Is Whiting Petroleum The Next Great American Oil Company

Whiting Petroleum's  success over the past few years has come primarily from high-quality assets in the oil-rich Bakken shale of North Dakota. But the company's recently acquired acreage in another oil-rich play in Colorado should drive even stronger production and cash flow growth in coming years.

Additional upside could come from further asset sales, which would help streamline Whiting's portfolio further and improve its balance sheet, resulting in a higher multiple and share price, according to hedge-fund manager John Paulson. Combined with its improving returns from the Bakken and an attractive valuation, Whiting looks like a solid investment right now. 

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Huge opportunity in Colorado
Whiting holds approximately 120,000 net acres across its Redtail Niobrara prospect, a highly economic oil-rich play in Colorado. Management has high hopes for Redtail and estimates its total resource potential at 492 million BOE net to the company. Though Whiting has only been drilling in the play for a few months, output growth has been highly impressive.

Net production from the Redtail field averaged 4,550 barrels of oil equivalent per day, in the first quarter of 2014, up 41% from the fourth quarter of 2013. Output should grow even faster going forward, since production during some of the months of the first quarter was relatively flat because of severe winter weather and the timing of pad completions.  

This year, the company will move into rapid development mode at Redtail and plans to drill 118 gross wells (104 net) using a four-rig drilling program. With an estimated more than 3,300 future gross drilling locations, the play should fuel strong production growth for the company for at least a decade, if not longer. It should also contribute meaningfully to Whiting's proved reserves and net asset value over the next several years, as the company continues to derisk and delineate its acreage.

Whiting also sees significant upside to its potential drilling locations based on the results of a high-density pilot test it expects to complete this month, which will involve spudding its 30F super pad located in the Horsetail township using much tighter spacing between wells. If the pilot program is successful, the company reckons it could more than double its current future gross drilling locations from 3,300 to more than 6,600.  

Continued improvements in the Bakken
Though the Redtail Niobrara is indeed a game-changing addition to the company's portfolio, Whiting's most prized asset remains the Bakken/Three Forks region of the Williston Basin, which accounted for roughly 73% of the company's first-quarter production and where the company continues to improve its well performance and boost returns through improvements in completion and frac design.

For instance, the company's use of new coiled tubing unit conveyed frac technology at its Missouri Breaks operations resulted in initial production rates that were 70% higher than with the previous sliding sleeve method and 40% higher than the cementer liner method, with comparable completion costs. The use of this completion method should drive significant improvements in capital efficiency over coming quarters.

Overall, Whiting's improved drilling and completion methods -- including coiled tubing, cemented liners, the plug-and-perf completion method, and greater use of sand in the fracking process -- have helped boost per-well productivity in the Western Williston Basin by about 50% while costing roughly the same as its previous approach using sliding sleeves. The company's well costs are now down to between $7 million and $8.5 million, compared with more than $9 million two years ago.

Whiting's not the only Bakken operator to have meaningfully reduced its well costs. In fact, most Bakken drillers have seen significant declines in their well costs over the past few years thanks largely to an aggressive shift toward pad drilling. Oasis Petroleum , for instance, expects its well costs to average as little as $7.3 million per well this year, down from $10.5 million in the first half of 2012.

Similarly, Kodiak Oil & Gas' well costs declined from roughly $12 million in 2012 to between $9.2-$9.5 million currently, while Continental Resources' well costs have fallen from $9.2 million a year and a half ago to an expected $7.5 million by year's end. Hess Corp. , however, has seen the most impressive improvement in its well costs, which have plunged from $13.4 million in the first quarter of 2012 to around $7.8 million in the third quarter of 2013.

Investor takeaway
Whiting's leading positions in the Redtail Niobrara and the Williston Basin, combined with its relatively high percentage of liquids production (88% as of the first quarter) and attractive cost structure, should drive several more years of strong growth in production, earnings and cash flow. The company also looks meaningfully undervalued on an EV/EBITDA and price-to-net asset value basis. Wunderlich Securities recently raised its price target for Whiting to $95 a share, which implies more than 30% upside from its current price of roughly $72 per share.

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