Investing in oil and gas companies that have the bulk of their properties in the United States can be a risky venture. If the price of gas and oil in North America goes down, it will have an adverse effect upon these companies. On the other hand if prices increase it will greatly benefit revenue for shareholders. In order to find a good company in this arena, investors need to find one with growing production and good prospects for future drilling. I believe Whiting Petroleum (WLL) Energy is one of these companies.
General Observations
The company was founded in January 1980 in Denver Colorado. In 1983 it merged with two other companies: Keba Oil & Gas and Hingeline-Overthrust and went public. In 1992 Alliant Energy acquired the company but in 2003 it became a public company again and has been ever since. It started off with a market cap of $284 million. It has been an independent oil and gas company acquiring, developing and exploring crude oil and natural gas; primarily in the Rocky Mountains but other regions of the United States also.
With a market cap of $7.7 billion, the company is a good size with a good short-term cash position; much better than the industry as a whole. The company has a current ratio of 1.42 which is better than the industry average of 1.27. Both are healthy but its nice to see assets 42% higher than liabilities. The company has done an incredible job growing earnings over the last 10 years. On an average it has increased earnings by 14.32% year over year with most of its growth in the last three. This includes net income and sales. The phenomenal growth in the last few years could be the reason why debt equity ratio is almost twice that of the industry average. (0.68 to 0.38) Long-term debt and deferred long-term liabilities make up 75% of its total liabilities.
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With that in mind, it still looks like a good value buy. The company's P/E ratio is only 14.06 while the industry average is clearly higher coming in at 23.09.
Since Whiting has its properties in North America, investors need to be aware of what oil and gas prices are supposed to be like this year.
Petroleum Prices in 2014
The general consensus is that oil prices in the United States will average close to $95 a barrel this year. There are some analysts that are more bearish on prices overall and are worried that if the Permian Basin production really booms prices could drop as low as $70 a barrel.
Since Whiting Petroleum gets most of its production from places like Bakken Shale, and other high production regions here in the United States it could really be affected if prices drop too much.
As an investor, is it better to look at competitors that have a global picture? One example would be a company like Anadarko Petroleum (APC) because it has developments around the world besides United States. If the US oil drops significantly, it is in a much better position to weather the storm.
OPEC has a goal to keep its oil prices above $100 a barrel through 2014, so oil and gas outside the United States is expected to be higher.
I know gas and petroleum prices are also expected to be lower in 2014, not by a lot but they are expected to be lower.
Since this is the landscape of oil in 2014, the only way for a company like Whiting Petroleum to perform well is to increase production like it has been doing. By looking at a comparison of the company's land parcels, we can see that production increased by just over 9% quarter over quarter. This is what the company will need to do to increase revenues since the price of gas and petroleum is not expected to rise significantly.
The increase in revenue (year-to-year) gives us a bigger picture of how the company has been aggressively beefing up its production.
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I mentioned earlier about the company's revenue growth and we can see the incredible jump in production by the difference in the company's revenues between 2012 and 2013.
Whiting's oil, NGL and natural gas sales revenue increased $390.9 million the first nine months of 2013 compared to the same period in 2012. Increased production translates into increased sales and the driving force behind the revenue was the increase in oil production-up by 16%. Between oil and gas, production increased 24.86% from 2012 to 2013.
In 2014, besides Bakken, I believe the Niobrara region will be the company's biggest investment.
Niobrara
The Niobrara Shale is a liquids-rich formation that covers parts of Colorado, Kansas, Nebraska and Wyoming. The formation is now estimated to be 33% larger than what was originally thought.
This makes up the company's "Redtail" property. By June 2014, the company is planning to have five rigs up and running and they will shift to "pad drilling." Its development plan for Redtail is to drill eight wells per spacing unit in its Niobrara (A & B) zones.
Whiting Petroleum's CEO, James Volker, has reported that the company is generating a 400% internal rate of return on every well drilled in this region and it is the company's most important investment outside of Bakken. A good portion of capital in 2014 will be invested in this region.
Part of the company's core growth plan includes seeking property acquisitions that complement its core areas. An example of this would be the recent Williston-basin acquisition.
Williston Basin Acquisition
The Williston Basin purchase in the Bakken region is an example of the company seeking acquisitions that complement its core areas of production. WLL purchased about 17,282 net acres which include 13 operations of 1280 acre drilling space units. It has a 58% average working interest in the present operations.
Oil and gas production for the properties averaged 2420 barrels of (BOE) per day last summer and WLL estimates proved reserves acquired at 17.1 million. The company's cost of revenue (COS) averaged around 17.5%. In the "proven reserves" 85% is oil, so let's estimate that 2057 barrels of that 2420 daily average may be oil. If oil is trading at $95 a barrel, upon sales the revenue equivalent would be about $5.8 million per month. Subtract COS and we are at $4.89 million. Since the company has a 58% working interest, that would translate into roughly $2.77 million gross revenue per month.
With the gross revenues topping $1.7 billion a year, this barely adds 2% to the company's revenue stream, but is a good example of how it is seeking acquisitions to complement its core.
Risks
Like most companies in this arena, the price of oil and natural gas has a huge affect upon how a company is able to implement its plans.
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What could happen if prices decline?
- It could hinder future growth because the company may not be able to borrow as much based upon its credit agreements.
- It may lower the amount of oil and natural gas the company can economically produce having an adverse effect upon reserves.
- Other things would also be adversely affected if there was a significant/extended decline in oil or natural gas prices. Future business plans; financial conditions; cash flow; liquidity and plans to finance capital expenditures will all be affected by this.
These are risks investors face when looking at small-cap companies in this arena who are focused in the United States alone.
Whiting Petroleum is highly favored by some analysts. The company has had robust revenue growth over the last three years on increased production. The combination of growing profit margins as well as good cash flow makes the company look like a good value investment.
(theStreet.com) has rated the company a buy while Howard Weil upgraded shares of the company in January to outperform according to TheFlyOnTheWall.com. The stock is presently trading at $58.50 and Howard Weil has a price target set at $95.00. This is a significant increase from its present position.
Its productions in the Bakken and Niobrara regions have done well. If Niobrara produces as well as the company thinks, we could see production continue to increase translating into more revenue which is good for shareholders.
Author's Note: The financial charts in this article came from the company's SEC Filings for the 3Q 2013. The property performance chart was made by the author with information taken from the same SEC filing.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)
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