Two years after WPX Energy Inc. was spun out of its pipeline giant parent The Williams Cos. in 2012, the fledgling standalone E&P faced an identity crisis: What was its strategic direction, and what did it want to look like in three, five, 10 years? WPX’s portfolio was bloated with legacy natural gas, which showed no signs of turning around, and its stock had remained flat despite a run-up in peer group valuations during that window.

Also, the board wanted “a fresh perspective” at the CEO level, one that would specifically enhance the company’s operating and financial performance with a long-term vision. That fresh perspective was Rick Muncrief, who joined the Tulsa-based operator as president and CEO in May 2014.

Muncrief, a southern Oklahoma native, spent 27 years training at Burlington Resources and ConocoPhillips, largely in the Rockies’ gas plays in which WPX was anchored. In the five years prior to WPX, he was senior vice president of operations and resource development for Continental Resources Inc. He quickly instituted at WPX what he called the ABCs: accountability, a bias for action and continuous improvement. “I wanted employees to have the sweet taste of success,” he said, “but to never get caught in the trap of saying ‘We’ve arrived.’”

At that time, WPX’s portfolio slanted two-thirds natural gas, consisting of its legacy Piceance Basin position, a Mancos Shale dry gas play and emerging Gallup Sandstone oil play in the San Juan Basin, the Bakken Shale, northeastern Pennsylvania Marcellus Shale, Powder River coalbed methane and interests in Argentina and Colombia. In the ensuing two-and-a-half years, Muncrief pared everything except the San Juan and Bakken positions, and famously added the Delaware Basin in a $2.5 billion acquisition from RKI Exploration & Production, recognized as Oil and Gas Investor’s Deal of the Year in 2015.

In January 2017, WPX announced an additional $750 million “bolt-on” acquisition in the Delaware from Panther Energy, adding another 18,000 acres and 6,500 barrels of oil per day of existing production. The deal will take its oil growth from 25% year-over-year to 30%, and increase its Permian rig count to seven.

All told, WPX’s flurry of A&D amounted to $6.5 billion, transformed the portfolio from seven core areas to three while largely exiting gas, and grew oil volumes to nearly two-thirds of total production in two-and-a-half years. WPX’s share price rose 157% last year, and now experiences top-tier operational metrics. “In essence, we built a brand new company,” he said.

It’s for this body of work since taking the helm at WPX that Oil and Gas Investor honors Muncrief with our Executive of the Year Excellence Award for 2016. Muncrief visited with Oil and Gas Investor to discuss the transformation and strategy.

Investor When you took over, what were the compelling reasons for a quick shift in the strategy?

Muncrief I found a company that struggled with very minimal margins. WPX actually had a pretty decent balance sheet but was going to be challenged over the long haul. It had a lot of production but also high operating costs, which is common when you are spun out of a much bigger company. It told me we had a cost control issue, a revenue issue driven by the commodity mix and a portfolio issue in asset quality. It’s hard to have a profitable, sustainable company if that’s the case—and this was a time when commodity prices were quite high.

There was going to be a day of reckoning when those thin margins caught up with us.

That was the thing that concerned me, and that’s why we felt like we had to pivot and go to work on our margins.

Investor You initiated a five-year strategic plan right away. What were the objectives?

Muncrief When you talk about transforming a company you have to keep the end in mind. What did we want to be? We wanted to be a much oilier company and drive margins.

Margin improvement was paramount, but we needed more focus. We recognized that we had too many assets, they were too marginal, and we had a cost structure that was not going to work over the long haul.

Commodity mix is one of the largest drivers of the margin, and we didn’t have much oil in the portfolio. We felt that, over several years, we could triple our margins but that would involve a five-fold increase in our crude oil production growth, so we went to work on changing that mix.

Investor As part of your plan, you wanted to have fewer core plays. Why did you take a three-basin approach?

Muncrief The Bakken by itself wasn’t substantial enough, and the Piceance by itself wasn’t oily, so we needed to have a core asset that we could build on, which later led to the Permian. But we initially felt that if we could increase activity in the Gallup and the Bakken, and put some cost control measures in, then we could achieve our objective of tripling our margins.

