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.
On October 23, 2013, Whiting Petroleum issued results for its Q3’13 earning release. Highlights of the release include:
- Production totals of 8.53 MMBOE, of which 87% was crude oil/natural gas liquids
- Discretionary cash flow at $450.5 million, a company record
- Promising signs from the Redtail project. Two recently completed wells are averaging a total of 944 BOEPD, and 899 potential gross drilling locations have been identified. WLL expects to add three more rigs by June 2014. Total acreage in the Redtail is 168,644 gross (119,978 net) acres.
- The sale of Postle and Big Tex assets for approximately $1.1 billion. WLL has stated the proceeds will be used to finance Redtail development.
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Growth in Midst of Asset Sales
Despite the sale of the Postle field assets, which accounted for approximately 7,560 BOEPD of WLL’s total of 93,380 BOEPD in Q2’13, production slipped to 92,750 BOEPD in Q3’13. In comparison to Q3’12, production increased 12% overall, with a 23% increase excluding the Postle assets.
The Postle was sold for approximately $860 million in July 15, 2013. WLL initially paid roughly $200 million for the 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 sale was instrumental in paying off debt.
James Volker, Chairman and Chief Executive Officer of Whiting, 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 Big Tex sale for $150.1 million added to WLL’s liquidity, accelerates drilling plans, and de-risks the play by bringing in another operator to the region.
Whiting Commentary on Q3’13 Results
Volker’s statement with the earnings release said: “This is an exciting time for Whiting and our shareholders. During the third quarter, we added 17,282 net acres to our Hidden Bench and Missouri Breaks prospect areas and 32,419 net acres to our Redtail Niobrara prospect. Our new completion design using cemented liners and plug and perf technology is working throughout the Williston Basin. Initial results from our higher density drilling program at our Pronghorn prospect are very encouraging, and we expect results from our Sanish field and Hidden Bench prospect higher density drilling programs in the fourth quarter. We expect to add a third rig at our Redtail Niobrara prospect on November 4, 2013 and are in development mode with an estimated 3,394 future gross well locations.”
He added, “In the third quarter, we replaced nearly all of the production from the Postle assets sale, which generated $816.5 million in net sale proceeds. We recently issued $2.3 billion of senior notes, $1.1 billion of senior notes bearing an interest rate of 5.000% and maturing in 2019 and $1.2 billion of senior notes that bear an interest rate of 5.750% and mature in 2021. We used the net proceeds from the Postle assets sale and bond issuance to strengthen our financial position and put us in a position for sustained growth. The sale of a portion of our Big Tex assets for $150.1 million will further increase our liquidity to accelerate development of our high rate of return Williston Basin Bakken and DJ Basin Niobrara assets. In addition, the transaction will bring a new operator to the Big Tex area whose drilling we expect will help de-risk our remaining 41,173 net acres at Big Tex, which is composed of 30,846 net acres in Pecos County, Texas, 6,207 net acres in Reeves County, Texas and 4,120 net acres in Ward County, Texas.”
Research Commentary
Oil & Gas 360® compiled a few paragraphs from research analysts who wrote on Whiting Petroleum following the announcement. OAG360 suggests that you contact the analyst and/or salesperson to receive a complete copy of the report. Please read the important disclosures at the end of this note.
Wells Fargo Securities Note on 10/23/13
- Our Take: Positive. WLL posted a solid Q3 report, with adj EPS coming in at $1.28 versus us at $1.08 and the Street’s $1.07. Highlights include encouraging results from new completion techniques in the Williston, two incremental Redtail rates, and a $150MM Big Tex sale. Total production of 8.53 MMBoe versus our 8.57 MMBoe. Adjusting for Q3 actuals and updating our model, 2013E and 2014E EPS move to $4.31 and $4.74 from $4.06 and $4.61, respectively.
- Redtail. Two new wells posted, one with a 30d of 452 Boe/d and one with a 60d rate of 492 Boe/d. While headline rates may look low, company has pointed out that these wells do not track a typical decline curve. Looking at a cumulative production chart, Redtail wells have generally tracked below a 400 Mboe type curve for the first 60 days, but do not show an immediate decline afterwards.
- Bakken: New Completion Design Appears Successful. Side by side tests show use of cemented liners and plug’n’perf technology resulted in material improvement in initial flow rates. Add’l commentary within.
