There are many oil and gas stocks that have suffered after a steep decline in oil & gas prices in the second half of 2014. This has also created some excellent long-term investment opportunities. Whiting Petroleum (WLL, Financial) is one such attractive opportunity to consider at current levels. This article discusses the company’s outlook and the reasons to be bullish on the stock for the long term.
Whiting Petroleum had touched a peak of $92.66 on August 29, 2014. Since then, the stock has declined sharply by 41% to current levels of $54.99. The stock currently trades at a very attractive trailing twelve month EV/EBITDA of 4.54, and I believe that the downside risk is minimal at current levels while the upside potential is significant.
The first reason to be bullish on Whiting Petroleum is the company’s strong reserves and production profile. As of 3Q14, the company had proved reserves of 438.5mmboe with 79% oil (89% liquids). Further, the company had a reserve life of 13 years based on the current production profile. A high percentage of oil and liquids in the company’s reserve profile is a big positive as it garners a higher margin than a profile with a higher proportion of gas.
In terms of production, the company’s 3Q14 production was 116,675boepd, which increased by a robust 26% as compared to 3Q13 production of 92,750boepd. Therefore, the company’s production remains robust even during relatively challenging times.
For the third quarter of 2014, the company’s realized oil prices declined to $74.88 as compared to $82.16 in the second quarter of 2014. This decline has impacted the company’s cash flow, but Whiting Petroleum still recorded discretionary cash flows of $538 million for the quarter and $1.6 billion for the nine months ended September 2014.
The key point is that the company’s growth continues and I believe that oil prices are likely to trend higher in 2015 and the near-term decline in oil prices is an opportunity to buy a quality producer with focus and strong performance in Williston Basin Bakken / Three Forks.
I must mention here that the company’s acquisition of Kodiak Oil & Gas will increase the debt. However, the company currently has a debt to capitalization of 39% and a debt to TTM EBITDAX of 1.25. This gives Whiting Petroleum strong financial flexibility to grow.
Further, the acquisition of Kodiak Oil & Gas (KOG, Financial) will increase the company’s reserves to 606mmboe and a 2014 estimated production to 152mboepd. Therefore, the impact on valuation and the impact on production upside (hence cash flows) will be significant. Debt is certainly not a cause of concern for Whiting Petroleum at this point of time.
In 2015, Whiting Petroleum has a planned capital expenditure of $2.8 billion and I believe that this capital expenditure will translate into robust growth for the company in 2015 and 2016. I therefore expect the cash-flow profile to be strong in the coming year and this should add more cushion to the company’s debt servicing capability.
The only risk relates to further decline in oil prices. However, in my opinion, oil prices are likely to remain stable and trend higher in 2015. OPEC and Russia are already planning production cuts for 2015 and this should have a positive impact on oil prices.
In conclusion, Whiting Petroleum is a company on the move and the company can get bigger with its rich assets in North Dakota. The 41% correction in the stock is an excellent long-term buying opportunity and investors with a time horizon of 3-5 years will see the stock outperform the broad markets. The company also has the potential to be among the best stocks in the oil & gas exploration space over the next 3-5 years.
I also believe that with the closing of the Kodiak acquisition and a significant increase in production profile in 2015, Whiting Petroleum will also be in a position to start paying dividends within the next 2 years. This would be an additional bonus for shareholders besides the likely capital appreciation that is coming as oil prices gradually trend higher.
