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RESEARCH ANALYST
Jonathan Chang j.chang@queensu.ca
Queens School of Business, 2017
613-809-0329
Industry Overview
EXPLORATION & PRODUCTION OVERVIEW
Industry operators explore for, develop and operate oil and gas
fields. Categorized as upstream operations. Includes the
production of crude petroleum, the mining and extraction of oil
from oil shale and oil sands, the production of natural gas, sulfur
recovery from natural gas and the recovery of hydrocarbon
liquids.
World Price of
Crude Oil
Industrial
production
index of OECD
Countries
KEY ECONOMIC
DRIVERS
GDP OF BRIC
Nation
World Price of
Natural Gas
125%
100%
S&P 500
75%
50%
25%
0%
-25%
2010
2011
2012
2013
2014
In light of recent price weakness, price levels are anticipated to slowly recover as supply diminishes.
Sources: IBIS World, Capital IQ
Industry Overview
NATURAL GAS PRICING (HENRY HUB)
75
Historical Prices
70
Projections
4.5
Historical Pricing
Projections
65
3.5
60
55
50
2.5
45
40
12/1/2014
3/31/2015
7/29/2015
11/26/2015
There has been some stimulus to world oil demand and a slight
downturn in US tight oil output
2
12/1/2014
3/31/2015
7/29/2015
11/26/2015
Industry Overview
WORLD CRUDE OIL DEMAND & SUPPLY (MMBL/D, 12-MON AVG)
Since March, the build in total crude/products stocks in the USA has
accelerated.
World oil demand growth this year is projected at 1.1-1.2 mmbl/d, while nonOPEC output growth is seen slightly lower at about 0.9 mmbl/d, the rise in
OPEC output since December of about 0.5 mmbl/d has largely offset these
changes.
OPEC output could move even higher later, if Iranian sanctions are lifted.
North Dakota
Williston Basin
Proved Developed
Proved Undeveloped
Total
Colorado
Piceance Basin
Proved Developed
Proved Undeveloped
Total
Bcfe
444
272
716
Bcfe
1,571
963
2,534
3,000
2,500
2,000
50.0%
50.0%
31.8%
36.5%
35.2%
1,500
1,000
70.0%
62.0%
20.3%
1,225
500
1,529
29.2%
1,512
994
900
677
687
2017E
2018E
518
0
2011A
2012A
2013A
34.3%
New Mexico
San
Juan
Basin
30.0%
Proved Developed
10.0%
Proved Undeveloped
Total
(10.0%)
Bcfe
370
227
597
(30.0%)
2014A
EBITDA
2015E
2016E
Margin %
Former exploration and production division of Williams Companies (WMB) spun off at start of 2012.
Sources: WPX Investor Relations, Imperial Capital, Capital IQ, Presentation Magazine
Quantitative Overview
PRICE VOLUME PERFORMANCE
30.0
CAPITALIZATION TABLE
15.0
26-Aug-14
TRDC to Joint Venture
with WPX Energy to
Develop Colorado Trail
Ridge Properties
27.5
12.5
25.0
22.5
10.0
2-Dec-15
Divestiture of 46.7k net
acres in Pennsylvania
to SWN Production
17.5
15.0
7.5
5.0
12.5
2.5
10.0
6-Apr-15
Agreement with Prometheus to supply
servicing and equipment to WPX
7.5
0.0
Jun
Aug
Oct
2014
Dec
Feb
Apr
2015
Volume (Millions)
20.0
12.92
Shares Outstanding
204.7
Market Capitalization
- Cash & Short Term Investments
2,645.3
82
+ Total Debt
2,000
+ Pref. Equity
4,563.3
FINANCIAL OVERVIEW
Total Revenue
2,437
Net Income
213
EV / Total Revenue
1.9 x
EV / EBITDA
3.0 x
Price / Earnings
18.2 x
Price / Tangible BV
0.6 x
1.3 x
Trading at 0.6 x to its tangible value, WPX provides interesting value opportunity for healthy net income and revenue levels.