We were an early mover in the Gallup play, which was more exploratory in nature, but we needed more scale. So we quadrupled the acreage size there and built it into something with more running room.

Investor How did you determine what assets were noncore to your future plans?

Muncrief We quickly determined we could not control our destiny on the South America nonop position. In the Marcellus, although we tried different stimulation types, we had too much variability. We also felt that the Marcellus was going to be challenged on the infrastructure buildout and with wide differentials, and that’s absolutely come to pass. The Powder River Basin had a high well count but no margins, and that was a quick decision.

Historically, the flagship asset had been the Piceance, so that originally stayed in the portfolio, and we would keep the two oil opportunities in the Bakken and the San Juan Gallup. Crude was still trading above $80. We could go a long ways down the road with those two on the oil side.

Investor And yet you sold the Piceance?

Muncrief We sold the Piceance after we moved into the Permian. We felt like we were on the clock then and needed to delever. And quite honestly, after the Permian, we saw the ability to become a much oilier company. It was going to be difficult to do that if we kept the Piceance in the portfolio. If we would have been more bullish on gas, we probably would have hung onto it.

Also, when you stack the margins of the Piceance up to the Permian, it was a stark contrast. We felt like we’d be much better served to be a smaller, leaner, higher-margin entity than what we would be if we kept the Piceance in the portfolio. We essentially traded the Piceance for the Permian and got a nice value for it. For our strategy, that was absolutely the right thing to do.

Investor Did the price downturn alter your best-laid plans that you’d laid out when you joined the company?

Muncrief It did. When I joined the company we didn’t see this coming. The good news is it presented us an opportunity to get in the Permian. In retrospect, it would’ve been very tough to pull that off when we did if not for the downturn.

I’d not be real sincere if I said that the pullback in commodity prices didn’t enhance our focus. When the commodity price collapsed, we felt like it was a great time to make a bold move into the Permian. From a resource perspective, that was where the greatest opportunity was going to be available to us.

Investor So why did you target the Delaware specifically, and why at this particular time when it was not as de-risked as it is now?

Muncrief The core of the Bakken was tightly held. The cores of the Eagle Ford and D-J Basin were tightly held. We knocked on several doors of companies that had the core of the Bakken, and they were going to hang onto it. We saw the same thing in the Eagle Ford. We were very, very intrigued by the Midland Basin, but the core of the Midland was pricey at that time.
The Delaware was emerging. At that point in time you saw folks struggling from a cost perspective, but we could see in other basins what longer laterals and enhanced completions could do. It was a great opportunity for us, so we made the move.

Investor How big of a stretch was it to take the RKI assets?

Muncrief It was a bold move. As it turned out, it was a little more of a stretch than we thought it would be, primarily because we tried to achieve that sweet spot of how much additional debt to take on. How much new equity do we issue? It’s that balance of taking on more debt vs. dilution.

In retrospect, I’d say the market would’ve accepted us issuing more equity than taking on that debt, but we felt at the time that was the sweet spot for existing shareholders. After we did that, commodity prices rolled within a month after closing and capital markets started shutting down. Had we tried to do the RKI deal 30 or 60 days later, we would not have been able to pull it off.

Investor How good is it? What have you learned since acquiring it?

Muncrief We felt like the acreage held a lot of potential in a lot of horizons, but that the three largest drivers would be the Wolfcamp A, the Second Bone Spring and some vertical drilling. That’s what RKI was doing, so that would be the bulk of our development in the first two to five years.

At the time we didn’t see that we were going to have an Upper A and a Lower A. We did not see the potential of the Wolfcamp X-Y, where we’ve had two very successful tests so far. We’ve also had successful tests in the Wolfcamp D, which is up to 1,000 feet thick in sections. It’s much more productive and prolific than we knew at the time. Since we’ve had it, we’ve been able to up our resource estimates fairly significantly.

