For years, satirical late-night TV host Stephen Colbert has been running a series on his show called "Better Know a District," which highlights one of the 435 U.S. congressional districts and its representative. While I am no Stephen Colbert, I am brutally inquisitive when it comes to the 5,000-plus listed companies on the U.S. stock exchanges.
What WPX Energy does
WPX Energy is an independent oil and gas exploration and production company, with wells in the Bakken and Marcellus shales, as well as the Piceance, Powder River, and San Juan basins. It also holds a majority interest in Apco Oil & Gas, which operates out of Argentina and Colombia. WPX's 2012 end reserves totaled 4.65 trillion cubic feet of natural gas equivalent including its overseas assets, and claimed a mixture of about 75% gas and 25% liquids (oil and natural gas liquids).
In the fourth quarter, WPX reported 40% growth in oil production, 3% growth in natural gas liquid production, and 2% natural gas production growth during the quarter. However, WPX still lost $1.12 for the year as the company experienced a 22% decline in realized natural gas prices, and it wrote down $225 million in non-cash impairments because of the falling price of natural gas.
Whom it competes against
WPX has a triple threat it has to contend with: its competitors, the spot price for natural gas, and the rising costs of E&P.
As you might imagine, a finite amount of land available for exploration makes finding valuable natural gas and liquid assets quite the premium. According to my Foolish colleague Tyler Crowe, 12% of WPX's assets are oil-based, of which many lie in the oil-rich Bakken Shale. This formation is known for its high-yielding oil reserves and is led by Continental Resources (NYSE:CLR) and EOG Resources (NYSE:EOG). One smart tactic nearly all Bakken producers are using is shipping their oil production by rail to Louisiana terminals instead of selling it at the wellhead or in Cushing, Okla., because Brent prices at shipping terminals in Louisiana are paying out significantly more. In December, the North Dakota Pipeline Authority estimated that 64% of daily production was being shipped this way, which makes for plenty of extra profits for all involved -- especially WPX, which saw oil production growth of 98% in the Bakken in the fourth quarter.
Realized natural gas prices can also be a friend or a foe, depending upon how you look at things. Chesapeake Energy (OTC:CHKA.Q), for example, leaned very heavily toward natural gas production as recently as early last year. However, weak natural gas prices necessitated a shift away from nat-gas drilling and production and toward Chesapeake's more liquid-rich assets. Having leveraged itself so heavily in the prior decade to natural gas assets, Chesapeake was forced to sell billions in assets simply to cover its capital expenditures in 2013.
Finally, costs are a huge concern. The amount of leverage oil companies take on in comparison with the cash flow they bring in is something that cannot be ignored. With $1.36 billion in net debt, WPX should be raising some caution flags, but also keep in mind that it has an incredible amount of assets it could sell to cover its debts if need be.
After carefully reviewing the prospects for WPX Energy, I've decided to go against my usual mode of thinking, which would be to shun a company perpetually in the red and make a CAPScall of outperform on the company.
There are two main reasons WPX makes an attractive investment here, even with a fat red number currently in the profit/loss column.
To start with, I want to echo Tyler's point of contention why WPX might make for an attractive acquisition target: It's extremely cheap valuation relative to its proven natural-gas reserves. Based on WPX's current valuation of $3.4 billion, investors are paying about $0.73 per billion cubic feet equivalents of natural gas. That's unbelievably inexpensive and could lead to a buyout, as Tyler alluded to.
The future of natural gas looks bright within the U.S. as well, with President Obama determined to promote cleaner energy solutions and wean the U.S. away from its reliance on foreign sources of oil and energy. Oversupply of natural gas may remain a forefront issue for years, but the demand side of the equation should rise to the occasion and help maintain a stable outlook on nat-gas prices.