Whiting Petroleum Corporation (ticker: WLL) is an independent oil and gas company that explores for, develops, acquires and produces crude oil, natural gas and natural gas liquids primarily in Williston Basin and Permian Basin regions of the United States. The Company’s largest projects are in the Bakken and Three Forks plays in North Dakota and its Enhanced Oil Recovery field in Texas.
James J. Volker, Whiting’s Chairman and CEO, recently delivered a speech on the West Coast. The focus of the presentation favored WLL’s properties in the Williston Basin, its $860 million sale of the Postle Field, the acquisition of 17,282 net acres in the Bakken shale, and the huge Niobrara Bench B opportunity for the company in the Wattenberg Field.
The company paid roughly $200 million for its Postle asset, generating a more than 4 to 1 cash on cash return, without giving value to any value generated from the field’s cash flows after investment. The Postle field, which Volker admitted was one of his favorites, was instrumental in paying off debt. Volker said, “We sold just a little over 11% of our total reserves, but we paid off about 50% of our entire bank debt with the proceeds from that sale so that our borrowing base would be available to us, should we need it.”
The $860 million return on the Postle Field redistributes cash, allowing WLL to heavily invest in its Redtail project in northeast Colorado. Volker said, “I do think (Redtail) is another world-class oil resource play. We think we have over 3,000 drilling locations there, for the Niobrara B. We’re embarking on that currently. And we’re ramping up with another rig this month. It will be at three by the end of this month. I predict by the middle of next year, we will certainly be at five rigs. By the beginning of 2015, we will probably be at eight. By the beginning of 2016, we will probably be at 11. And basically we intend to drill it all up in the period of about seven years, so we actually intend in 2017 to add nine more rigs per our current plan.”
WLL’s CEO continued, saying the Redtail project is in the middle of what management calls a “golden triangle,” with key facilities nearby its field. “Only about 17 miles north of the center of our acreage position, where we happen to be building a natural gas plant right now to handle all the gas that we’ll also produce there, is a Trailblazer Line. Of the east of us is a line that is being basically run all the way, it exists currently, it’s being converted into an oil line, it’ll run all the way to Cushing and to other markets. And then, there’s an NGL line of to the west of us.”
“So we’re located right in the middle of some great facilities that’ll give us good takeaway capacity. And we’re in the process of building this Redtail natural gas plant out there that we believe will have a nameplate capacity of about 45 million cubic feet of gas a day and be capable of actually about 60 million cubic feet of gas a day. And we believe that we’ll produce about 1 barrel of oil for every MCF of gas a day. When these wells come in, they’ll do about a 0.5 an Mcf a day per barrel, and after a year or so, about 1 Mcf per barrel. So we expect that we’ll have some sizable oil production to sell out here and be roughly 80% to 90% oil production. So we’re making the investment necessary to capture all the gas stream and as little flowing out here is possible.”
Volker closed by commenting on the efficiency and richness of Redtail, based on results from WLL’s current seven wells. “It’s 59 million barrels per spacing unit here in the Niobrara. So twice as rich per spacing unit; these are 960-acre spacing units. We have 1,280-acre spacing units up in the Bakken. (In Redtail) we expect to drill about 16 wells and we are drilling basically two 8-well pads for drilling spacing unit moving along quite nicely. And each rig out there will be able to drill about 30 wells per unit. So even when we get to our five rigs we’ll be drilling about 150 wells a year and we expect recoveries of over 5,000 BOEs per well. Why? Because our original 400,000 BOE type curves are being outperformed by the wells that we’ve been drilling out there over the last couple of months.”
David Tameron, managing director at Wells Fargo Securities, reviewed WLL in his note on September 30, 2013. “Success at Redtail would result in 1) removing Street’s inventory concerns; 2) improving capital efficiency and corporate metrics; and 3) moving WLL’s production rate to 20%+ for the foreseeable future, which is well above Street expectations. We believe Redtail will be a growth engine for WLL over the coming years, with the recent $2.3 billion in bonds providing ample liquidity to execute on development plans. The company also has monetization optionality going forward, which includes their Robinson Lake and Belfield processing plants in the Williston in addition to a potential Big Tex JV/divestment.”
He added, “We would note that WLL believes EUR’s could move to 550 MBOE, up from their current type curve of 400 MBOE (recent wells all tracking above type curve). We believe WLL’s infrastructure plans have line of sight to support production ramp over the next 18-24 months.”
Tameron also adjusted his 2014E yr/yr production growth estimate to 20% from 14%, and raised 2013E and 2014E EPS estimates to $3.74 and $4.53 from $3.65 and $4.27, respectively. His valuation range also increased to $70-75 per share from $65-69 per share, in regards to the Redtail evaluation.
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