WLL: Whiting Petroleum Corp. Analysis and Research Report

2018-07-30 - by Asif , Contributing Analyst - 93 views

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Whiting Petroleum is an independent oil and gas company engaged in development, production, acquisition and exploration activities primarily in the Rocky Mountains region of the United States. The company's current operations and capital programs are focused on organic drilling opportunities and on the development of previously acquired properties, specifically on projects that the company believe provide the greatest potential for repeatable success and production growth, while selectively pursuing acquisitions that complement its existing core properties. During 2017, the company focused its drilling activity on projects that provide the highest rate of return, while closely aligning its capital spending with cash flows generated from operations. During 2018, the company continue to focus on high-return projects in its asset portfolio that will add production and reserves while generating free cash flows from operations. In addition, the company continually evaluate its property portfolio and sell properties when the company believe that the sales price realized will provide an above average rate of return for the property or when the property no longer matches the profile of properties the company desire to own, such as its plan to explore monetization of its Redtail field assets and the asset sales discussed in the “Acquisitions and Divestitures” footnote in the notes to condensed consolidated financial statements.

The company's revenue, profitability and future growth rate depend on many factors which are beyond its control, such as oil and gas prices, economic, political and regulatory developments, competition from other sources of energy, and the other items discussed under the caption “Risk Factors” in Item 1A of its Annual Report on Form 10-K for the period ended December 31, 2017. Oil and gas prices historically have been volatile and may fluctuate widely in the future. The following table highlights the quarterly average NYMEX price trends for crude oil and natural gas prices since the first quarter of 2016:

Crude oil ($)33.51 45.60 44.94 49.33 51.86 48.29 48.19 55.39 62.89 
Natural gas ($)2.06 1.98 2.93 2.98 3.07 3.09 2.89 2.87 3.13 

Lower oil, NGL and natural gas prices may not only decrease its revenues on a per unit basis, but may also reduce the amount of oil and natural gas that the company can produce economically and therefore potentially lower its oil and gas reserve quantities. Substantial and extended declines in oil, NGL and natural gas prices have resulted, and may result in impairments of its proved oil and gas properties or undeveloped acreage and may materially and adversely affect its future business, financial condition, cash flows, results of operations, liquidity or ability to finance planned capital expenditures. In addition, lower commodity prices may reduce the amount of its borrowing base under its credit agreement, which is determined at the discretion of its lenders and is based on the collateral value of its proved reserves that have been mortgaged to the lenders. Upon a redetermination, if borrowings in excess of the revised borrowing capacity were outstanding, the company could be forced to immediately repay a portion of the debt outstanding under its credit agreement. Alternatively, higher oil prices may result in significant mark-to-market losses being incurred on its commodity-based derivatives.

2018 Highlights and Future Considerations

Operational Highlights

Northern Rocky Mountains – Williston Basin

The company's properties in the Williston Basin of North Dakota and Montana target the Bakken and Three Forks formations. Net production from the Williston Basin averaged 103.1 MBOE/d for the first quarter of 2018, representing a 3% decrease from 106.8 MBOE/d in the fourth quarter of 2017. Across its acreage in the Williston Basin, Whiting Petroleum has implemented new completion designs which utilize cemented liners, plug-and-perf technology, significantly higher sand volumes, new diversion technology and both hybrid and slickwater fracture stimulation methods, which have resulted in improved initial production rates. As of March 31, 2018, the company had four rigs active in the Williston Basin and added a fifth rig in April 2018. Under its current development plan, the company expect to put 123 wells on production in this area during 2018.

Central Rocky Mountains – Denver-Julesburg Basin

The company's Redtail field in the Denver-Julesburg Basin (“DJ Basin”) in Weld County, Colorado targets the Niobrara and Codell/Fort Hays formations. Net production from the Redtail field averaged 23.3 MBOE/d in the first quarter of 2018, representing a 13% increase from 20.6 MBOE/d in the fourth quarter of 2017. Whiting Petroleum has established production in the Niobrara “A”, “B” and “C” zones and the Codell/Fort Hays formations. Whiting Petroleum has implemented a new wellbore configuration in this area, which significantly reduces drilling times. During 2017, the company completed and brought on production a significant portion of its drilled uncompleted well inventory (“DUCs”) from yearend 2016. During the fourth quarter of 2017, based on the recent and comparative well performance results of the DJ Basin to the Williston Basin, its management decided to concentrate development activities during 2018 in the Williston Basin. The company plan to complete 22 DUCs in its Redtail field during the first half of 2018, and then cease additional development activity in this area until commodity prices further recover.

The company's Redtail gas plant processes the associated gas produced from its wells in this area, and has a current inlet capacity of 50 MMcf/d. As of March 31, 2018, the plant was processing over 36 MMcf/d.

Liquidity and Capital Resources

Overview. At March 31, 2018, the company had $31 million of cash on hand and $3.9 billion of equity, while at December 31, 2017, the company had $879 million of cash on hand and $3.9 billion of equity. Cash on hand at December 31, 2017 consisted of the remaining proceeds from the issuance of its 2026 Senior Notes in December 2017.

One of the primary sources of variability in its cash flows from operating activities is commodity price volatility, which the company partially mitigate through the use of commodity hedge contracts. Oil accounted for 68% and 69% of its total production in the first quarter of 2018 and 2017, respectively. As a result, its operating cash flows are more sensitive to fluctuations in oil prices than they are to fluctuations in NGL or natural gas prices. As of April 24, 2018, the company had derivative contracts covering the sale of approximately 73% of its forecasted oil production volumes for the remainder of 2018. For a list of all of its outstanding derivatives as of April 24, 2018, refer to Item 3, “Quantitative and Qualitative Disclosures about Market Risk”.

During the first quarter of 2018, the company generated $233 million of cash provided by operating activities, an increase of $153 million from the same period in 2017. Cash provided by operating activities increased primarily due to higher crude oil, NGL and natural gas production volumes and higher realized sales prices for oil and NGLs. These positive factors were partially offset by a decrease in cash settlements received on its derivative contracts, as well as higher production taxes, cash interest expense and lease operating expenses during the first quarter of 2018 as compared to the same period in 2017. Refer to “Results of Operations” for more information on the impact of volumes and prices on revenues and for more information on increases and decreases in certain expenses between periods.

During the first quarter of 2018, cash flows from operating activities and cash on hand plus $90 million in net borrowings under its credit agreement were used to finance the redemption of the remaining $961 million of 2019 Senior Notes and $173 million of drilling and development expenditures.


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