While most of the major shale players are pulling away from drilling dry gas this year in the face of low prices, WPX Energy Inc. appears to be yanking up the tracks, as well.
Looking to generate capital for liquids-rich plays including the Bakken, the Tulsa-based company recently sold its holdings in Texas and Oklahoma to KKR Natural Resources and Premier Natural Resources for $306 million, WPX announced April 2.
“We’re receiving good value for assets that are not core to our strategy of growing our primary operations in the Bakken shale, Piceance basin and Marcellus shale,” WPX CEO Ralph Hill said. “This strengthens our balance sheet, reflects our strong commitment to running our business in a disciplined manner and provides funds we could use to further expand the oil and natural gas liquids components of our business.”
When the company released its annual earnings filings in late February, it wrote, “In determining which drilling opportunities to pursue, we target a minimum after-tax internal rate of return on each operated well we drill of 15 percent. While we have a significant portfolio of drilling opportunities that we believe meet or exceed our return targets even in challenging commodity price environments, we are disciplined in our approach to capital spending and will adjust our drilling capital expenditures based on our level of expected cash flows, access to capital and overall liquidity position.”
Bakken gets one-third 2012 capex
The Bakken is an opportunity that definitely exceeds WPX’s return targets. With an average gross well cost of $10.5 million, the company is estimating a pre-tax IRR between 44 and 52 percent at a West Texas Intermediate oil price of $95 per barrel. That is several dollars below the current price, but WPX expects Bakken oil to trade $10-15 lower than WTI in 2012.
The company plans to spend about a third of its $1.2 billion capital budget on the Bakken this year, running six rigs on its 86,000 net acres.
The Bakken isn’t WPX’s only opportunity to exceed those return targets, though. Between 2009 and 2011, liquids went from being 10 percent of its total production mix to 17 percent, and from 12 percent liquids of its total reserves mix to 23 percent liquids.
The economics of its wet-gas aren’t as favorable as Bakken oil in the current price environment. In the Piceance basin of Colorado, WPX estimated its average gross well cost to be around $1.43 million and its pre-tax IRR to be 31 percent at a Nymex price of $4 per thousand cubic feet, considerably higher than current natural gas prices. In the Marcellus shale of northeastern Pennsylvania, the company spends between $6 million and $8 million per well and earns a pre-tax IRR between 23 and 26 percent at $4 gas.
WPX (WPX on the New York Stock Exchange) releases its first quarter earnings May 3.