- Big Tex Sale. WLL has several potential monetization levers, and this quarter they pulled Big Tex. The company entered into a $150MM agreement to sell 32,183 net acres and 200 net Boe/d in the Delaware Basin; expected to close by October 31, 2013. In addition to improving liquidity and allowing for accelerated development in the Bakken/DJ, the private operator should help to de-risk WLL’s remaining 41,173 net Big Tex acres.
- Updated 2013 Guidance. New FY13 prod’n midpoint of 34.1 MMBoe, up from prior 33.8 MMBoe, although LOE, G&A, and Interest also ticked up a bit. Capex still at $2.5BN;WLL dropped two rigs during the Q, but still spent $679MM in the quarter. Guidance implies $571MM remaining, although adding a rig in early Nov so we would not be surprised to see a slight outspend. No 2014 guidance, but we remain at +22% y/y prod’n growth for 14E versus the Street at 14%.
- EPS Beat. Reported adjusted EPS of $1.28, which was well above both our $1.08 and the Street’s $1.07. We note, however, we did not strip out the adjustment relating to the PPP associated with Postle, so a comparable number would be $1.15 per share for WLL’s adjusted EPS. Apart from this, WLL posted lower expenses than we modeled, slightly offset by weaker-than-expected realizations.
Barclays Equity Research Note on 10/23/13
WLL reported earnings above our estimate primarily reflecting lower-than-expected income taxes and DD&A. Discretionary cash flow came in lower due to lower-than-expected realized prices, higher cash costs, and lower deferred taxes. Production was in-line with our estimate and management’s guidance. Management bumped FY13 production guidance by 1%, primarily reflecting an acquisition of producing properties in the Williston Basin during the third quarter. The capital budget was unchanged. Growth continues to be underpinned by development of the Bakken/Three Forks where the company has seen positive results from wells utilizing a new completion design and initial increased density tests at Pronghorn.
Financial Results
- 3Q recurring earnings and discretionary cash flow were $1.28/share and $3.93/share compared with our estimates of $1.22 and $4.20, respectively.
- Third quarter production averaged 92.8 MBOE/d, in-line with our 92.5 MBOE/d estimate and management’s guidance of 90.2-94.6 MBOE/d. WLL completed an acquisition of acreage and producing wells in the Williston Basin, which added 25 MBOE (~272 BOE/d) to third quarter volumes.
Operating Update
- Sanish Field – Production averaged 36.8 MBOE/d in 3Q13, up from 36.3 MBOE/d in 2Q13. WLL has initiated its higher density pilot project and expects results in 4Q13. Management believes success could add 191 gross well locations.
- Southern Williston Basin (Lewis & Clark/Pronghorn) – Production averaged 14.2 MBOE/d in 3Q13, up 6% from 13.3 MBOE/d in 2Q13. WLL completed its first two increased density wells in the Pronghorn. The Privratsky 24-22PH HD and Privratsky 14-22PH HD were completed with initial rate of 1,482 BOE/d and 1,254 BOE/d, respectively. Both were completed using cemented liners and plug and perf technology. The company is evaluating the potential to drill six or seven wells per spacing unit compared with its prior plan of three wells. Also at Pronghorn, WLL completed a three-well pad to test its new completion design. The Obrigewitch 21-29PH was completed using a cemented liner and plug and perf with an initial rate of 2,432 BOE/d, approximately a 50% increase over two offsetting wells completed on the same pad using the previous method. At Lewis and Clark, WLL completed the Kjetstrup Federal 11-19-1PH using the new completion design with an initial rate of 1,348 BOE/d from the Pronghorn Sand, approximately a 50% increase over an offset well completing using the previous method.
- Western Williston Basin (Hidden Bench/Tarpon/Missouri Breaks/Cassandra) – Production averaged 13.7 MBOE/d in 3Q13, up 46% from 9.4 MBOE/d in 2Q13. During the third quarter, WLL acquired 39,310 gross (17,282 net) acres in and around its Missouri Breaks and Hidden Bench prospects. The properties include 13 operated 1,280-acre drilling spacing units with an average working interest of 58% and net revenue interest of 48%. The acquisition brings the company’s total leasehold in the Western Williston Basin to 205,581 gross (120,309 net) acres. At Missouri Breaks, WLL continues to have positive results from a new completion design that utilizes cemented liners and higher sand volumes. The last eight wells that were completed using this design had average first 30-day cumulative production of 14.4 MBOE (480 BOE/d), approximately 60% better than the previous 31 wells using uncemented lines and sliding sleeves. At Hidden Bench, WLL completed the Eide 41-13-2H using the new completion design with an initial rate of 3,795 BOE/d. An offset well, the Eide 41-13HR, was completed using the previous method with an initial rate of 2,715 BOE/d.