Sources: WPX Investor Relations, Capital IQ
ASSET QUALITY
San Juan ranked 4th best oil basin in the United States in 2013
HOLT VALUATION
Expectations for economic returns to turn around in the nearfuture as implied by fade.
Sources: Various
Market Mispricing: 1YR - Stock Performance Tied Too Closely to Oil Prices
JUNE 2012 JUNE 2014 STOCK PRICE PERFORMANCE (BEFORE RECENT OIL PRICE DECLINE)
80%
60%
Correlation:
40%
0.6284
20%
0%
-20%
Jun 2012
Oct 2012
Feb 2013
Jun 2013
Oct 2013
Feb 2014
JUNE 2014 JUNE 2015 STOCK PRICE PERFORMANCE (FOLLOWING RECENT OIL PRICE DECLINE)
40%
20%
Correlation:
0%
0.9402
-20%
-40%
-60%
-80%
Jun 2014
Aug 2014
Oct 2014
Dec 2014
Feb 2015
Apr 2015
In light of recent oil price decline, investors have allowed crude oil price movement to dictate decision about company.
Sources: WPX Investor Relations, Imperial Capital, Capital IQ, Presentation Magazine
250
222
240
220
226
210
191
200
159
150
100
50
1P Reserves (mboe)
Production (boe / d)
300
1,250
1,000
2010A
2011A
Light/Medium Oil
2012A
2013A
Natural Gas
2014A
820.3
2009A
2010A
750
748.4
793.6
2012A
2013A
726.5
500
250
0
0
2009A
891.1
793.3
2015E
2011A
Light/Medium Oil
NGL
Natural Gas
2014A
NGL
INCREASING MARGINS
1,000
3,500
$USD millions
3,059
3,000
2,822
3,027
2,779
2,555
2,500
20%
10%
500
0%
-10%
-500
-20%
-30%
-1,000
-40%
-1,500
-50%
2010A
2,000
2012A
2013A
2014A
2015E
2016E
2011A
2012A
Net Income
2013A
2014A
2015E
NI Margin %
Flexibility of WPX allowed it to quickly decrease production levels while focusing on still delivering sustainable results.
Sources: Equity Research, SEC Filings, Capital IQ,
Accounting Methodology
Successful Efforts
Successful Efforts
Full Cost
Full Cost
Successful Efforts
Successful Efforts
Full Cost
Full Cost
WPX Energy uses successful efforts accounting and is often criticized for having bloated G&A costs. In fact, because of
the way it chose to reports its financials, it is being penalized for using more conservative accounting.
Sources: Transnational Research Associates, Art Madsen, FASB, SW Learning, Rational Walk, Solomon Zori Blog, Guy Fottfried
Our Williston and San Juan Gallup oil volumes jumped an impressive 60% and 376%,
respectively, versus a year ago.
As Clay mentioned, we recently signed a deal with Western, which will lower our differentials in the
San Juan, therefore increasing our ultimate net back pricing across the oil portfolio.
The San Juan team continues their impressive results with over 8,000 barrels per day of
production. This level means we were able to achieve a 376% increase over the last year.
The San Juan Gallup production is up over 500% versus first quarter of '14.
SAN JUAN AS 4TH RANKED US GAS FIELD IN TOP 100 BY EIA
In 2011, Harold Hamm claimed that the recoverable share may reach 24 billion barrels; this would mean that Bakken
contains more extractable petroleum than all other known oil fields in the country, combined.
WPX has established a top tier crude oil play
in the Bakken in the Williston Basin of North
Dakota. WPX and its predecessor companies
have over three decades of experience and
expertise in exploration and production in the
U.S. Rockies Mountain region.
