Shares of WPX Energy (NYS: WPX) hit a 52-week low on Friday. Let's take a look at how it got there and see whether cloudy skies are still in the forecast.
How it got here
WPX, which has oil & gas reserves in the Piceance basin, Bakken shale, and Marcellus shale, has had a rude welcome to being a publicly traded company for many reasons since being spun off from Williams Companies.
First, the company's primary revenue source is its natural gas reserves -- they accounted for 80% of first-quarter production. That's bad news given that natural gas prices are trading within a short distance of multi-decade lows. Secondly, WPX owns a majority interest in Apco Oil & Gas, an oil and gas exploration company working primarily out of Argentina. Since the Argentine government announced that it would be nationalizingYPF (NYS: YPF) , fears abound that the same fate could await Apco. Finally, the natural gas sector as a whole isn't seen in great light right now. Between possible fiduciary boo-boos from Chesapeake Energy's (NYS: CHK) CEO, Aubrey McClendon, to concerns over the safety of fracking, pessimism arguably has never been higher.
But don't throw the possibility of a rebound down the well just yet. Despite its heavy reliance on natural gas, WPX has worked feverishly to increase its production of oil and natural gas liquids. The latest quarter signified a 26% boost in production of the two combined. Also, WPX is taking steps now to focus its business on these higher-priced fuels by selling off assets in Texas' Barnett shale region and the Arkoma Basin in Oklahoma in April for $306 million. With WPX carrying sizable debts on its balance sheet, the move helps strengthen its cash position.
How it stacks up
Let's see how WPX Energy stacks up next to its peers.
With the exception of Continental Resources (NYS: CLR) , which has oil and gas reserves from across the country, the majority of natural-gas-focused companies have done poorly over the past six months. Even the oil-focused Kodiak Oil & Gas (NYS: KOG) has been unable to catch a break.
Kodiak Oil & Gas
Sources: Morningstar, Yahoo! Finance. NM = not meaningful.
In this instance I've chosen to include Chesapeake Energy as a "competitor" because, as the United States' second-largest natural gas producer, it's a good gauge of the industry's health. Outside of Chesapeake's management gaffes, the company's assets look undervalued at its current levels even with the company's surprise first-quarter profit miss.
As you can see from the above metrics, WPX is notably cheaper on a book basis and actually holds far less debt relative to its equity than its peers. But it's also the only company expected by Wall Street to lose money this year (mostly due to one-time impairment writedowns), and it has the Apco Oil & Gas uncertainty to deal with.
Kodiak Oil & Gas, which has assets in the Bakken shale within the Williston basin, derived 96% of its revenue from oil production in its latest quarter. That's great for revenue and could be good for Kodiak's bottom line if it can control its rising debt levels and reverse its oil-hedging losses.
Continental Resources hasn't dipped as much as its peers, despite a recent profit miss, because of its plans to boost production by 37% to 40% this year as opposed to its previous growth expectations of 26% to 28%. That's a lofty goal that my colleague Travis Hoium feels could be tough to accomplish, especially with operating costs on the rise.
Now for the $64,000 question: What's next for WPX Energy? That answer is going to depend on whether WPX can seamlessly shift the bulk of its business away from natural gas production and control its debt levels, and whether Apco remains independently run in Argentina.
Our very own CAPS community gives the company a three-star rating (out of five), with 17 of 19 members expecting it to outperform. Although I'm normally all over underfollowed CAPS plays, I have yet to make a CAPScall on WPX Energy and I have no intention of entering a call either way anytime soon.
WPX leaves a lot of questions unanswered. It's attempting to boost its crude and NGL production, which should make the company's outlook more predictable. The near-term outcome for its international investment in Apco is also a serious concern. However, WPX has a good chance at turning the corner and becoming profitable by as early as mid-2013 by my best estimates. I feel it would be worth adding to your watchlist and revisiting the stock in three to six months.
If the falling price of natural gas has you and your stocks down, then perhaps you should get your copy of our latest special report detailing three companies that could benefit from high-priced oil. This report is free for a limited time, so get your copy by clicking here.
Craving more input on WPX Energy? Start by adding it to your free and personalized watchlist. It's a free service from The Motley Fool to keep you up to date on the stocks you care about most.
At the time thisarticle was published Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong.The Motley Fool owns shares of Chesapeake Energy. Motley Fool newsletter services have recommended buying shares of Chesapeake Energy. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
Copyright © 1995 - 2012 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.