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.
Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.
Dave Meats does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.
We’d like to share more about how we work and what drives our day-to-day business.
We sell different types of products and services to both investment professionals and individual investors. These products and services are usually sold through license agreements or subscriptions. Our investment management business generates asset-based fees, which are calculated as a percentage of assets under management. We also sell both admissions and sponsorship packages for our investment conferences and advertising on our websites and newsletters.
How we use your information depends on the product and service that you use and your relationship with us. We may use it to:
To learn more about how we handle and protect your data, visit our privacy center.
Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.
To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.
Read our editorial policy to learn more about our process.