Independent oil & gas operator WPX Energy Inc. (WPX) in a quest to expand margins has decided to sell its mature coalbed methane holdings and expand its high growth San Juan oil assets by more than 50%. The intention simply is to park its capital in high return assets.
WPX Energy will sell its remaining mature, coalbed methane holdings in the Powder River Basin for $155 million in cash. As a part of the deal, the company will also release firm transportation with $30 million in future demand obligations. In 2013, production in the basin represented nearly 14% of the company’s total production, but generated only 5% of its adjusted EBITDAX.
During the second quarter 2014, the company sold a portion of its working interest in a Piceance Basin natural gas well, which negatively impacted the total 2014 production projection of the company. However, the robust increase in domestic oil production fully offset the decline, as the company raised its 2014 total production guidance on an equivalent basis to 1,209–1,256 million cubic feet equivalent per day (MMcfe/d) from the previous projection of 1,203 MMcfe/d–1,217 MMcfe/d.
The decision to increase its San Juan oil acreage is also a tactical one for WPX Energy. The company was able to lower its well cost in San Juan Basin’s Gallup oil play by nearly 26% in the first half of 2014 versus the prior-year period. In addition, oil production from the Gallup oil play also increased 76% sequentially.
This new deal expands WPX Energy’s holdings by 26,000 acres in San Juan Gallup taking its total holdings to 74,600 net acres in the oil rich San Juan Basin. The company already had two rigs in the region and plans to bring in a couple more to speed up development in this oil rich play.
There is further room for upside as the company estimates 425 gross drillable locations for oil in the area assuming 160-acre spacing. We believe rising demand for oil and declining well cost will boost margins for the company going forward.
WPX Energy currently holds a Zacks Rank #3 (Hold). Investors interested in the oil and gas E&P industry may consider stocks like Cheniere Energy, Inc. (LNG), Clayton Williams Energy, Inc. (CWEI) and Sanchez Energy Corporation (SN). All these stocks carry a Zacks Rank #1 (Strong Buy).
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