Despite Fair Value Boost, WPX Still Overpriced
The no-moat gas and oil producer plans a much higher-than-expected level of drilling activity in 2017 and beyond.
In a recent corporate presentation WPX (WPX) highlighted management's plans to grow the business over the next 4-5 years. Revising our estimates to reflect a much higher-than-expected level of drilling activity supports a higher valuation. Our current enterprise value estimate is $2.5 billion, 48% higher than our previous model. Owing due to WPX's very high financial leverage, that drives an even larger swing in equity value and our new fair value estimate is $6 per share. However, that's still significantly below the current market price.
According to the new plan, WPX will ramp to eight operated rigs by the end of this year, which is higher than our previous 2017 forecast of six rigs (and a hefty increase from the current four rigs). Due to the lag between commencing drilling and putting new wells on stream this additional activity won't impact 2016 volumes very much, but it does support more robust growth in 2017 and beyond. Management believes it can grow oil volumes with a 20%-35% CAGR through 2020. Our updated forecast remains on the lower end of this range, but we believe a 20% CAGR is achievable over the period.
We were previously reluctant to model more activity for WPX due to concerns about the company's financial health. However, our estimates incorporated a net gas management expense of around $140 million per year going forward. That's a reasonable forecast for this item in 2016, due to a one-time charge relating to transport costs in the now-sold Piceance natural gas asset. But going forward, this expense is expected to be in the ballpark of $5 million. We have decreased our estimates for WPX's unit operating expenses, following updated guidance from the company. That boosts our EBITDA forecasts for the next several years, which means the increased activity described above does not weigh as heavily on net debt to EBITDA as previously thought. Our current projections show this metric at 4.1 times and 2.2 times at the end of 2017 and 2018, respectively.
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Dave Meats does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.