Since its spinoff from Williams Companies (NYSE: WMB ) , WPX Energy (NYSE: WPX ) has struggled with low natural gas prices and weak production numbers. Surprising to some in the market, the company reported a large first-quarter profit that smashed low estimates even though the company didn't achieve any surprise production numbers. In fact, the production numbers beat forecasts while still showing year-over-year and sequential declines.
The results for WPX Energy were solid based on factors beyond the company's control and show how the market is bigger than any management team. Despite the shift of capital spending to oil, WPX Energy still obtains nearly 80% of production from natural gas. Along with a company like Chesapeake Energy (NYSE: CHK ) , higher natural gas prices will solve most of the ailments that these companies have faced in the last couple of years.
First quarter results
WPX Energy posted adjusted income from continuing operations of $44 million, or $0.21 per share. The market expected a nearly breakeven quarter so the results were surprising, especially following quarter after quarter of losses since the spinoff from Williams. Ironically, the spinoff was suppose to unleash the value in the exploration and productions side, yet Williams saw the most benefit.
With the surging natural gas prices during the polar vortex winter, the company benefited from a 52% increase in realizations for domestic natural gas sales. Even with a 5% dip in natural gas production from the prior year period to 975 MMcf/d, WPX Energy saw revenue from that commodity surge 44%. Combined with a 26% gain in oil production, the company had its most successful quarter in years despite lower overall production.
Total adjusted EBITDAX reached $320 million, smashing the best result last year by an incredible $110 million.
Similarly, Chesapeake Energy produced earnings per share that surged 97% on only an 11% increase in production. The company suggests that due to a slight production increase and most importantly an increase in the benchmark commodity price assumptions raised the full-year operating cash flow outlook by $700 million.
Natural gas realizations
The big gains for WPX Energy came from much higher natural gas prices. For the first quarter, the domestic net realized average price for natural gas excluding derivative impact was $4.40 per Mcf, up from only $2.90 per Mcf in the prior year period. Additionally, the company benefited from higher natural gas liquid prices, which increased 36% over last year to reach $38.27 per barrel.
For its part, WPX Energy spent the quarter drilling aggressively in the Piceance Basin with a target to grow the major natural gas discovery in the Niobrara shale. The initial Niobrara well has exceeded more than 2.5 Bcf of cumulative gas production, and the second well produced 1 Bcf in its first six months. Unfortunately, the third well ran into problems and must be redrilled. The company recently placed two more wells on production, but the production additions have been too slow to stop companywide production declines in natural gas.
Chesapeake Energy saw natural gas price realizations surge to $3.27 per Mcf, compared to only $1.90 per Mcf in the 2013 fourth quarter. The price surged 72% due to the company's access to the New York City hub during the strong winter weather. The problem with Chesapeake Energy is that the price differential remained a very high $1.008 per Mcf.
With the shift toward drilling for oil, investors missed that WPX Energy and Chesapeake Energy still produce a lot more natural gas. The higher prices combined with both companies lacking natural gas production growth despite lower inventories provide a solid case for natural gas prices to remain high.
Investors learned an important lesson about how market shifts can correct any ailment. Ultimately, WPX Energy will benefit from higher natural gas prices despite management's attempt to reduce focus on the commodity.
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