Observers: Piceance Basin remains crucial to WPX even under new leadership
It took only a matter of months after a change in leadership at Encana last year for the company to suspend its long-running drilling program in western Colorado’s Piceance Basin.
Encana wanted to focus more on drilling for oil and other liquids, as have other companies that have turned to more lucrative prospects after falling natural gas prices took the luster off Piceance drilling.
Now WPX Energy is undergoing a change at the helm as well, with the December announcement of the departure of president, chief executive officer and board member Ralph Hill. And the change raises the question of whether the one company doing almost all of the current remaining drilling in the Piceance might significantly curtail those activities as well.
Probably not, say observers who point to how integral WPX’s Piceance assets are to the company’s overall portfolio, and its more limited options for chasing more oil and liquids-rich development opportunities elsewhere.
“I don’t see them shifting activity out of the (Piceance) but at the same time I guess that new CEO, whenever they find him, might have a different agenda for the firm,” said Robert Bellinski, who tracks WPX as a stock analyst for Morningstar.
WPX has yet to announce this year’s drilling plans, something it doesn’t typically do each year until late January or sometime in February, said company spokesman Kelly Swan.
But he noted that the Piceance is a core area for WPX.
“If you just look at it from a very pragmatic standpoint it’s essentially over half of our company’s total production,” he said.
Encana long has described its Piceance holdings as a key corporate asset. But after Doug Suttles took over as CEO there last year, the company announced a break in its Piceance operations as it turned its focus to liquids-oriented areas. Encana had been operating five local rigs in November.
That followed other actions in recent years that have included:
■ Bill Barrett Corp. halting its natural gas drilling in the Piceance and selling a share of its assets south of Silt to Vanguard Natural Resources, LLC, as it shifted to oil development elsewhere.
■ Antero Resources selling its Piceance holdings to Ursa Resources and concentrating on development of more liquids-rich natural gas and oil in the eastern United States.
■ PDC Energy selling its local holdings to Caerus Oil and Gas as PDC pursues oil and other liquids in areas including eastern Colorado.
WPX is operating seven rigs in the Piceance, with Ursa Resources operating one, according to the organization Community Counts. The company drilled about 200 wells in the Piceance during each of the last two years, according to data from Bentek Energy, an energy market analytics firm. WPX has more than 4,000 local wells.
‘FRESH SET OF EYES’ SOUGHT
Hill had worked more than 32 years with Williams and WPX, which was the name given to the exploration and business that was spun off from Williams and became a separate company at the start of 2012. WPX spokesman Swan said Hill had been instrumental in the formation of Williams’ exploration and production business, including playing a critical role in Williams entering the Piceance Basin with its acquisition of Barrett Resources in the early-2000s.
Of Hill’s departure, Swan said, “It was a board decision. The board was just looking for a fresh perspective to come in and try to give the long-term strategic plan a critical outlook and just a fresh set of eyes on it.”
WPX has said Hill will remain with the company through the end of March to help with the transition of his duties. James Bender is serving as interim president, CEO and board member. He has served as WPX’s senior vice president and general counsel.
The Tulsa-based company has hired an executive search firm to look for a new permanent leader.
John Harpole, president of gas brokerage firm Mercator Energy of Littleton, said Hill’s departure surprised him. But he said he doesn’t expect much change in WPX’s local rig count because the company’s whole modus operandi “is to keep the production level they’ve got right now, keep it up where it is.”
Last year, WPX added two rigs to its Piceance operations to stem a production decline that was affecting its revenues and cash flow. Analyst Brian Velie with Capital One Southcoast said that production is needed for the company’s overall growth. Bellinski said such production also is needed to meet pipeline delivery commitments.
Swan said the increased drilling worked, as WPX’s Piceance gas volume grew 2 percent between the second and third quarters, to an average of 603 million cubic feet per day.
WPX posted a $114 million net loss in the third quarter of last year, and lost $223 million in 2012. Bellinski said while profits are always better, net losses don’t necessarily indicate financial difficulties for energy companies because the picture can be clouded by loss-reporting requirements for hedging arrangements that lock in prices for customers.
Velie said a lot of WPX’s losses result from “underwater” gas-gathering contracts that it inherited as part of its spinoff from Williams and that come off the company’s books in the third quarter of this year. Bellinski said the company will save money once certain pipeline contracts end.
Velie said the stock has been trading at a discount compared to that of WPX’s peers, and the quickest way for the new CEO to address that might be to sell off some less-appreciated assets.
LIMITED OPTIONS FOR LIQUIDS
As for pursuing more oil and other liquids, that’s an option for WPX, but a more limited one in its case than for some other companies, given the proportion of its gas versus oil holdings.
“They don’t have as much flexibility as some of these other producers” to go after oil and liquids versus gas, said Erika Coombs, an energy analyst with Bentek Energy.
WPX’s production is now about 80 percent natural gas, and it is pursuing a few oil-based opportunities. Swan said Williams spent about $1 billion for acreage in North Dakota, helping position it to spin off WPX because it increased the diversity of its portfolio. WPX’s exploration efforts also have led to an oil discovery that it is pursuing in New Mexico.
Still, Coombs said, “They’re more limited in where they can drill (for oil), which is why they’re still there” drilling for gas in the Piceance.
Said Velie, “WPX has a couple of oily properties where it can put money to work.”
He expects the company to post about an 8 percent overall decrease in production for 2013, but about 20 percent growth in oil production.
But the company remains gas-dominated, he said.
“I don’t expect them to try to make a monumental shift and try to change their stripes overnight.”
In terms of making a big turn toward oil, “there was a time to make that shift and to be a first-mover,” when acreage could be acquired at more attractive prices for drilling in formations such as the Bakken formation in North Dakota and the Eagle Ford formation in Texas, Velie said.
“Now everyone knows what top liquids-play acreage is worth and there are few deals to be had,” he said.
Bellinski said it’s hard for WPX to move away from being an overwhelmingly gas-oriented company without buying assets that probably wouldn’t be cheap, “given how much more in favor oil is over natural gas.”
Swan agreed that it’s more costly to buy acreage in an emerging oil and gas play once it’s proven up. When what is now WPX was part of Williams, it was very much production-oriented, Swan noted. Williams’ history, and now its renewed focus, is as a pipeline and processing company.
As a spinoff, WPX has begun allocating money strictly to exploration as well, with the goal of entering areas when there’s a “cheaper cost of entry,” he said, citing the company’s work in New Mexico as an example.
Exploration by WPX is occurring in the Piceance as well, with hugely productive test drilling for natural gas in the Niobrara shale formation, which is deeper than where most local gas development occurs, in sandstone.
“That’s a huge opportunity for them,” Harpole said.
Meanwhile, he said WPX can afford to continue with its production-oriented Piceance sandstone formation work because of its drilling efficiencies, economies of scale, production per well and other factors that offset low prices.
“The Piceance is their moneymaker. That’s why they’ve kept that rig count at seven,” he said.