Whiting Petroleum Corp. (ticker: WLL) is an exploration and production company with one of the largest acreage positions in the North Dakota Bakken oil shale. In addition to its projects in the Bakken, WLL operates enhanced oil recovery (EOR) projects at North Ward Estes Field in the Permian Basin of Texas. The company’s strategy is to create sustainable growth through a combination of high return Bakken assets and long lived enhanced oil recovery projects.
As of December 31, 2011, WLL had approximately 354.2 MMBOE (86% oil) in proved reserves. The company produced on average 82.6 MBOEPD during Q3’12.
Source: Whiting Petroleum website
Below, OAG360 highlights some of Whiting’s key operating and financial attributes:
- Oil weighting. Perhaps the first thing that comes to mind when thinking about Whiting Petroleum is its weighting to crude oil production and reserves. Approximately 86% and 83% of WLL’s reserves and production are comprised of crude oil and liquids, respectively. The average from EnerCom’s 86 company E&P database is 43%.
- Low 3-year Finding and Development (F&D) Costs. Whiting’s 3-year F&D cost is $19.00 per barrel compared to the average 3-year F&D costs from EnerCom’s 86 company E&P database of $25.68. Remember, this is a past measure of performance. However, the company’s growth potential is evident in the 1,215 net 3P locations (predominately in the Rockies) and future development cost of $5.76 per barrel.
- Asset Intensity. WLL’s asset intensity is 41% compared to the EnerCom E&P database average of 91%. A quick recap: asset intensity is the amount of free cash flow that a company must reinvest to hold production flat and is calculated as trailing twelve month production multiplied by 3-Year F&D cost all divided by trailing twelve month cash flow from operations. What does this mean? WLL can invest 59% of its remaining cash flow into its high return assets and long-lived (EOR) projects.
- Debt-to-Market Capitalization. As of January 11, 2013, WLL had a debt-to-market capitalization ratio of 29%. Not only is this significantly lower than the industry average of 105%, but compares favorably to the mid-cap market capitalization peer group average of 48%.
Five Value Drivers that Make Up EnerCom’s Five Factor Model
In addition to the observations above, we analyzed Whiting using EnerCom’s Value Drivers. These five Value Drivers are the components of EnerCom’s proprietary Five Factor Model (5FM). The table below compares WLL’s ECI Value Drivers to a peer group (as of September 30, 2012).
With a debt-to-market capitalization ratio of 29%, Whiting carries less debt than its operating peers who have an average debt-to-market capitalization of 42%. OAG360 looks to see if the Capital Efficiency will continue to trend upward as a result Whiting improving its overall future development costs. This trend is already evident with trailing twelve months (TTM) EBITDA margin ($46.92 per BOE) and TTM Cash Margin ($47.34 per BOE) outperforming EnerCom’s 86 company E&P database averages of $30.48 per BOE and $26.16 per BOE, respectively.
We believe 2013 will be a year of growth for Whiting Petroleum. WLL’s Q3’12 production of 82.6 MBOEPD represented quarterly year-over-year growth of 17%. The company exited the September quarter producing 84.6 MBOEPD which represents the company’s guided mid-point for Q4’12. The company forecast a Q4’12 daily production range of 82.6 MBOEPD to 86.9 MBOEPD.
The company’s drilling inventory is broad and deep. In the company’s January 2013 presentation, Whiting disclosed having 1,215 net 3P locations in its drilling inventory, 51% located in northern and central Rocky Mountains, and 28% in the Permian Basin.
CAPEX spending in the northern and central Rockies are estimated to be $936MM, or 49% of WLL’s 2012 estimated budget of $1.9 billion. Williston Basin down-spacing and exploring additional zones aside, we believe WLL has significant EOR projects in the Permian, and potential upside in the Niobrara.
We note that WLL’s EOR projects made up 39% of the company’s proved reserves as of 12/31/11, but only comprised 20% of the company’s production. In 2012, the company allocated 12% of their $1.9 billion capital investment budget to the projects.
Click here for Whiting’s latest corporate presentation.
Valuation
OAG360 looks at a company’s valuation based on three methodologies, including reserves, production and EnerCom’s 5 Factor Model (5FM).
As of market close of January 11, 2013, shares of WLL were trading at $47.55. Using our three methodologies we estimate that Whiting’s share value to be between $46.00 and $71.96 per share.
Net Asset Value: Proved Reserves
As of December 31, 2011 WLL had proved reserves of 345 MMBOE, 31% of which are proved undeveloped, and 86% of which are oil. The average enterprise value to proved reserves from a group of Whiting’s peers was $29.83 per BOE. Adjusting for the company’s balance sheet items and assigning a probability of success of 90% to the proved value, the result is a valuation of $65.34 based solely on proved reserves.
Net Asset Value: Production
For the trailing twelve months period ended September 30, 2012, WLL produced an average of 78,415 BOEPD. The average enterprise value to flowing production multiple for the same peer group used in the proved reserves valuation was $128,129 per BOEPD. Assigning this multiple to WLL’s production rate, OAG360 estimates WLL shares to be worth $71.96 per share.
EnerCom’s Five Factor Model
This 5FM analysis compares WLL’s 2013 estimated price to cash flow per share of its peer group. EnerCom’s 5FM was designed to be used as a starting point for evaluating E&P relative valuation. The Five Factors are metrics that we believe management teams have the most control – costs, expenses and growth.
Using EnerCom’s proprietary Five Factor Model (5FM), components described earlier, on September 30, 2012, WLL’s 2013 P/CFPS ratio should be 3.5 times, approximately 0.1 times, or 2.8% below the 3.6 times that it presently trades (as of January 11, 2013). This would imply a share price of $46.00 per share. We note that just a 5% reduction in 3-year F&D cost, which we believe is possible given the company’s future development cost of $5.76 per barrel, our predicted multiple would be 5.1 times, implying a share price of $67.56.
Composite Valuation
Assigning a weighted average of 33% to reserves, production, and EnerCom’s Five Factor Model, OAG360 estimates WLL’s value to be at $60.49 per share.
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