- Redtail Niobrara Prospect – During third quarter, WLL acquired 48,131 gross (32,419 net) acres at Redtail, bringing its total leasehold in the prospect to 168,644 gross (119,978 net) acres. The company completed two wells that bracket is Phase I acreage, which has 899 potential gross drilling locations, on the eastern and western side. The Horsetail 18-0713H averaged 452 BOE/d over the first 30 days and the Wildhorse 04-0424H averaged 492 BOE/d over the first 60 days. As of October 15, the company had three wells flowing back and ten wells waiting on completion. Management expects to add a third rig on November 4, a fourth rig in January 2014, and a fifth rig in June 2014.
- North Ward Estes – Production averaged 9.6 MBOE/d in 3Q13, up from 9.3 MBOE/d in 2Q13.
Asset Sale Update During the third quarter, WLL sold 32,183 net acres and approximately 200 BOE/d of net production in its Big Tex prospect area to a private buyer for $150 million. The acreage includes 30,822 net acres in Pecos County and 1,361 net acres in Reeves County. The sale is expected to close by October 31. The company retained 41,173 net acres in the area, of which 30,846 net acres are located in Pecos County, 6,207 net acres in Reeves County, and 4,120 net acres in Ward County.
Guidance Management raised FY13 production guidance to 92.9-94.0 MBOE/d from 91.8-93.4 MBOE/d. The guidance includes the impact of the Williston Basin acquisition that closed on September 20 (producing ~2,500 BOE/d) and the pending Permian Basin sale (producing ~200 BOE/d). The full-year guidance includes a 4Q13 estimate of 95.7-100 BOE/d, which reflects a 5% sequential increase at the midpoint. Our current FY13 and 4Q13 estimates are 93.3 MBOE/d and 98.3 MBOE/d, respectively, and do not include the impact of the aforementioned acquisition and asset sale. Management maintained its 2013 capital budget of $2.5 billion.
Capital One Southcoast Note on 10/24/13
We are taking our target price $9 higher to $89/share after hearing CEO Jim Volker’s detailed plans for the Red Tail Niobrara growth over the next 5 – 7 years. Improved completion techniques in the field have the company’s 8 most recent wells averaging better than 400 MBOE EUR type curve performance. We now use 350 MBOE in our model, up from the previous 325 MBOE, which accounts for $4/share of the increase. Another $4/share is attributed to the increased well inventory and faster pace of development. We now use 16 wells per drilling spacing unit (up from 12) with 8 credited to both the Niobrara A and B benches. Rig ramp-up plans have not been formalized but the 5 set for 2014 could be followed by an additional 3 per year all the way up to a potential total of 20 rigs (per conference call discussion). Our model peaks at 11 rigs by 2016 for now with our estimated ~1700 net wells drilled up by the end of 2019. The most interesting comment on the conference was when Volker stated that he believes “another Whiting exists within the Niobrara.” Our newly modeled assumptions generate a Niobrara production peak of about 90 MBOE/d in 2020, which would just about match the 93 MBOE/d that all of WLL produced this past quarter. We risk WLL’s geologic confidence in the Niobrara with our EUR estimate, which is below the company estimate, and well costs of $5.0MM, which are at the high end of the guided range ($4.0MM – $5.5MM). Assuming 400 MBOE EURs at a cost of $4.5MM would take our target price $12/share higher. The other $1/share of today’s target price increase goes to the western Williston, where we increased our EUR estimate from 500 to 550 MBOE on the improved completion techniques but slowed our drilling pace slightly. If the Niobrara asset proves as consistent as WLL expects, then the decision for the company is which play wins the fight for future capital and how much leverage (1.1x debt/EBITDA today) do they trade for growth? We like WLL’s options and its oily assets and will be interested to hear more about the other 500K net acres of exposure in 3 new oily stealth plays on the 4Q call.
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