Tulsa-based WPX Energy Inc. remains on track to stay within its original capital budget and within its production range for the year as cost savings are realized across its No. 1 target, the Permian Basin.
CEO Rick Muncrief, who helmed a conference call to discuss first quarter performance, said better West Texas Intermediate (WTI) oil may accelerate plans to reduce debt and return more money to shareholders.
“We originally presented a goal of returning capital to shareholders in the year 2021,” Muncrief said. “Since that time, some things are starting to line up in our favor, and we believe there is a chance we could accomplish it sooner...in the form of debt retirements, dividends and/or stock repurchases...
“At today's strip we believe we can generate more than $100 million of free cash flow this year,” lifted in part on executing some midstream deals that within two years could result in net proceeds of more than $500 million.
COO Clay M. Gaspar said WPX had “aggressively incorporated the lessons we've learned” working across various Lower 48 basins. On other issues, though, like the weather, the producer has little control. He illustrated his point by noting that North Dakota experienced its coldest February since 1936, with prolonged subzero temperatures that forced completions to slow in the Williston Basin.
While the first quarter numbers for the Williston were unaffected, some second quarter sales may be delayed, he said, dampening overall output.
The Permian’s Delaware sub-basin in March had issues too, experiencing windstorms that left a portion of the region without power for a period of time during the first quarter. The power outage impact reduced quarterly oil output by around 1,400 b/d.
WPX expects to make up the production shortfall and “even exceed” full-year production guidance, Gaspar said.
Many operators experienced oil and gas realization issues in the Permian during 1Q2019. For WPX, Delaware oil realizations averaged 9 cents below WTI including basis hedges. Despite a significant basis blowout late in the quarter, its natural gas realizations were 76 cents below New York Mercantile Exchange, including hedges.
To improve gas processing issues in the Delaware, midstream partner Howard Energy Partners LP is currently commissioning the second 200 MMcf/d processing train, which is set to ramp up by the end of June.
Muncrief was asked about the Permian natural gas takeaway issues, which crushed prices during the first quarter.
"I think there is going to be a lot of gas coming on over the next several years in the Permian,” he said. “You're going to see some pressure on that pricing. There are numerous projects on the drawing board. From an industry perspective, it's going to help alleviate part of that, but there is going to be a lot of gas coming on.”
Vice President Greg Horne, who handles midstream and marketing, said WPX had seen similar takeaway issues in other basins.
“From a macro situation, the way we look at what's going on out in the Permian Basin is that you certainly need infrastructure to evacuate the gas...to get it to the Gulf, and there's a number of pipelines that are going to come on,” with more possible depending on “global demand, the health of the economy, etc.
“If we continue on a pace that we're on, the economy to new pipe maybe every one to 1.5 years,” Horne said. “You'll continue to see this pressure especially in shoulder seasons, which is what we're in now, and we expect that Permian gas will continue to be pressured. You'll have to certainly keep an eye on the future and be synced up with what the demand is that's coming down the road.”
Overtime, Horne said, Permian producers will sign up for firm transportation and some projects will provide “a big plus. But at the end of the day, producers have to recognize the importance of the associated gas and be ready to handle it.”
Muncrief also spent a few minutes to discuss the “hot topic” of parent-child well interference in the Permian, which WPX has been working to solve since 2016.
“We now have more than a dozen spacing tests investigating various horizontal and vertical spacing, completion designs...sequencing impacts, and they are planted in various parts of our development area. Of course, commodity prices and well costs also significantly contribute to the calculus of seeking the most accretive solution.
“Today I can humbly say that I believe we are well ahead of our peers in this important work and I have a great deal of confidence in our development plan. That said, we embrace a learning mentality, and we will always continue to evolve and improve…”
In addition to solving spacing issues, WPX output is improving efficiencies in drilling and completions, with spud-to-rig release improving to 23 days in 1Q2019, up from an average of 32 days in 2018.
“As we move from delineation to development, we have more room for improvement,” Muncrief said. “Recently, we had a two-mile well with the record spud-to-rig release in just under 16 days. The team is already looking for improvements beyond that impressive mark.”
On the completion side, lateral feet completed per day has also improved by around 90% in the last year.
“The gains have allowed us to utilize one fracture crew for a very efficient five-rig program that we're now running. Last year, we would have needed almost two full fracture crews to keep up with the five rigs running at a slower pace.”
WPX is selling assets that should result in $550 million in net proceeds. Two sales are already completed: its 20% stake in WhiteWater Midstream’s Agua Blanca natural gas pipeline system and the sale of the Nine Mile Draw acreage in the Delaware. The third transaction, selling equity in the Oryx II pipeline project, is on track to be completed by the end of June.
Net losses in 1Q2019, blamed in part on $207 million in derivative losses, totaled $48 million (minus 11 cents/share), versus a year-ago net loss of $119 million (minus 7 cents).