WPX Energy: Painfully Building the Foundation for Growth

WPX Energy (NYSE: WPX  ) continues to build the foundation for growth, yet the improvements aren't showing up in recent results. Like any oil and gas exploration and production company trying to turn around operations, any gains in the short term can quickly be offset by declining production from old wells. Until the company can drill enough new wells, the positive results can be hidden, as is the case with WPX Energy.

The first quarter sequential gain in natural gas production is a signal that WPX has finally turned the corner. Combined with a substantial increase in oil production, the company is set to benefit from the suddenly surging natural gas prices and stubbornly high oil prices.

With a 2013 capital budget of $1.2 billion and earnings before interest, taxes, depreciation, and amortization expected south of $800 million, WPX is looking to unload the Apco Oil and Gas International  (NASDAQ: APAGF  ) position. Considering the valuation of industry leader Southwestern Energy (NYSE: SWN  ) that is focused on natural gas in two major shale plays, the move by WPX to consolidate efforts by selling Apco appears very prudent.

Niobrara beast times two
The impressive results in the Niobrara continue with the second well producing an impressive initial production of 11.8 MMcf/d from the lowest pressure area in the 180,000 acres WPX Energy owns. The well has been choked back to 8 MMcf/d. In essence, the second well could be the lowest producing well due to the shallowest formation of the acres owned -- a very positive sign for future development.

The original well, called the "Niobrara Beast," produced an incredible initial production of 16 MMcf/d and more than 10 months later is still producing 3.5 MMcf/d. Both of those wells are listed as the top-two producers in the region. The third well encountered technical issues, and the next two wells are in the drilling process. With the combination of these new wells and natural gas production finally reaching sequential increases, the company has the foundation for a strong 2014.

These results don't even include the strong 40% growth reached in both the Bakken and the Marcellus. Unfortunately the Marcellus only counts for 9% of total natural gas production, and the shale continues to encounter infrastructure problems that will limit near-term growth. The Williston Basin in the Bakken continues to see large gains, including a 14% sequential increase in quarterly oil production.

Unloading Apco
WPX holds an approximate 69% controlling interest in Apco, which owns oil and gas interests in Argentina and Colombia. The market currently values Apco at $412 million, providing WPX with an interest worth $285 million. The company has retained financial advisors, but it might be difficult to unload at the market value.

For the third quarter, Apco generated nearly $34 million in revenue and had adjusted net income of $7.7 million prior to taking a $13.7 million charge related to new tax legislation enacted by the Argentine government. The company is spending a significant amount of capital drilling in the Neuquen basin. It spent nearly $41 million over the first nine months of the year drilling 20 development wells and three exploration wells in the Neuquen plus two wells in Colombia.

Southwestern example
With a market cap approaching $14 billion, Southwestern continues to provide WPX the path to rewarding shareholders. Southwestern has a similar revenue base yet a market cap almost four times the amount of WPX. The key to the Southwestern success is the focus on a couple of primary exploration areas where operations can continuously be improved. Not to mention, Wall Street loves the consistent growth that Southwestern has provided over the years.

Whereas WPX expects a 10% drop in revenue for 2013 followed by an 11% rebound in 2014, Southwestern expects consistent growth each year. Though Southwestern saw earnings bounce around, including a drop in 2012, it expects a rebound 2013 and out years. The higher natural gas prices should start pushing expectations even higher.

Bottom line
The laser-like focus of Southwestern hopefully provides WPX with a blueprint for increasing shareholder wealth. The plans to unload the Apco position, while not financially material, will help provide more of a focus on the important development areas. WPX is quickly turning the Niobrara assets into a very valuable resource.

Along with the Bakken Shale oil assets and the potential in the Marcellus once third-party infrastructure improves, WPX will have all of the development areas it needs. With natural gas prices hitting multi-month highs and WPX plunging 20% in recent weeks, the stock is aligning for a great entry point with the foundation built for long-term success.

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