Timing is everything. Unfortunately for Whiting Petroleum (NYSE:WLL), its timing was off pretty badly last year. It acquired Bakken Shale-focused rival Kodiak Oil and Gas right before oil prices plunged. Now it's paying the price. However, the timing of that deal wasn't the only timing issue that affected the company's third-quarter results.
Whiting was bitten by low oil prices
Whiting's realized price per barrel of oil equivalent, or BOE, plunged to just $37.86 during the quarter, roughly half of what the company realized in the third quarter of last year. In part as a result, Whiting reported a loss of $1.87 billion, or $9.14 per share, for the third quarter. That was light-years away from the profit of $158 million, or $1.32 per share, it reported in the year-ago quarter. However, the bulk of the company's reported loss was due to asset writedowns resulting from the low oil prices. If its results are adjusted for those writedowns and a few other items, the company's actual loss was just $35.4 million, or $0.17 per share. While that's still not a great result, it is a more accurate reflection of the company's results.
Whiting presses pause on CO2
While adjusting out the company's impairment charges helps provide a better apples-to-apples comparison between quarters, the writedowns Whiting took do have an impact on its value. During the quarter, the company took two writedowns, the biggest of which was a $1.7 billion non-cash pre-tax impairment charge for the partial writedown of its North Ward Estes field in Texas. This field is notable for being an enhanced oil recovery project that uses carbon dioxide to coax more oil out of a legacy oil field. The company took the writedown because it doesn't plan on further developing this field until prices recover.
Whiting isn't alone in taking a hit after pressing pause on an EOR development. While oil produced through enhanced oil recovery carries a low cost, the capital costs to bring carbon dioxide to the field are high. That's why we've seen a number of companies delay CO2 EOR projects since oil prices plunged, including Kinder Morgan (NYSE:KMI), which has pulled billions of dollars in projects out of its backlog. In fact, this past quarter Kinder Morgan noted in its earnings release that it had "removed approximately $1.0 billion in projects primarily in the CO2 segment as a result of CO2-enhanced oil recovery, as well as additional source and transportation projects being delayed beyond the time horizon of our five-year backlog due to lower commodity prices."
Kinder Morgan, which is both a major producer of CO2oil in Texas and a supplier of CO2 to other producers, doesn't expect these projects to be developed until oil is meaningfully higher, probably in the $80-per-barrel range. That's possibly when we'd see Whiting reconsider its own project.
Whiting was also bitten by the bear
The other part of Whiting's big writedown this quarter related to its acquisition of Kodiak Oil and Gas last July. During the quarter, the company wrote down $870 million of the value of that $6 billion acquisition.
However, despite the writedown, Whiting's acquisition hasn't been a complete disaster, even if in hindsight its timing was off. According to a Reuters report, the company effectively paid $23.77 per barrel for Whiting's proven reserves, which isn't all that exorbitant, especially at the time the acquisition was made. Further, the company has done a good job driving down its costs in the Bakken. Last quarter, its average completed well cost was $6.6 million, down from $8 million a year ago. Further, the company is getting more out of its wells, with its newest completion method driving a 44% increase in production from wells drilled in the third quarter versus those drilled in the second. Because of this combination, the company expects to capture a 31% internal rate of return on new wells drilled at a $50 strip price, or the price in the futures market. This is something that wouldn't have been thought possible last year.
Investors need to walk away from Whiting's third quarter with the following three takeaways. First, oil prices are having a deep impact on its current financial results, as it's losing money at the moment. Further, those weak prices are also affecting the company's plans, as it joins Kinder Morgan to indefinitely delay CO2 EOR projects. Finally, those prices exposed a bit of a misstep in the timing of the Kodiak acquisition, though the deal isn't a disaster because the company is rapidly improving its costs, well performance, and returns.
Matt DiLallo owns shares of Kinder Morgan and has the following options: short January 2016 $32.5 puts on Kinder Morgan and long January 2016 $32.5 calls on Kinder Morgan. The Motley Fool owns shares of and recommends Kinder Morgan. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.