Whiting's Big Bakken Upside
Kirk is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Many investors are looking for the quick score in the Williston Basin through take-overs. To date, several purchases of Bakken players by larger oil companies have already occurred. However, the primary reason to own Bakken oil stocks is the long-term growth and income potential of these companies. The possibility of having a bid put in on a stock you own is a nice kicker though.
One company with both long-term potential and the possibility of being bought out is major Bakken acreage holder Whiting Petroleum (NYSE: WLL). Whiting, in fact, recently employed Merrill Lynch to scan the market for a potential suitor. With private equity firms putting record amounts of money into energy investments in 2012, it seems Whiting is at least conducting their due diligence.
Alas, no takers were found for Whiting just yet, as the asking price was higher than the market could bear at the moment. I am thinking the search took on the same qualities as when a major league baseball general manager says, "We're not trying to trade Biff, Buck or Buddy, but if somebody blew us away, we'd listen." So far, nobody is blowing Whiting management away, though that could change someday.
And why wouldn't Whiting's asking price be high? Management knows they have a good thing going, so they are not likely to sell without getting top dollar. Let's take a look at their strengths, weaknesses, opportunities and threats with a SWOT analysis and see if we can see into the future of Whiting's share price regardless of whether they go it alone or find a dance partner.
- Whiting holds 714,567 net acres in the Williston Basin, approximately two-thirds Bakken and Three Forks formation plays. This acreage, based upon other deals, is likely worth at least $6,000 per acre if sold soon, for value of at least $4.2 billion. The current market cap of the company is $5.1 billion.
- About 83,000 de-risked acres are in the highly productive Sanish/Parshall play. At the end of Q3 Whiting produced 31,400 BOE per day in the play. Decline rates appear to be lower than standard projections. Wells pay for themselves between 7 and 16 months (at $80/barrel) and offer internal rates of return of 70% and higher. Drilling in this play will continue into 2015, providing cash flow for other development areas.
- Whiting produces the second most oil and natural gas liquids in the Bakken after Continental Resources (NYSE: CLR), which is a recognized leader in the region. In comparing Whiting to Continental, which is the Bakken acreage leader, Whiting's profit and operating margins are comparable at 19% vs. 18%, and 30% vs. 32%. Whitings return on assets is also similar to Continental with both in the middle 6% range. Return on equity for Continental slightly exceeds Whitings at about 15% vs. 12%, however, Whiting is gaining. These comparable numbers demonstrate the overall strength of Whiting's execution.
- Though it is best known as a Bakken play, Whiting in fact is a diversified company with oil and gas reserves across the United States totaling almost 2 million net acres. The company holds significant acreage in the Permian play in Texas for about a third of operations, acreage Oklahoma, Colorado and Michigan. With the Bakken acreage valued at almost current market cap, the balance of the company is essentially trading for almost free or free.
- Currently Whiting has a very favorable 86%/14% split on production of oil and natural gas liquids versus natural gas. Long-term reserves appear to be divided about 2/3 oil and natural gas liquids versus natural gas. In the short and intermediate term, this is highly attractive as there is a historic price differential favoring oil and NGLs over natural gas, which is likely to persist throughout the main drilling years for Whiting in the Bakken over the next decade.
- Whiting does have a fairly leveraged balance sheet with $1.6 billion of debt and plans to add up to $1 billion more in borrowing over the next year.
- The company's total acreage could be completely drilled within about 10 to 15 years, meaning it might need to acquire more assets, introducing acquisition risk and more costs.
- Whiting's Pronghorn, Lewis & Clark, Hidden Ranch and Big Island Bakken/Three Forks plays are coming online rapidly and as a group are stronger cumulatively, though not as prolific individually, than the Sanish play. If execution is good those plays should push Whiting's high-growth phase into early in the next decade.
- Whiting has pipeline and natural gas processing capacity in the Bakken region. With coming EPA regulations to capture currently flared natural gas production, Whiting is in position to collect tolls on the natural gas transport.
- Whiting's Niobrara and Permian plays offer continued solid production over time. Their Niobrara 77,608 net acre position has potentially explosive growth and very solid margins due to lower drilling costs versus the Bakken.
- Whiting's Enhanced Oil Recovery (EOR) offers additional revenue potential and also an asset it may sell to generate cash.
- All plays combined offer the potential for Whiting to potentially double to triple their proven reserves.
- The company's credit lines net of cash flow from operations only cover about 2 years of worth of new drilling at their current high growth rate. Should credit markets dry up due to a macro event Whiting could be hard pressed to maintain production.
- The biggest threat to all of the companies using hydraulic fracturing to bring up oil would be if the EPA or other government agency put a stop to the practice. While this is not likely based upon recent policy by the EPA, it is not an impossibility.
- With transportation using over half of all oil, a major breakthrough in battery technology leading to large market share increases for electric and hybrid vehicles combined with a mass shift to natural gas for larger vehicles could reduce top and bottom lines for Continental. This does not appear likely, but would be a shock if it would occur quickly.
- Execution risk due to the challenges of initiating production in new tight-oil plays.
In summary, on a sum of the parts basis, Whiting appears to be valued strictly based upon its Bakken assets, undervaluing it by about 50%. Over time, should Whiting stay independent, its quick pay-back on wells will eventually lead it to throw off a strong dividend.
kirkydu Kirk Spano is the owner of Bluemound Asset Management, LLC and publisher of the American Resource Boom Letter. Clients of Bluemound do not hold positions in any security mentioned above. The Motley Fool has no positions in the stocks mentioned above. Motley Fool newsletter services recommend Chevron. 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!