Imperial Capital
Sources: EIA, Seeking Alpha, Richard Zeits, WPX Investor Presentation, Wikipedia, Equity Research, Imperial Capital
50%
30%
10%
-10%
-30%
Cimarex
Encana
Cabot
Ultra
Petroleum
SM
Southwestern
QEP
Antero
WPX
100%
9.3 x
93.6%
80%
8.0 x
6.4 x
53.9%
60%
4.0 x
46.3%
40%
3.0 x
1.9 x
1.5 x
1.4 x
1.2 x
0.8 x
0.6 x
35.6%
26.9%
31.3%
20%
0%
0.0 x
UPL
COG
XEC
AR
ECA
SM
SWN
QEP
WPX
UPL
SM
COG
ECA
SWN
AR
QEP
XEC
WPX has a wider margin of safety (liquidation value) and more quickly improving bottom line relative to peers.
Sources: WPX Investor Relations, Capital IQ
WPX
HOLT: Valuation
Oil & Gas Exploration & Production
Market Cap: 2.632 USD
Economic PE
Price
HOLT: Estimator
Oil & Gas Exploration & Production
Market Cap: 2.632 USD
2014
2016
2017
Sales Growth %
10.8
10.8
10.8
10.8
EBITDA %
35.1
35.1
35.1
35.1
Asset Turns
0.23
0.23
0.23
0.23
0.6
0.6
0.6
0.6
-9.8
8.9
8.7
8.7
Discount Rate
5.30
5.67
CFROI %
Warranted Valuation
Amount (MM)
Per Share
7,286
35.77
-2,040
-10.01
1,140
5.60
6,386
31.35
2,689
13.20
94
0.46
116
0.57
3,719
18.26
27.70
Winddown Value/Share
0.47
Winddown Ratio
Shares Outstanding
204
upside
+41%
Sources: Credit Suisse HOLT
Company Name
Texas Mean
Colorado Median
Overall Mean
Overall Median
Ticker
WPX Energy
WPX
Discount to Overall Mean
Discount to Overall Median
Stock Price
6/14/15
% of 52W
High
74.8%
51.7%
60.2%
53.2%
12.92
48.2%
`
Market
Cap
Natural Gas /
NGL+Oil Prod.
EV / EBITDAX
LTM
CY+1
EV / FCF
EV / 1P
EV /
Daily Prod.
13,979.8
11,072.7
3,116.8
95.5%
48.9%
46.2%
23.8 x
4.0 x
1.4 x
15.7 x
4.8 x
1.8 x
16.3 x
2.2 x
5.2 x
$12.84
$23.85
$10.47
$65.25
$86.02
$37.92
10,111.6
8,848.3
3,277.1
81.9%
99.6%
55.6%
4.3 x
3.3 x
2.8 x
8.6 x
3.8 x
5.5 x
13.9 x
30.6 x
1.7 x
$12.43
$7.82
$7.62
$33.20
$39.94
$33.90
10,027.5
2,183.0
86.8%
91.8%
5.5 x
6.2 x
11.9 x
8.7 x
10.4 x
1.8 x
$7.15
$6.25
$90.64
$49.17
Market
Cap
9,389.8
7,412.3
7,827.1
9,437.9
Natural Gas /
NGL+Oil Prod.
63.5%
79.0%
75.8%
84.4%
EV / FCF
7.9 x
15.4 x
10.3 x
7.8 x
EV / 1P
$15.72
$9.29
$11.05
$9.14
EV /
Daily Prod.
$63.06
$35.68
$54.50
$44.55
2,645.3
78.3%
3.9 x
(62.2%)
(50.4%)
$6.28
(43.2%)
(31.3%)
$23.33
(57.2%)
(47.6%)
EV / EBITDAX
LTM
CY+1
9.7 x
7.5 x
3.5 x
6.0 x
6.4 x
7.6 x
4.1 x
7.0 x
1.5 x
(76.2%)
(63.0%)
1.9 x
(74.8%)
(72.8%)
Trades at a discount of approximately 50-65% to natural gas pure play E&P competitors.
