What: Despite announcing the acquisition of acreage in the Permain Basin in July, shares of WPX Energy (NYSE:WPX) couldn't withstand the massive sell-off in the entire oil and gas industry and declined 25% in July.
So what: If this were any other time, chances are Wall Street would have cheered the move WPX made last month to acquire privately held oil and gas producer RKI Exploration & Production for $2.75 billion. Not only was the company locking up acreage and production in one of the most promising shale basins for the next couple of decades, but it was doing so in a down market when those assets were trading at a pretty significant discount. At $12,000 per acre of undeveloped land in the deal, it's a 65% discount to what other companies were paying for similar acreage just over a year ago.
What made investors turn sour on WPX despite this opportunistic move was that the price of West Texas Intermediate fell by more than 12% in July to less than $50 a barrel, a price point which seems to freak out Wall Street. Without a financial boost from futures contracts, there aren't many shale producers out there that can make money at that price. If those prices last for a while, it could put shale producers, WPX included, in a world of hurt.
Now what: WPX Energy is actually in a better position than many others in the exploration and production industry today, as evidenced by its ability to finance the acquisition of another company in today's market. The company has some pretty decent hedging protection through the rest of this year and into 2016, but beyond that things could get really hairy without a change in oil and gas prices. If prices do indeed rise, the acquisition of RKI Exploration will look like a stroke of genius, but even a good purchase can hurt WPX in a down market.
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