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WPX Cowboys Up, With Western Portfolio Now Sole Focus

WPX Energy Inc. is hauling its rigs and equipment out West and will keep the drillbit going in only three states -- North Dakota, New Mexico and Colorado -- with the balance of the portfolio, including Appalachia, on the sales block, the Tulsa-based operator said.

The independent outlined the strategy late Wednesday before an investor day presentation on Thursday. In the three core plays in which it plans to keep the money focused over the coming five years, the operator has an estimated 16,000 drillable locations on a gross basis. At the end of 2013, WPX had an estimated 14 Tcf-plus of proved, probable and possible (3P) reserves across 480,000 net acres.

"We're confident we have the right building blocks in the Williston, San Juan and Piceance basins," said CEO Rick Muncrief. "We have upside in all three. Our strategy accelerates our oil development and capitalizes on what we can gain from technical excellence, new technology and greater economies of scale."

WPX already has begun executing on the strategy to move more oil volumes than it did a year ago. It has completed the first two 7,500-foot laterals in the San Juan's Gallup oil play, a discovery it made last year, and has implemented 6 million-pound proppant completions in the Williston. Early results from doubling the stimulation size has shown a 14% production increase from three Bakken Shale wells and a 13% increase from three wells in the Three Forks formation of the Williston, Muncrief said.

"Ultimately, WPX believes that its strategy gives it the opportunity to increase oil production five-fold and triple its operating margins and company value by the year 2020 compared to its results last year."

After spinning off from Williams in early 2012, WPX stumbled with a natural gas-heavy portfolio that was laden with a jumble of onshore properties and a South American interest through its ownership in Apco Oil and Gas International. Apco was sold earlier this month, and over the past year, other underfunded properties in Texas and Oklahoma were sold off as well (see Shale Daily, Oct. 3; Aug. 20). To help defray costs in its strong gas portfolio in Colorado, in which it doesn't want to part, WPX has partnered in its Piceance Basin assets (see Shale Daily, Aug. 27).

There are other assets about which WPX explained little in the advance strategy document, including an estimated 114,000 acres in Appalachia, but the intent of what is to become of the dry gas assets is clear. Nothing was mentioned about any drilling this year in the Marcellus Shale, nor any other dry gas play, nor does it appear any is planned.

"The balance of properties is either in the process of sale or targeted for divestiture," the company said. "Within its three core resource plays, WPX will prioritize capital based on the highest long-term returns. This includes advancing the company's oil development and shifting capital within basins from historical areas of emphasis to new ones with greater opportunity."

Instead, WPX expects to spud 48 wells in the Gallup oil discovery in San Juan this year, up from an original forecast of 29. More capital also is to be shifted from the Piceance to "opportunities" in the Ryan Gulch field, where it has more than 4,000 drillable locations at 10-acre spacing remaining.

The goal for the annual spending plans over the coming five years "is to have at least a 30% internal rate of return at reasonable commodity price assumptions," according to management. "WPX's highest returns today are in the Gallup and Bakken Shale oil plays."

WPX made its way into the Bakken play four years ago when it acquired Dakota-3 E&P Co. LLC, handing it around 84,000 net acres on the Fort Berthold Indian Reservation. It now has about 105 million boe in proved reserves in the play.

The rejuvenated San Juan, once a go-to for natural gas, also has become an oil bonanza for WPX, with almost 50,000 net wells under lease for Gallup development alone. Cumulative Gallup volumes since the discovery in spring 2013 have surpassed 875,000 boe net, including 700,000 bbl of oil.

In the Piceance of Colorado, WPX holds more than 220,000 net acres and has 4,600-plus wells. It remains one of the largest gas producers in the state, with some of the biggest wells to date (see Shale Daily, Oct. 28, 2013; April 9, 2013).

Gas isn't being pushed out of the plans completely, but oil has become an increasingly more integral part of WPX. In 2012, oil accounted for 8% of equivalent production, and last year, it accounted for 10%. Between April and June, oil comprised 14% of equivalent volumes. Over the same time frame, from 2012 through June 2014, oil sales, as a percentage of total product revenues, have risen to 37% from 23%.

Said Muncrief, "Here's the fundamental question I hear. ‘Are you a gas company or are you going to be an oil company?' For WPX, it's not either or. We're both. With the depth we have in our gas reserves, we like the optionality it gives us. We also believe that our gas is going to be advantaged on pricing because of the access we have to premium western markets.

"At the same time, increasing our oil output brings significant value to our stockholders. Ideally, oil will account for more than 25% of our total volumes as we execute on our strategy. That's going to require us to achieve a five-fold increase in our oil production compared to what we did domestically last year."

The operator plans to do it through efficiency. WPX took its Gallup sandstone exploration project from zero locations to more than 400 in less than 18 months, Muncrief said. At the same time, average well costs in the basin were reduced by 26% during the first half of 2014 compared with 2013. WPX now owns or controls about 84,000 net acres in the Gallup oil window.

"Scale drives efficiency," the CEO said. "All three of our core resource plays have opportunities to increase returns through cost reductions and other operational efficiencies...By driving down development costs, we're increasing our amount of available capital. That can be a sizeable number considering that there are opportunities to save anywhere from $250,000 per well to $1 million dollars per well."

While it realigns its portfolio, WPX also is reconfiguring its organizational structure. A leadership position is being created for business development, with additional staff embedded within the resource plays and some functions consolidated, such as engineering, supply chain management and exploration, similar to how WPX streamlined its drilling team in 2013. It also recently completed an early retirement program, with more than 100 people accepting offers.

Tudor, Pickering, Holt & Co. (TPH), which covers WPX, said Thursday the makeover was a positive regarding plans to sell off the Marcellus portfolio and it was “good to see 2015 domestic oil growth guidance above estimates at 45%,” higher than the average Street estimates of 41-42%.

Based on its 3P reserves estimates, WPX’s net asset value/share could increase by $3.00-5.00 from the current $26.00 on a higher Ryan Gulch inventory, San Juan additions/improvements and cost savings, TPH said.

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