WPX Energy Earnings Call INSIGHTS: The Bakken, Gas Realizations

On Thursday, WPX Energy Inc Class A (NYSE:WPX) reported its second quarter earnings and discussed the following topics in its earnings conference call. Take a look.

The Bakken

Brian Corales – Howard Weil: Just a couple on the Bakken. Costs have come up a little bit. Can you talk about where costs are and Ralph, I think you said, try to cut $2 million from the cost. What would a well cost if you can cut $2 million out of and where is the majority of that savings coming from?

Ralph A. Hill – CEO: I’ll start and I’ll Bryan – if we cut $2 million out instead of – we’re basically drilling 45 wells there in the Bakken this year. So, if you look at the $60 million, we wanted about $10.5 million well cost this year and with $75 million increase the way that translates out to our net working interest that’s about a $12.5 million well instead of $10.5 million. So, we believe we can get down to $10.5 million. That’s with the pad drilling and with better completions and I’ll let Bryan take over there for the – Bryan, why don’t you answer the last part of that? But we should be able to drive it down to $10.5 million.

Bryan K. Guderian – SVP of Operations: Yeah, certainly, we’re not happy where costs are at this point in time either and I think you’ve seen some color around this perhaps from the other companies that have already released. We have drilled since we bought into the project about 45 wells. We have what we would consider to be I guess near final cost on about 30. Looking at the drivers of those actual costs versus what we’ve been targeting as Ralph said $10.5 million, I guess there is one area that we haven’t really talked about that I would add a little color to. We feel like there is – Ralph has mentioned that $2 million savings when we transition the pad drilling, frankly we feel like there’s a couple million dollars worth the savings associated with improving our contractor and vendor service quality of the wealth that we drilled thus far. There’s still a lot of problems associated with executing on those wells and I think it’s generally driven by the demand for services in the Bakken, the services and the experience of those folks just have been running hard to catch up to the operator demand that exist in the basin. We’ve seen pretty significant improvement on all fronts with respect to our rigs are dedicated frac crew and so again we still believe that over time as we get the pad drilling as we take the problem wells out which are fairly common early in an aggressive growth basin like this that we can take $2 million to $2.5 million off of our current run rate. Ralph mentioned we’re looking at $12.5 million as our estimate for well cost over the balance of this year and we hope to drive that considerably lower as we get into pad drilling, which will be the prevailing mode of operation for us 2013.

Ralph A. Hill – CEO: The good news us we’ve only drilled about of our locations and I do believe that we’re already seeing better well cost and better time on the one pad we’re drilling. We’ve had one well drilled in 25 days, so we’re eliminating move days. As Bryan mentioned, our crews are getting better. We probably feel that there’s just some design things we had to get through and just better crews and as you know we like to go to efficiency type rigs they’re built for the (area). They’re just now coming on. We’d like to dedicate a frac crew. Those things just take time and we inherited, what we would say was poor equipment and we’re just fixing that code and if you look at the Marcellus, I think we’ll just change the code and crack the code, just like we did in the Marcellus like we did in the Piceance.

Brian Corales – Howard Weil: One other question, with the new leasehold, should we assume that’s in a new play, not a bolt-on to the Bakken or one of your existing Rockies assets?

Neal A. Buck – SVP of Business Development & Land: This is Neal. Clearly, we don’t want to miss out any plays going on in our backyard, so we stay current on all plays and if you can find one in one of our areas that’s great, but our main criteria is that we’re looking for oil, that we’re looking for great risk reward on our investment and then we want large continuous positions where we can apply our efficiency model, like we use in the other basins, so and in some cases that may be near our existing production and other cases it won’t be.

Gas Realizations

Matt Portillo – Tudor Pickering Holt: In terms of the – I have a couple of quick questions on NGL and gas realizations. For the quarter, it did look like you guys had a pretty significant drop on your gas realizations. Could you give us any color as to what may have led to that drop in realizations and then on the Piceance in particular, could you talk about where you think breakeven economic rates of return are at the moment, if you kind of use, current NGL pricing and current oil pricing?

Ralph A. Hill – CEO: Yeah, on the gas realizations, we did see a significant drop. We had – we also had I think I think some prior period adjustments that impacted the second quarter over the first quarter on gas. Mike do you have anything?

