Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk. This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 5 Most Undervalued Companies for the Defensive Investor – July 2015. By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries. What follows is a stock analysis showing a specific look at how WPX Energy Inc. (WPX) fares in the ModernGraham valuation model.
Company Profile (obtained from Google Finance): WPX Energy, Inc. is an independent natural gas and oil exploration and production company. The Company is engaged in the exploitation and development of unconventional properties. The Company’s principal areas of operations are the Piceance Basin in the Rocky Mountain region, the Williston Basin in North Dakota and the San Juan Basin in the southwestern United States. The Company holds approximately 196,149 net acres in the Piceance Basin, which is located in northwestern Colorado. The Company operates approximately 177 wells in the Williston Basin and also owns interest in 19 wells that are operated by others. The Company holds 85,483 net acres in the Williston Basin. It holds approximately 134,000 net acres in the San Juan Basin, located across New Mexico and Colorado. The Company operates approximately 945 wells in the San Juan Basin and also owns interest in 2,319 wells that are operated by other operators in New Mexico and Colorado.
Defensive Investor – must pass at least 6 of the following 7 tests: Score = 0/7
- Adequate Size of Enterprise – market capitalization of at least $2 billion – FAIL
- Sufficiently Strong Financial Condition – current ratio greater than 2 – FAIL
- Earnings Stability – positive earnings per share for at least 10 straight years – FAIL
- Dividend Record – has paid a dividend for at least 10 straight years – FAIL
- Earnings Growth – earnings per share has increased by at least 1/3 over the last 10 years using 3 year averages at beginning and end of period – FAIL
- Moderate PEmg ratio – PEmg is less than 20 – FAIL
- Moderate Price to Assets – PB ratio is less than 2.5 or PB x PEmg is less than 50 – FAIL
Enterprising Investor – must pass at least 4 of the following 5 tests or be suitable for a defensive investor: Score = 1/5
- Sufficiently Strong Financial Condition, Part 1 – current ratio greater than 1.5 – FAIL
- Sufficiently Strong Financial Condition, Part 2 – Debt to Net Current Assets ratio less than 1.1 – FAIL
- Earnings Stability – positive earnings per share for at least 5 years – FAIL
- Dividend Record – currently pays a dividend – FAIL
- Earnings growth – EPSmg greater than 5 years ago – PASS
|Net Current Asset Value (NCAV)||-$12.76|
Balance Sheet – March 2015
Earnings Per Share
Earnings Per Share – ModernGraham
WPX Energy Inc. does not pay a dividend.
WPX Energy Inc. does not qualify for either the Defensive Investor and the Enterprising Investor. The Defensive Investor is concerned with the small size, low current ratio, lack of dividends, insufficient earnings stability or growth over the last ten years, and the high PEmg ratio. The Enterprising Investor is concerned with the level of debt relative to the current assets, insufficient earnings stability over the last five years, and the lack of dividends. As a result, all value investors following the ModernGraham approach based on Benjamin Graham’s methods should explore other opportunities or proceed with a speculative attitude. As for a valuation, the company appears to be overvalued due to the current negative EPSmg, which leads the ModernGraham valuation model, based on Benjamin Graham’s formula, to return an estimate of intrinsic value falling below the price.
The next part of the analysis is up to individual investors, and requires discussion of the company’s prospects. What do you think? What value would you put on WPX Energy Inc. (WPX)? Where do you see the company going in the future? Is there a company you like better? Leave a comment on our Facebook page or mention @ModernGraham on Twitter to discuss.
Disclaimer: The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours. Logo taken from Wikipedia for the sole purpose of identifying the company; this article is not affiliated with the company in any manner.