Sources: Capital IQ
Target Name
Eagle Rock Energy Partners, L.P.
Date
05/21/2015
Transaction
Equity
Value
551
3.3 x
2.9 x
05/11/2015
2,488
4,704
1,137
1,203
4.3 x
4.1 x
04/20/2015
296
650
130
193
5.2 x
3.5 x
11/01/2010
3,791
5,262
611
567
8.6 x
11.9 x
Legacy Reserves LP
04/03/2009
538
905
238
512
3.9 x
2.7 x
05/24/2006
1,588
2,212
745
522
3.1 x
4.2 x
n/a
05/09/2006
1,386
1,448
377
1,511
4.1 x
19.1 x
04/23/2006
1,647
2,262
745
522
3.1 x
4.2 x
05/09/2003
176
587
131
567
4.7 x
11.5 x
Mean
Median
1,385
1,386
2,084
1,448
482
377
651
522
4.5 x
4.1 x
7.1 x
4.2 x
Transaction
Enterprise
Value
721
Operating Metrics
Revenue
225
EBITDA
263
2,186
4,534
3,059
EBITDA
1,529
E&P Companies based in the United States with Transaction Value from 500M to 6B
Sources: Capital IQ
Valuation Multiples
EV /
EV /
Revenue
EBITDA
EV /
EV /
Revenue
EBITDA
1.5 x
3.0 x
2016E
2017E
2018E
2019E
2020E
2021E
2022E
2023E
2024E
2025E
$61.44
$3.14
$63.00
$3.26
$64.59
$3.38
$66.22
$3.51
$67.90
$3.64
$69.62
$3.78
$71.38
$3.92
$73.19
$4.06
$75.04
$4.22
$76.94
$4.38
$78.89
$4.54
86.4%
83.2%
31.6%
86.4%
83.2%
31.6%
86.4%
83.2%
31.6%
86.4%
83.2%
31.6%
86.4%
83.2%
31.6%
86.4%
83.2%
31.6%
86.4%
83.2%
31.6%
86.4%
83.2%
31.6%
86.4%
83.2%
31.6%
86.4%
83.2%
31.6%
86.4%
83.2%
31.6%
Realized Pricing
Light/Medium Oil ($C/bbl)
Henry Hub Natural Gas ($US/mcf)
NGL ($U/bbl)
2015E
$53.08
$2.61
$19.43
2016E
$54.43
$2.71
$19.92
2017E
$55.80
$2.81
$20.43
2018E
$57.22
$2.92
$20.94
2019E
$58.66
$3.03
$21.47
2020E
$60.15
$3.14
$22.02
2021E
$61.67
$3.26
$22.57
2022E
$63.23
$3.38
$23.14
2023E
$64.83
$3.51
$23.73
2024E
$66.48
$3.64
$24.33
2025E
$68.16
$3.78
$24.95
131
3,150
70.8
727
122
2,814
65
655
110
2,495
59
585
96
2,192
53
514
79
1,903
47
444
58
1,629
42
371
31
1,368
37
297
0
1,120
33
219
0
884
28
176
0
660
24
134
0
446
20
94
Production
Light/Medium Oil (mboe)
Natural Gas (mmcf)
NGL (mboe)
Production - Oil Equivalents (mboe)
Production - (boe / d)
9.2
335.4
6.3
71
195.6
11.4
319.0
6.0
78.6
215.4
14.0
303.3
5.7
86.6
237.1
17.3
288.5
5.4
95.3
261.1
21.3
274.3
5.2
104.9
287.4
26.3
260.9
4.9
115.5
316.5
31.3
248.1
4.7
127.2
348.4
0.0
236.0
4.4
140.0
383.6
0.0
224.4
4.2
154.2
422.4
0.0
213.4
4.0
169.7
465.0
0.0
202.9
3.8
186.9
512.0
23.4%
-4.9%
10.1%
23.4%
-4.9%
10.1%
23.4%
-4.9%
10.1%
23.4%
-4.9%
10.1%
23.4%
-4.9%
10.1%
23.4%
-4.9%
10.1%
23.4%
-4.9%
10.1%
23.4%
-4.9%
10.1%
23.4%
-4.9%
10.1%
23.4%
-4.9%
10.1%
23.4%
-4.9%
10.1%
Benchmark Pricing
WTI Crude ($US/bbl)
Henry Hub Natural Gas ($C/mcf)
3.0%
23.4%
-4.9%
10.1%
Pricing data excludes derivative contracts to be conservative in face of hedges taken before dip in prices.
