(By Balaseshan) Deutsche Bank analyst Stephen Richardson initiated coverage of WPX Energy Inc. (NYSE: WPX) with a "Hold" rating and $19 price target.
Richardson said WPX is a transition E&P, where execution has lagged expectations over its first year as a standalone public entity. The stock trades at discounts to the peer group on all metrics, driven primarily by structural challenges of the business (not asset quality).
WPX is actively working to address the margin gap, and with improved execution should begin to close the valuation gap. The analyst looks for a path to more tangible operational improvements, and a more aggressive approach to the cost-reduction opportunity. Until further catalysts emerge, he has a "Hold" rating.
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Richardson said the market has taken the view that the asset configuration and cost structure are uncompetitive and will be challenged to grow. While poorly understood by the street, a number of initiatives will see EBITDA rise by $175 million (about 15% from the fiscal 2012 base) on an annualized basis by 2015, agnostic of commodity price.
Coupling this with improved execution in the Bakken and Marcellus should see the margin & valuation gap begin to close, the analyst noted. Additionally, WPX has the opportunity to accretively divest legacy gas assets as the forward curve recovers.
While capital is not a constraint, strategically paring higher cost assets should further right size the cost structure. With significant opportunity for improvement, a sense of urgency should follow as 2013 progresses.
Not to be understated, the balance sheet (about 18% net debt/cap, 1.7 times debt/EBTIDA) is a key attribute which means the stock enjoys less absolute downside to net asset value than peers (about 7% downside on a $80/bbl & $4/mmbtu deck), Richardson noted. From a capital preservation perspective, the stock is unique amongst his coverage group.
WPX is trading up 1.13% at $15.25 on Friday.