WPX Energy - Bakken Shale Review

By Eric Fox | January 08, 2012 AAA

WPX Energy (NYSE:WPX) plans to focus on the development of the Bakken formation in 2012 and will use this play as one of its core areas to help grow the company. (To know more about oil and gas, read Oil And Gas Industry Primer.)


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Separation
WPX Energy is the former exploration and production segment of Williams (NYSE:WMB), which announced a restructuring in 2010 that involved splitting up into separate upstream and downstream public companies. The separation was completed at the end of 2011, with shareholders of Williams receiving one share of WPX Energy for every share owned.

Bakken Shale
WPX Energy established a position in the Bakken through an acquisition in November 2010, purchasing approximately 86,000 net acres for $925 million. The acreage is located on the Fort Berthold Indian Reservation in the Williston Basin. The company picked up existing oil production of 3,300 barrels per day from 24 existing wells, as well as extensive undeveloped acreage.

WPX Energy has been aggressive since the acquisition closed and completed 22 wells over the last year, increasing production to 6,400 barrels of oil equivalent (BOE) per day by October 2011.

After WPX Energy announced the Bakken purchase in late 2010, the company established a production target of 20,000 BOE per day from this play by the end of 2012. WPX Energy is currently operating five rigs in the Bakken and plans to add an additional rig in mid-2012.

Returns
WPX Energy estimates that Bakken wells will generate an after-tax return of 57%. This return incorporates a cost of $9.5 million to drill and complete a well, an estimated ultimate recovery of 700,000 BOE per well and an assumed oil price of $95 per barrel.

Other operators active in the Bakken with acreage on the Fort Berthold Indian Reservation include Enerplus (NYSE:ERF), which has 74,000 net acres here. The company estimates that it can increase production from here to a range between 20,000 and 25,000 BOE per day by 2014.

Credo Petroleum (Nasdaq:CRED) also has acreage exposed to the Bakken and plans an aggressive ramp up in development here in fiscal 2012. The company has budgeted to participate in 20 operated wells and will spend most of its drilling budget in this area.

Delays
One issue that investors should monitor is the difficult environment present in the Williston Basin during certain months of the year. In the second quarter of 2011, many operators active in the Bakken reported delays in development due to a severe winter and flooding.

SM Energy (NYSE:SM) had to shut in wells during the quarter and reported shut-in production of 1,500 BOE per day at the peak. Hess (NYSE:HES) was also impacted by this issue and reported completion delays during the quarter.

The Bottom Line
WPX Energy made a large acquisition of undeveloped acreage with Bakken exposure and aggressively worked these properties in 2011. The company plans to increase activity here in 2012 and will make the oil play in the Williston Basin one of its core areas going forward. (For additional reading, check out A Guide To Investing In Oil Markets.)

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At the time of writing, Eric Fox did not own shares in any of the companies mentioned in this article.

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