A few months ago, we looked at the merits of Rosetta Stone (RST), the investment idea presented by David Nierenberg of D3 funds at the Value Investor Congress in Las Vegas. In this article, we are going to examine, WPX Energy (WPX). The idea was presented by Guy Gottfried of Rational Investment Group. The presentation can be found here. Readers will have to scroll down the page to find it. What intrigued us about WPX initially was that at the time it was presented it was trading for 66% of TANGIBLE BOOK value. While that might be expected if the company was a bank or insurance company or had a huge debt maturity looming, it is rare for an E&P company to trade at less than even 1.5X book.
Using reasonable estimates for the value of the company’s oil and gas reserves, WPX appears to be even more undervalued. In this article, we will expand on Mr. Gottfried’s analysis to show that WPX appears to have considerable upside with a reasonable margin of safety for investors. We also like it when other value investors whom we respect come to similar conclusions on valuations and investment thesis. In addition to reading company annual reports, we read the reports and commentaries of mutual fund companies such as FPA, Third Avenue Value, GMO and Aegis. Many times these funds go into detail on an idea and the methodology used to analyze a company. In the first quarter Aegis Fund quarterly commentary, the portfolio manager Scott Barbee makes his case for WPX in the following excerpt. Mr. Barbee also expands on the thesis a bit more in the latest Value Investor Insight publication.
Source: Aegis Fund Q1 Shareholder Letter.
Here is a summary table of his valuation metrics. Please do not let the precision of the numbers give you a false sense of certainty in them.
|Aegis Value Fund Valuation||Price per Unit||Value ($M)|
|Nat Gas Proved Reserves (TCF)||4.1||$1.25||$5,130|
|Bakken Oil (MBBL)||68||$20.00||$1,360|
|NAV per share||$31.16|
This was the starting point for our analysis. Our entire report can be found on Seeking Alpha, here. Please email us if you want a copy of the report.