Sources: Capital IQ
2015E
2016E
2017E
2018E
2019E
2020E
2021E
2022E
2023E
2024E
2025E
$488.4
$876.3
$122.4
$1,487.0
$617.9
$864.6
$119.4
$1,601.9
$781.8
$853.1
$116.4
$1,751.3
$989.1
$841.8
$113.5
$1,944.4
$1,251.5
$830.6
$110.6
$2,192.8
$1,583.4
$819.6
$107.9
$2,510.9
$1,929.9
$808.7
$105.2
$2,843.8
$0.0
$798.0
$102.6
$900.5
$0.0
$787.4
$100.0
$887.4
$0.0
$776.9
$97.5
$874.4
$0.0
$766.6
$95.1
$861.7
Operating Costs
Transportation Costs
Total Operating & Transportation Costs
$440.5
$139.8
$580.3
$474.5
$150.6
$625.1
$518.8
$164.6
$683.4
$576.0
$182.8
$758.7
$649.5
$206.1
$855.7
$743.8
$236.0
$979.8
$842.4
$267.3
$1,109.7
$266.8
$84.7
$351.4
$262.9
$83.4
$346.3
$259.0
$82.2
$341.2
$255.2
$81.0
$336.2
Total Royalties
Operating Netback Before Tax
$103.9
$802.8
$112.0
$864.8
$122.4
$945.5
$135.9
$1,049.7
$153.3
$1,183.8
$175.5
$1,355.6
$198.8
$1,535.3
$62.9
$486.2
$62.0
$479.1
$61.1
$472.1
$60.2
$465.2
$46.10
$71.9
$684.8
$66.90
$617.9
$144.2
$71.9
$648.7
$63.38
$585.3
$157.6
$71.9
$715.9
$69.95
$646.0
$175.0
$71.9
$802.8
$78.44
$724.4
$197.3
$71.9
$914.6
$89.4
$825.2
$226.0
$71.9
$1,057.7
$103.3
$954.3
$255.9
$71.9
$1,207.4
$118.0
$1,089.5
$81.0
$71.9
$333.2
$32.6
$300.7
$79.9
$71.9
$327.3
$32.0
$295.3
$78.7
$71.9
$321.5
$31.4
$290.1
$77.6
$71.9
$315.7
$30.8
$284.9
$802.8
$66.9
$735.9
$864.8
$63.4
$801.4
$945.5
$69.9
$875.5
$1,049.7
$78.4
$971.3
$1,183.8
$89.4
$1,094.5
$1,355.6
$103.3
$1,252.3
$1,535.3
$118.0
$1,417.3
$486.2
$32.6
$453.6
$479.1
$32.0
$447.1
$472.1
$31.4
$440.7
$465.2
$30.8
$434.4
$20.83
$7.60
$0.53
$0.24
$0.34
$12.12
58.2%
$20.38
$7.44
$0.52
$0.70
$0.29
$11.43
56.1%
$20.23
$7.39
$0.52
$0.69
$0.29
$11.34
56.1%
$20.40
$7.45
$0.52
$0.70
$0.30
$11.44
56.0%
$20.90
$7.63
$0.53
$0.72
$0.31
$11.71
56.0%
$21.74
$7.93
$0.55
$0.75
$0.33
$12.18
56.0%
$22.36
$8.16
$0.57
$0.77
$0.34
$12.52
56.0%
$6.43
$2.35
$0.16
$0.22
$0.08
$3.61
56.2%
$5.76
$2.10
$0.15
$0.20
$0.08
$3.23
56.2%
$5.15
$1.88
$0.13
$0.18
$0.07
$2.90
56.2%
$4.61
$1.68
$0.12
$0.16
$0.06
$2.59
56.2%
SG&A
Net Interest Expense
Cash Flow Netback Before Tax
Tax Expense
Cash Flow Netback After Tax
9.0%
9.8%
2 0 15 E WT I C rude O il P ric e
Discount Rate
$ 17.76
$ 51.44
$ 56.44
$ 61.44
$ 66.44
$ 71.44
9.0%
$ 16.66
$ 17.81
$ 18.96
$ 20.11
$ 21.26
9.5%
$ 16.10
$ 17.22
$ 18.35
$ 19.48
$ 20.60
10.0%
$ 15.56
$ 16.66
$ 17 .7 6
