While momentum investors may not want to deal with supposedly "broken" growth stories, I think investors more interested in value and financial performance can still find a lot to like in Bakken name like Whiting Petroleum (NYSE:WLL). The frenzy over these companies is largely over, but as is often the case the market has over-corrected and these shares look interesting even considering some of the bearish scenarios.
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Q2 Results - Some Bad, but Mostly Good
Whiting delivered a solid overall result in its last quarter. Production increased about 6% from the first quarter (and 26% from the prior year), and management modestly bumped up its full-year production target. Costs were higher than in the year-ago period, but down a bit sequentially and relatively solid compared to expectations.
Differentials were disappointing, missing expectations by about $4 to $5 a barrel depending upon the analyst. This is a basin-wide issue in the Bakken, though, as this area lacks the pipeline infrastructure of more mature oil-producing regions. While this issue seems to be getting better, it's likely to remain a volatile quarter-to-quarter issue.
SEE: A Guide To Investing In Oil Markets
Bad News First
Back when the Bakken was just getting underway, Whiting was a much-loved name that could seemingly do no wrong. Since then, though, bears have tried to make their case.
Margins are a worthwhile topic of discussion; wells in the Bakken aren't cheap and unfavorable differentials don't help. On the other side, the company is trying pad drilling and if good initial results continue, the company could cut $2 million (more than 20%) off the cost of wells in the Sanish.
Whiting also faces the risk that a declining inventory of drilling prospects will pressure sentiment. Although Whiting's reserve base (and reserve growth) has been quite good, energy has always been a "what have you done for me lately" type of business. I find a little irony, though, that bears want to punish Whiting for potentially declining project inventories while also punishing larger companies like Occidental (NYSE:OXY), Apache (NYSE:APA) and Chevron (NYSE:CVX) for talking about increasing project inventory and committing more capital to develop them.
The World Still Needs Oil
Whiting certainly needs good results in areas like Pronghorn and Lewis & Clark, and signs of upside in the Permian and/or Niobrara overall would definitely be welcome. Likewise, while the company is perhaps vulnerable to a recovery in natural gas that draws interest back to names like Chesapeake (NYSE:CHK) and Ultra Petroleum (NYSE:UPL), the reality is that the world still needs crude oil and Bakken, Niobrara and Permian exploration is going to be significant in the United States for a while.
SEE: Oil And Gas Industry Primer
What's more, Whiting has shown that it can operate itself pretty effectively. Management has identified and executed good acquisitions in the past, and has shown its ability to handle the day-to-day nuts and bolts as well.
The Bottom Line
There's no shortage of investment options in the energy space, from multinationals like Chevron, large independents like Apache and Anadarko (NYSE:APC), down to smaller names like Whiting, Denbury (NYSE:DNR), SM (NYSE:SM) and Range Resources (NYSE:RRC). That means investors need to shop around a bit and do their own due diligence.
Nevertheless, even if Whiting isn't thought of as the bulletproof stock it once was, I still think there's more value here than the market currently reflects. Clearly all bets would be off if the global economy worsens significantly, and drags oil prices down with it, but it's hard not to like a company heavily leveraged to oil, with both ample years of reserves in hand and good drill bit reserve growth history. At six times 2013 EBITDA, these shares ought to trade into the $60s.
At the time of writing, Stephen D. Simpson did not own shares in any of the companies mentioned in this article.
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