Ring In The New Year With WPX Energy

New Year’s Eve is one of those ‘big events’ that rarely lives up to its hype and often ends up pretty anti-climactic. Doesn’t bode well for this ensemble flick(actually, I am sure it will suck for a host of other reasons). The board of directors at

Williams Companies (WMB) believes they have found the solution for a great NYE though as the company recently approved plans to spin off WPX Energy, its E&P unit, on December 31st to shareholders as of December 14th. Surely a more exciting event than watching a big ball drop 77 feet, no? Well…maybe not.

The original proposal, similar to Sunoco’s execution of the SunCoke spinoff, called for an IPO of WPX Energy this year followed by a distribution of the remaining stake to shareholders in 2012. Alas, the equity markets markets didn’t behave and the weak IPO environment caused the company to shelve the IPO and to pursue a pure spinoff instead. Even though the parent will not be able to pay down debt with the IPO proceedings, it is still expecting to maintain its credit rating. For additional background information on the transaction, see our earlier post here.

WPX Energy owns and is developing various oil & gas assets throughout the United States in locations such as the Piceance Basin (Rockies), the Bakken Shale (North Dakota) and the Marcellus Shale (Pennsylvania). The company also has a 69% ownership stake in Apco Oil and Gas International (APAGF) which holds oil and gas concessions in Argentina and Colombia. Apco only represents a small portion (~5%) of its reserves though. Here is a snapshot of the company’s proven reserves (as of Dec 31, 2010):

Basin/Shale	Estimated Net Proven Reserves
	Bcfe	% Proved Developed
Piceance Basin	2,927	53%
Bakken Shale	136	11%
Marcellus Shale	28	71%
Powder River Basin	348	75%
San Juan Basin	554	79%
Apco	190	60%
Other	290	72%
Total	4,473	59%

Currently, the Piceance basin represents the bulk of the company’s production, however I would expect that to change as the company has recently acquired significant chunks of acreage in the Bakken and Marcellus shales. I would expect those areas to grow significantly as they are expected to consume about 35% of the company’s 2011 drilling budget and 47% of 2012’s budget. While these shale assets are some of the more exciting energy projects in the US (you may have heard something about a shale ‘boom’) and a boon to the company, they are obviously not without risks.

For additional information on the company, both financial and asset-wise, check out its Form 10. The filing lists the usual list of reasons for the spin, including increased management focus and competition for assets. One of the differences between the two companies will be dividend payments. While the parent company, WMB, plans on growing its dividends by 10-15%, WPX does not intend to pay anything out. Not a surprising decision given the constant capital intensity of the E&P business, but it might disappoint some investors.

Shareholders of Williams will receive one share of WPX Energy for every 3 shares owned of WMB and the new company will trade on the NYSE under the ticker ‘WPX’. Given the nature (and recent popularity) of the business, it should be relatively easy to put together a list of comparable companies for a relative valuation comparison. We will keep you updated.

Disclosure: Author holds no position in any stock mentioned.

Related articles

• WPX Energy Prices $1.5 Billion of Senior Notes (prnewswire.com)
• Williams to spin off exploration unit, nixes IPO (seattletimes.nwsource.com)