2.3 to 3.5 billion barrels of oil and NGLSs.

Southwestern Energy produces natural gas from more than 1.5 million acres of land principally located in the Fayetteville Shale in Arkansas and the Marcellus Shale in Pennsylvania. Due to a 2 Tcfe reduction of previous reserve estimates based on low natural gas prices, the company only listed 4 Tcfe of proved reserves at the end of 2012.

So while WPX Energy is comparable on reserves and actually has higher production levels, it doesn't compare on the stock valuation. Both Range Resources and Southwestern trade for approximately $13 billion while WPX languishes at around $4.4 billion. In fact, Bloomberg compiled data suggesting WPX trades as the cheapest oil producer in the S&P 500 at a price-per-barrel ratio of 5.5.

Bottom line
Due to the new discovery in the Niobrara Shale that should lead to production growth and a large reserve increase by 2014, WPX trades at an attractive valuation. A second and third well in the shale to be completed this year could help confirm the potential in that area. If the beast turns out to be a normal Niobrara well, the stock could absolutely fly higher.

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