WPX Energy Hints at Explosive Results in the Niobrara

Mark is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Last week WPX Energy (NYSE: WPX) announced a discovery in the Niobrara shale that might ultimately double the current 18 Tcfe of natural gas 3P reserves. The discovery well produced an initial high of 16 Mcfe per day suggesting that reserves in the area are much higher than expected.

The company is one of the largest leaseholders in the Niobrara/Mancos shales that underlie the companies expansive leasehold position in the Piceance Basin. The struggling natural gas producer was spun off from Williams Companies at the end of 2011. Will this new discovery finally propel the stock higher?

The results should help other companies that have decent positions in the Piceance Basin of the shale including Encana (NYSE: ECA) and Bill Barrett (NYSE: BBG)

WPX position

The company owns 180,000 net acres in the Niobrara shale and has drilled more than 4,000 wells in the Piceance Basin. The discovery well initially flowed 16 Mcfe per day and has been choked back to an average rate of 12 Mcfe per day. Even more importantly the company has the gathering and processing infrastructure to accommodate the additional gas volumes and without the need for modification to existing gas treatment facilities.

The discovery is expected to add nearly double the current 18 Tcfe of 3P reserves. The company is only valued at $3B with a revenue run rate of over $3B. The increased production could have a big impact to the revenue base though dramatic increases in natural gas production could further add to the national glut of the resource.

The typical well in the area has averaged initial production rates of 1 Mcfe/d. The big test will be the two additional wells being drilled in the area in 2013 to confirm the productivity of the formation across the basin.

Encana stability

The company has a market cap of $14.4B so it doesn’t provide the potential for fast growth from this development, but the Piceance Basin is a big contributor to the ability of Encana to continue paying the 4.1% dividend yield.

The basin only provides 17% of the current natural gas production so investors in this stock get less of a pop from any production gains in the area similar to that of WPX. Even doubling production in the basin would only increase the area to 27% of the total company’s natural gas production.

Encana is a great way to participate in the ability to increase production in the area without having to any significant risk that the other test wells will be non-confirming.

Speculative play

On the flip side of Encana, Bill Barrett provides access to the high growth potential of the area with a market cap around $1B and a revenue base of around $650-700M. The Piceance Basin is the highest producing area as of September 30with 152 Mcfe/d. The company shifted drilling to the Unita basin and the Denver-Julesburg (DJ) basin during 2012 due to the low natural gas prices.

The announced capital spending for 2013 will also be focused outside of the Piceance basin but the recent news from the likes of WPX could encourage Bill Barrett to shift priorities especially if natural gas prices were to ever increase. The Gibson Gulch is considered a “swing area” as the company claims to be able to modify the drilling program with the broader swing in commodity prices.

At September 30, 2012, the Company had an approximate 98% working interest in production from 935 gross wells in its Gibson Gulch program. Effective October 1, the company sold an initial 18% working interest in the area.

Conclusion

While Encana and Bill Barrett provide decent opportunities to benefit from growth in the Piceance Basin, it appears that WPX provides the ultimate investment. The play still needs additional successful wells drilled to confirm that the formation is consistent across the play.

WPX is very focused on natural gas so any investor wanting to avoid that exposure has the option of investing in Encana for the dividend and Bill Barrett for the great impact to revenue from any expansion to the potential reserves in the basin. Otherwise, WPX appears like a ripe investment as production grows from existing resources while the company is also shifting towards liquids production in the Bakken.


Mark Holder and Stone Fox Capital Advisors, LLC have no positions in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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!

blog comments powered by Disqus