$ 18.86
$ 19.97
10.5%
$ 15.03
$ 16.11
$ 17.19
$ 18.27
$ 19.35
11.0%
$ 14.52
$ 15.58
$ 16.64
$ 17.69
$ 18.75
2 0 15 E H e n ry H u b N a t u ra l G a s P ric e
Discount Rate
$ 17.76
$ 2.64
$ 2.89
$ 3.14
$ 3.39
$ 3.64
9.0%
$ 16.78
$ 17.87
$ 18.96
$ 20.05
$ 21.13
9.5%
$ 16.22
$ 17.29
$ 18.35
$ 19.41
$ 20.48
10.0%
$ 15.68
$ 16.72
$ 17 .7 6
$ 18.80
$ 19.84
10.5%
$ 15.16
$ 16.17
$ 17.19
$ 18.21
$ 19.22
11.0%
$ 14.65
$ 15.64
$ 16.64
$ 17.63
$ 18.62
$5,489.7
10.0%
145.7
(2000.0)
$3,635.5
204.7
$17.76
$12.92
37.5%
Price Summary
INDICATIVE VALUATION GRAPH
IMPLIED RETURN
Current Market
Price
$10
EV / EBITDAX (LTM)
$20
$30
$40
$50
$60
Entry Price:
$12.92
Target Price:
$17.76
Dividend Yield
0.0%
37.75%
EV / EBITDAX (2015E)
EV / FCF
Price / 1P
NAV
Analyst Targets
FUTURE OUTLOOK
Positives
Increasing will stimulation in Williston Basin Bakken crude oil
play through quarterly updates
New style completion in San Juan Basin Gallup sandstone crude
oil play
Exploratory Niobrara dry gas wells in Piceance Basin
Rebound in oil prices
Negatives
An economic slowdown in the United States
Heavy reliance on industrial demand within domestic regions
WPX Energy does not have tremendous growth opportunities, however its cost structure has made it a strong play to
survive the low oil price environment while being well-positioned to take advantage of any rebound.
Sources: Equity Research, Imperial Capital
APPENDIX - PROMPT
SUBMISSION TOPIC
Facing upstream - Is the crisis for oil & gas the new normal?
Given the recent fall in oil prices, oil & gas companies have come under significant pressure and some struggle to remain profitable. This didnt
leave stock price performances untouched. Some however experienced an exceptional surge more recently. Reasons for such movements in
the market include potential takeovers and a slight recovery in oil. It is unclear what OPECs long-term strategy is and how US shale gas
production will play out. Analysts continue to argue over the long-term outlook for oil and with that the implications for oil & gas companies.
Clearly some companies are better positioned to profit from the recent turmoil than others. Who will eventually come out on top?
Pick one public company from the industry (country irrelevant), which you find particularly undervalued and would suggest to invest in.