WPX Energy Still Lacks Growth, Leading to Low Valuation

Several years after a promising spinoff from Williams Companies (NYSE: WMB  ) , WPX Energy (NYSE: WPX  ) is still struggling to build a growing production base. The E&P has hit some prolific wells in the Niobrara Shale, yet issues in the Marcellus combined with declining legacy fields have left the company bumping along the bottom. At the time of the spinoff, WPX Energy reached production levels of 1,308 MMcfe/d and forecasted that the 13% annual production growth would continue.

The guidance for 2014 again shows a natural gas producer stuck in its tracks. This is in contrast to Range Resources Corporation (NYSE: RRC  ) , which continues to produce higher volumes and ramp up proven reserves in the very region where WPX Energy is having the most problems.

Over the last three years, investors saw large gains in Williams and got a 4% dividend while all the headaches were spun off to WPX investors. The value-unlocking transaction has yet to prove the original case, but some signs are emerging that it might finally happen toward the end of 2014.

Increased oil production not enough
WPX Energy provided guidance for 2014 that includes nearly 40% growth in domestic oil volumes while long-lived natural gas assets will pull down the overall growth. In total, WPX forecast a Dec. exit rate of 1,310 MMcfe/d, notably flat with the production rate back at the time of the spinoff in 2011. On top of that, the company had to write off $1.4 billion worth of assets in its Appalachian and Powder River properties due to lower forward natural gas prices. Consequently, the stock slumped 10% for the day.

The good news is that oil production will increase in 2014 from 25% more wells drilled in the Williston Basin and a doubling of activity in the San Juan Gallup area. Even better, the primary natural gas area of the Piceance will have a production exit rate 6% higher than the 2013 exit rate.

In total, the production is forecast at around 1,210 MMcfe/d during the first quarter with that number ramping up to average nearly 1,250 MMcfe/d for the year. As mentioned above, the exit rate will be considerably above the first quarter production, though investors aren't likely to be happy considering the third-quarter 2013 production was 1,2677 MMcfe/d. The limited year-over-year gains despite the huge finds in the Niobrara are very discouraging.

Range saw no Marcellus problems
While WPX Energy took a huge charge to write down Appalachia or Marcellus properties, Range Resources continues to plug away with substantial gains in proved and unproved reserves. Range reported that proved reserves increased 26% to 8.2 Tcfe, driven primarily by the developments in the Marcellus. Also, the company released that total unproved reserves potential increased to 64 to 85 Tcfe. The numbers grew substantially from the 48 to 68 Tcfe at year-end 2012.

Range attributes 62% of the unproved reserves to the Marcellus Shale were it has 955,000 net acres across the play. Interestingly though, Range didn't report any of the writedown issues apparently faced by WPX Energy due to lower forward gas prices.

Bottom line
While WPX Energy continues to take one step forward and one step back, investors have to wonder why its problems in the Appalachia area aren't being felt by a leader in the Marcellus. The valuation discrepancy is stunning, with Range Resources having a market value of nearly $10 billion more than the lowly $3.4 billion of WPX. The numbers are likely to stay dramatically different until WPX can generate the actual growth in production that it has spent the last three years trying to obtain.

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