We’ve been able to use that to do some bolt-on acquisitions. We’ve gone from the original 90,000 acres to roughly 120,000 acres with a very large inventory of projects. We’ve learned a lot technically, and we’ve learned a lot about the resource, and we continue to see things. We’ve not seen anything we’ve been disappointed in. That is so encouraging. It’s a deal that keeps getting better with time.

Investor What is your longer-term vision for the Delaware position?

Muncrief We’ll continue to try to do bolt-ons that make sense and core up in areas. Investors have applauded our game plan and so I’d like to have more scale there. But you have to understand that 120,000 acres in that part of the basin equals at least six or seven times that from a net effective reservoir perspective. When you think about the horizons to develop over the next couple of decades, it’s a staggering number. We’re real excited about what we have there.

Investor How important are the Bakken and the San Juan to your overall portfolio scheme?

Muncrief The Bakken is a wonderful No. 2 asset. It’s 85% crude oil. The returns are very competitive with what we’re seeing in the Permian. The big difference is the scale with just under 600 wells left to drill. That being said, right now the Bakken is a big contributor to our oil production and is very important to us. We have about 300 wells left to drill in the Gallup. From a return standpoint, it’s very competitive, and that’s core to our business plan, which is to allocate capital to the highest returns.

We have three really nice investment opportunities, all of which are fairly close from a return standpoint. It’s just a matter of scale. Those two assets play a big role as we transition. Obviously, the Permian is going to be a much larger, much quicker-growing part of our portfolio going forward. Right now, we’re at a point in time where having those other two assets play a critical role for us and help to effectively grow our Permian position.

Investor What role does gas have in WPX’s portfolio now, if any?

Muncrief It does have a role. We’ll have exposure to gas as a commodity with associated gas in the Delaware Basin. We’re going to have a nice exposure to that commodity right there.

Currently, the legacy San Juan gas position is about 100 million cubic feet a day, one-sixth of our production. Some is operated, some is non-operated.

That begs the question of how important is the legacy gas that we operate in San Juan to the portfolio going forward? We have drilled a two-mile lateral in a lower interval underneath most of our operated assets up there and have been very impressed with what we’ve seen. That being said, that asset will have to compete for capital with the core of the Bakken, the core of the Delaware and then our San Juan Gallup play.

Investor You’re on record as saying that the transformation of the company culture was as important as the assets. Why is that, and what has changed?

Muncrief The Williams E&P organization had some top-notch folks, but they had never tasted the heights of success. It’d been a challenging time for them, and even though they were working hard, they were burdened by some things that had been spun out of the legacy company. There was not a clear strategy.

Now we’ve got a winning attitude. I see the look in people’s eyes. Instead of just winning a participation medal, we want to win the gold medal. We’ve successfully delevered the balance sheet. We’ve pulled off transactions that a lot of others didn’t. We’re very decisive in our decision making. Those things are the hallmark of a winner.

That’s what I’m most proud of—injecting a winning attitude into this organization.

Investor How do your margins and growth potential compare then vs. now?

Muncrief Our margins have more than doubled from three years ago and crude prices are half of what they were. That says a lot. As we look into the future, we’re going to see even more growth and margins. The more oil that we produce, then margins on a barrel equivalent percentage are going to continue to increase.

Our original strategy documents said we wanted a five-fold increase in our oil production. That would be about 80,000 barrels a day by 2020; now we’re planning to be there in 2018. It’s just an outcome of a shift in the asset portfolio. Having the Permian in the portfolio not only supercharges our margins, it supercharges our growth rate on oil.

Investor Looking back, what were your keys to success?

Muncrief When you take on a transformation—and this one has been quite large and quite challenging—you need to understand your capabilities—the human aspect—and quickly make changes. Get the right team pulled together.

Another stumbling block is not being decisive, being so afraid of making the wrong call that you are frozen in fear. Once the commodity prices pulled back, no doubt our focus was on what we needed to do. We didn’t have to worry about being frozen with fear. We were excited about the success and opportunity we saw ahead of us, so we were decisive and made the moves. And it’s worked out very well for us.