Description

WPX is a short.

Why?  Because despite massive investments, it has been unable to grow production or reach cash break-even levels.   It now finds itself with a large debt burden that seems very hard to pay back, absent a massive improvement in oil prices:

*Pro forma for $294 million sale of int’l assets

Even at $80 realized oil prices, which reflects $93 WTI, the company will still face negative Ebitda-Maintenance Capex (let alone its full $1b+ capex program).  The figures below are based the company’s guidance for continuing operations (@ $80 realized oil price):

Obviously, under the current price deck the situation is a lot more precarious.  And, most likely the capex program will not be cut to maintenance level, which will keep the cash burn rate in the hundreds of millions of dollars.

Naturally, the company is divesting non-core assets and exploring other ways to monetize some of its assets.  Recently, it entered into an agreement to sell 47k net acres to SWN for $300 million.  This will reduce its production by c. 5%, while reducing net debt to about $1.4b, and interest expense to around $90m.

The issue is there is a plethora of companies shedding non-core assets.  It does not seem unreasonable to expect rapidly deteriorating pricing.  This will probably become a major roadblock for companies attempting to reduce debt this way.

Run your own scenarios.  My base scenario, at WTI $70, still has the company decidedly cash-flow negative before interest expense.

Further, by my estimations, it seems likely the company will violate the financial covenants of its credit facility.  Specifically, the recently amended credit facility added a net debt to ebitdax covenant minimum of 3.75 and a PV10 to debt minimum of 1.25.

Naturally, bond prices have deteriorated in the last few weeks, but are still attractive shorts in my view.  Given that at least one issue is still trading above par, it looks like a heads-I-win, tails-I-loose-a-little.  At the current pace, it does not seem far-fetched to expect a rating downgrade in the near term.

The bottom line is: when the going was great this company did medium to bad.  Now that the going is tough, the outlook looks quite ugly.  It is difficult to envision a scenario under anything close to the current price deck where ebitda-maint capex is positive.  Also, absent a huge rebound in commodity prices, one can anticipate substantial impairments to oil and gas properties in the near term, which could very well push the PV/debt covenant below its minimum required.

The company has mentioned it will provide 2015 guidance in mid-December.  It is presenting tomorrow at an investor conference.  This could well serve as the opportunity to issue 2015 guidance.  Absent a huge reduction in its capex budget and a reasonable expectation for meaningful divestitures on attractive terms, I don’t see how it can control the cash drain.

Assuming an announcement of major capex and opex cuts, it will be interesting to see target production levels.

More in the q&a, if there is interest…

Catalyst

2015 guidance - mid dec 2015

continued cash burn in excess $100m/yr

ratings downgrade

impairments