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Morningstar | WPX Cutting Capital Expenditures in Response to Lower Prices

WPX Energy delivered production of 156 mboe/d in the fourth quarter, which was 26% higher sequentially and 20% higher year over year. This beat our forecast of 146 mboe/d and pushed full-year volumes into the upper half of guidance. But the firm’s financial results were fractionally lower than expected, with adjusted EBITDA and adjusted earnings per share coming in at $306 million and $0.02, respectively (consensus estimates were $315 million and $0.05). We plan to incorporate these operating and financial results into our model shortly, but after this first look our fair value estimate and no-moat rating remain unchanged.

Relative to our estimates, production costs were slightly higher than expected, at $12.03/boe, roughly $0.50 higher than our model. Realized prices for both oil and natural gas were below our forecasts, too, owing to the shortage of takeaway options in the Permian Basin, which accounts for about two thirds of WPX’s output. But after factoring in derivative gains, unit revenue was very close to the respective benchmarks (West Texas Intermediate and Nymex), reflecting the success of the firm’s marketing strategy thus far. Going into 2019, we expect prices to strengthen further, as 80% of the firm’s Permian oil will be linked to Gulf Coast pricing (up from 55% in 2019).

The firm also dialed back its development plans for 2019 in response to the recent decline in crude prices (as most upstream firms have recently done). The updated budget is $1,100 million-$1,275 million, which translates to 149-161 mboe/d. This compares with previous guidelines, issued after the third quarter, calling for $1,450 million-$1,650 million and average output of 159-171 mboe/d.