WPX Energy Valuation Model - Sept 29

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dan_s
Posts: 34471
Joined: Fri Apr 23, 2010 8:22 am

WPX Energy Valuation Model - Sept 29

Post by dan_s »

I just getting started on the forecast/valuation model for WPX. I will post it to the EPG website early this afternoon.

In the last 3 months, 15 ranked analysts set 12-month price targets for WPX with price targets of $5.00 to $12.00. The average price target among the analysts is $8.67. This morning Johnson Rice posted a price target of $9.00.

Here is something to get you started from the WPX website.

MID-YEAR OUTLOOK
For the remainder of 2020, WPX has 91,700 bbl/d of oil hedged with fixed price swaps at a weighted average price of $53.05 per barrel and 20,000 bbl/d with fixed price collars at a weighted average floor price of $53.33. < So, First Call's operating cash flow per share forecast of $2.31 looks about right.

For 2021, WPX now has 59,878 bbl/d of oil hedged with fixed price swaps at a weighted average price of $40.78 per barrel and 240,000 MMBtu/d of natural gas hedged with fixed price swaps at a weighted average price of $2.62 per MMBtu.

Consistent with a scenario WPX outlined in its first-quarter slide deck, the company plans to exit the year at 140,000 bbl/d of oil. Most of the planned completions in the back half of the year are scheduled to occur in the fourth quarter.

WPX completed 12 wells in the second quarter prior to releasing all four of its completion crews. In July, the company redeployed one crew in the Delaware Basin and one in the Williston Basin. WPX plans to add one more frac crew in the Delaware Basin near the end of August.

WPX now expects total capital spending of $1,050 to $1,150 million this year, down another $50 million from the most recent target. Total capital spending in the first half of 2020 was $501 million, including $188 million in the second quarter following a pullback in activity.

The company could maintain the same level of oil production in 2021 – approximately 140,000 bbl/d – with an estimated maintenance capital budget of $800 to $850 million next year and generate approximately $200 million of free cash flow at current commodity prices.
Dan Steffens
Energy Prospectus Group
dan_s
Posts: 34471
Joined: Fri Apr 23, 2010 8:22 am

Re: WPX Energy Valuation Model - Sept 29

Post by dan_s »

This what WPX Energy told their shareholders on 9-28-2020 My comments are in blue.

This is a Strategic Merger of Equals

Accelerates cash-return business model – The merger accelerates Devon’s transition to a business model that prioritizes free cash flow generation over production growth. With this highly disciplined strategy, management is committed to limiting reinvestment rates to approximately 70 to 80 percent of operating cash flow and restricting production growth to 5 percent or less annually. Free cash flow will be deployed toward higher dividends, debt reduction and opportunistic share repurchases. < WPX does not currently pay a dividend. Post merger, Devon should pay a fixed dividend of $0.11/quarter + a variable dividend "kicker" based on free cash flow..

Immediately accretive to financial metrics – The transaction is expected to be immediately accretive to all relevant per-share metrics in the first year, including: earnings, cash flow, free cash flow, and net asset value, as well as accretive to return on invested capital. The combination is also expected to enhance the company’s credit profile and decrease its overall cost of capital. < WPX should have ~250,000 Boe per day of production in 2021. My Devon forecast shows 330,000 Boe per day in 2021, so "New Devon's" combined production of 580,000 Boe per day will compare to EOG's 2021 production of ~850,000 Boe per day.

Maintains strong balance sheet and liquidity – The all-stock transaction ensures the combined company will retain a strong balance sheet with a pro forma net debt-to-EBITDAX ratio of 1.6x on a trailing 12-month basis and is targeting a leverage ratio of approximately 1.0x over the longer term. The combined company will also have excellent liquidity with approximately $1.7 billion of cash on hand and $3 billion of undrawn capacity on its credit facility expected at closing. < Both companies are now FCF positive.

Increases scale and diversification – The transaction creates one of the largest unconventional oil producers in the U.S. with production of 277,000 barrels per day. The combined company will benefit from a premier multi-basin portfolio, headlined by the world-class acreage position in the Delaware Basin that is 400,000 net acres and accounts for nearly 60 percent of the combined company’s total oil production. The Delaware Basin acreage is geographically diversified between southeast New Mexico and Texas, with only 35 percent of the leasehold on federal land. The consolidated Delaware footprint provides a multi-decade inventory of high-return opportunities at combined activity levels of 17 drilling rigs. The balance of the portfolio will be diversified across high-margin, high-return resource plays in the Anadarko Basin, Williston Basin, Eagle Ford Shale and Powder River Basin.

Drives significant cost synergies – Cost savings from initiatives underway in the second half of 2020 and synergies resulting from the merger are expected to drive $575 million in annual cash flow improvements by year-end 2021. These cost improvements are expected to be attained through operational efficiencies, general and administrative savings and reduced financing expense. The net present value of these cost synergies over the next 5 years equates to more than $2 billion of value. The all-stock transaction structure allows shareholders of both Devon and WPX to benefit from the cost synergies and significant upside potential of the combined company. < If they can achieve this level of annual savings, it will definitely increase my stock valuation.

Supports implementation of a “fixed plus variable” dividend strategy – With the business scaled to consistently generate free cash flow, Devon is initiating a new dividend strategy that pays a fixed dividend and evaluates a variable distribution on a quarterly basis. The fixed dividend is paid quarterly at a rate of $0.11 per share and the target payout is approximately 10 percent of operating cash flow. In addition to the fixed quarterly dividend, up to 50 percent of the remaining free cash flow on a quarterly basis will be distributed to shareholders through a variable distribution. This enhanced dividend strategy is effective immediately upon close of the transaction. < This is what the Wall Street Gang says they want to see from upstream companies.

Shared commitment to ESG excellence – Both Devon and WPX share an uncompromising commitment to ESG leadership, employee safety and environmental responsibility. Consistent with this commitment, the combined company will pursue measurable ESG targets, including methane intensity reduction, and will have progressive actions and practices in place to advance inclusion and diversity. Further, ESG metrics will be incorporated into the compensation structure and the board will monitor ESG goals and results.

Combines complementary cultures – Devon and WPX share similar values and this combination is designed to optimize the strengths of both companies’ operating philosophies to drive the continued growth and success of the business. < This is important. Mergers like this put a lot of stress on employees, many of which will be loosing their jobs. Devon's staff has a big job integrating WPX assets and people into their systems. This is what my teams at Hess did.
Dan Steffens
Energy Prospectus Group
dan_s
Posts: 34471
Joined: Fri Apr 23, 2010 8:22 am

Re: WPX Energy Valuation Model - Sept 29

Post by dan_s »

I have posted my forecast/valuation model for WPX to the EPG website.

My valuation of $9.25/share is based on the operating cash flow per share of 2020 + 2021 / 2 X 4.
4X operating cash flow per share is approximately the average of what the "Elite Eight" companies in our Sweet 16 portfolio are trading for today.

WPX is currently trading for about 2X operating cash flow per share. < BTW their 2020 cash flow is now locked in by some outstanding oil hedges at more than $53/bbl.

This afternoon I will combine the DVN and WPX models to see what "New Devon" looks like.
Dan Steffens
Energy Prospectus Group
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