Michael R. Fiser – SVP of Marketing: Well I would just add that our outlook on gas is still supportive overall even though we were down quarter-over-quarter as we look forward to the second half of the year, we continue to feel like prices will be supportive due to the drop in rig count, the inventory is getting worked off and all the fundamentals point to more balanced market as we go to the second half of the year.

Ralph A. Hill – CEO: Then on the gas realization, I guess it was prior period roughly. On the returns, we still believe that in the Piceance, the reason we’re not drilling as much as we did as we could is really we’re trying – we’re managing our balance sheet. $2.85 gas environment in the Piceance still would return a 15% return to us. We’ve done at 4,000 times, we know we can do that, but we’re choosing not to do that at this point. So, we haven’t changed our view on sub amount of $3 gas prices and 15% not out target necessarily, but we think that would still bring a 15% type return.

Matt Portillo – Tudor Pickering Holt: Great, and then just on the CapEx for the quarter, you guys spend around $400 million, could you give us the break out on what was spent on acquisitions?

Rodney J. Sailor – SVP and CFO: I think that our exploration number was about $30 million in the quarter.

Matt Portillo – Tudor Pickering Holt: So, if we think about your full year guidance, at 1.4 billion, that implies a pretty significant drop-off on a run rate basis for Q3 and Q4, but I believe you guys are talking about bringing in an additional rig back into the Marcellus, you are running two, going to three and I think you had planned on an additional rig in Q4 in the Bakken. Can you help us understand a little bit where those changes or where those savings will come outside of kind of the acquisition cost?

Ralph A. Hill – CEO: Actually in this first quarter of the year, we were really 4.5 or 5 rigs in the Marcellus that I recall and then it’s dropped down to – it actually dropped down to one as we’ve been switching around. So that’s just starting to kick in. They will be adding the second and third. So, it will be in the second and third quarter there. We also had some – first quarter was hit by a carry forward if you will, from the previous year. So, that’s really what’s happening primarily.

Rodney J. Sailor – SVP and CFO: I’ll add a couple of comments if Bryan wants to weigh in and Ralph again on it. We’ve probably seen a little higher cost in the Marcellus but we expect to catch up in the third and fourth quarter on that. The Bakken, we’ve discussed at length, but again as Ralph mentioned and Bryan also mentioned, we had some cost coming in from last year. Again that’s part of those cost increases and then finally we had, as we said we had some land purchases.

Bryan K. Guderian – SVP of Operations: In Marcellus it’s really a timing issue. We were coming off more rigs throughout 2011 and as Ralph mentioned, we ultimately got down one and so we should really gain on that run rate here in the third quarter and then also on Piceance. We were coming off a much higher rig count in Piceance last year as well and some of those costs carried into the first quarter and as well you’ve seen it’s now stable at five rigs for the last probably 4 months and so we should gain on that run rate over the balance of the year too.

Rodney J. Sailor – SVP and CFO: I would just add, and I think Bryan is starting to see efficiencies and we talked briefly to it, or Ralph spoke briefly to it. We’re starting to see the efficiencies in the Marcellus and that should help us out in the third and fourth quarter and again we think we turned the quarter in the Bakken, which would also help us out in the third and fourth quarter but we will be challenged for the rest of the year, but (again) just on plan.

Matt Portillo – Tudor Pickering Holt: Just two quick final questions from me. In the Marcellus you mentioned I think in the press release that in July there is 30 million a day curtailment. Is that incremental to your production, so essentially was that – what you’re talking about was the upside to your production or is that actual production that you’ve had to curtail on the Laser pipeline, so you’re actually going to see a decline in July’s production number.

Rodney J. Sailor – SVP and CFO: It’s incremental, its gas we would have had on if their pressures were – if the system operator reliable and pressures were lower.

Matt Portillo – Tudor Pickering Holt: Then final question for me, in terms of asset monetizations have you guys at all looked at or explored the potential to high grade your portfolio further and potentially looking at monetizing some of your CBM assets where I would assume given the three core place for you at the moment really won’t see much capital allocated to them over time?

Rodney J. Sailor – SVP and CFO: You saw we did that earlier with the Barnett and we will be always looking at all of our assets and understanding that they fit better with us over somebody else, so there is nothing on the front burner anything at this time, but we really believe and making sure whatever stays in our portfolio is driving our value, so we’ll continue to operate that way.

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