Little known Whiting Petroleum burst from the IPO starting gate in late 2003 with a merger and four acquisitions, including a lofty $345 million transaction for Permian basin oil and gas properties announced Sept. 1 that has put the small but deal-minded exploration and production independent on the radar screen.
Moreover, Whiting remains on the hunt for additional properties, despite a hefty $435 million debt, representing 64 percent of the company’s roughly $814 million market value when its latest deal closes in a few weeks.
“Admittedly this is a great big red fish here at the bottom of the boat, and I can tell you it will get our full attention as we implement it,” James Volker, Whiting’s president and chief executive officer, said in a Sept. 2 conference call with industry analysts. “So I’ll admit to the fact that we may be somewhat more selective.”
In fact, the Denver-based company already is working on a few “relatively small” acquisitions in the $10 million range, Volker said. “I anticipate that we’ll be able to go ahead and close those,” he added.
Whiting no stranger to deals
Whiting, a spinoff of Wisconsin-based power utility Alliant Energy, actually has been around since the early 1980s and is no stranger to deals. But only since its initial public offering last November has the company blossomed into a legitimate contender among the ranks of growing U.S. independents.
The company’s $345 million acquisition of Permian basin properties from undisclosed private sellers is by far Whiting’s largest in its brief eight-month history as a publicly traded company.
Of the 422 billion cubic feet of gas equivalent reserves acquired in its first five transactions since the IPO, 251.1 billion cubic feet or nearly 60 percent comes via the Permian basin deal encompassing 17 producing fields in West Texas and southeastern New Mexico. When the deal closes, Whiting’s overall daily production is expected to rocket to 176 million cubic feet of gas equivalent, a 73 percent increase over average 2003 production.
The Permian basin properties currently produce 4,730 barrels of oil per day and 9.5 million cubic feet of gas per day, or 37.8 million cubic feet of gas equivalent per day. Five of the 17 fields represent 72 percent of the transaction’s value.
“We believe development of just the proved undeveloped reserves in this acquisition offers the opportunity to increase the current rate of production from these properties by over 50 percent during the next 18 months,” Volker declared.
Key fields in New Mexico and Texas
Key areas include the Parkway field in Eddy County, N.M.; the Would Have and Signal Peak fields in Howard County, Texas; the Keystone field in Winkler County, Texas; and the DEB field in Gaines County, Texas.
The purchase and sale agreement reflects perfectly Whiting’s so-called “exploit and explore strategy” involving low-risk proved and probable reserves and virtually no risky wildcat drilling. In addition to the Permian basin, the company is active on the Gulf Coast and in the Rocky Mountains, Michigan and Midcontinent regions of the United States.
“We continue to add reserves and production that are complementary to our existing asset base through acquisitions, exploitation and our proved undeveloped reserve base and by drilling a limited number of exploratory wells,” Volker said.
Of the 251.1 billion cubic feet of proved equivalent reserves, 103 billion cubic feet are undeveloped and ready for exploitation drilling, Volker said, adding that the company believes there are 54 bcf of unbooked probable reserves to be had.
Whiting would operate wells representing 72 percent of production
Whiting would end up operating wells representing 72 percent of net daily production, “which will give us significant control over future development in this acquisition,” Volker said.
The acquisition would add about 300 operated producing wells to Whiting’s Permian basin core area, making it operationally equal to the company’s North Dakota core area.
However, ambition also has created a large $435 million bank debt that clearly worries some analysts who question whether Whiting would have sufficient cash reserves after debt payments on four acquisitions to adequately develop its properties, as well as to make future acquisitions to growth the company.
Whiting is no financial giant. For the 2004 second quarter, the company reported net income of $13.5 million or 72 cents per share on revenues of just $54.7 million. But that compared to 2003 second-quarter net income of $7.1 million or 38 cents per share on revenues of $39.8 million.
Volker even conceded said that while rating agency Standard and Poor’s was “very positive” about the recent deal, Moody’s “might put us on a watch for a while, say a cautionary thing, watching to see what we do with this debt.”
Company anxious to reduce debt-to-capitalization ratio
Volker said Whiting also would be anxious to get its 64 percent debt-to-capitalization ratio into “a reasonable and happy range.” He said that by using cash provided by operating activities, net of planned capital expenditures, the company believes it could reduce its bank debt by about 67 percent to under 40 percent within two years. Whiting also plans to hedge most of the production in guaranteed price ranges from the four acquisitions during the two years.
If needed, there would be options to service Whiting’s debt, including proceeds from any future sale of non-core properties and the sale of company stock, Volker said.
“Our stock at Whiting is very dear to us,” he added. “If we sell stock, I can assure you that we’ll do it at a time when the price is high enough that it stays a very accretive deal for our shareholders.”
Roughly $100 million remaining on credit facility
Whiting also would have roughly $100 million remaining on its credit facility after the company’s latest transaction closes for future acquisitions, Volker said.
“Not that I necessarily intend to use that, but it’s available to us,” he said. “If something really good came along, I suppose we would certainly take a strong look at it.”
Whiting said it plans to invest $65.2 million in the Permian basin properties, with $23 million of the amount to spent in 2004, $24.5 million in 2005 and $16.9 million throughout the 11-year life of the properties. Of the total, roughly 75 percent would be for drilling and 25 percent for water flooding, the company said.
