A very optimistic estimate of the cumulative future dividend of WHX is $225m. The company sells for $250m. In any case, WHX is certain to go to $0. This can reasonably be expected by 2017.
I use rough numbers because I don’t like calculators and spreadsheets. My numers are from the latest 10q and 10k. [www.sec.gov]
Whiting USA Trust has no material asset other than the right to receive 90% of the net proceeds of some oil and natural gas producing properties in the Rocky Mountains, Mid-Continent, Permian Basin and Gulf Coast regions. After 9 MMBOE have been produced, the Trust will wind up its affairs and terminate. The 9 MMBOE are projected to be produced by 2017. Production is approximately 60% oil and 40% natural gas. The Trust distributes its earnings quarterly. Payments represent a return of investment (tax exempt !).
This is my kind of DCF. The trust has roughly 5 MMBOE remaining; it started out with 9 MMBOE in 2007.
With oil at $100, 5 MMBOE is worth $500m.
The market cap is $250m. This implies a healthy double digit discount rate assuming it takes five years to pump up the remaining 5 MMBOE.
I can see why mr. Market is willing to pay $250m.
Remember the first half of 2008 ? Oil was at all-time highs; $130 - $140. Back then, the Trust distributed a record of 45m per MMBOE produced. At best, we can expect 5 x 45m = $ 225m for the 5 MMBOE remaining.
Those record distributions of 45m per BBOE were made at record prices for oil and a much better production mix (more oil, less gas). [www.sec.gov]
Why the difference ?
In short, at $ 100 oil, 5m BOE is worth less than $ 500m if they're underground.
1) “Whiting deducts from gross oil and natural gas sales proceeds, all royalties, lease operating expenses (including costs of workovers), production and property taxes, hedge payments made by Whiting to the hedge contract counterparty, maintenance expenses, postproduction costs (including plugging and abandonment liabilities) and producing overhead.”
2) We didn't account for the fact that 40% of production is natural gas. A BOE of natural gas is about 60% cheaper than a barrel of oil.
3) We didn't account for the fact that the Trust has a right to just 90% of net proceeds.
I leave it to the reader to find a recent transaction of US oil reserves implying a value of more than $25 per BOE and that's oil not 40% gas. [www.ogfj.com] [www.worldoil.com]
Intrinsic value II
We use a 5% discount rate to find the present value of that $225m…... let’s just say WHX is not reasonably worth a dime over $ 200m.
Mr. Market says this is a bet on rising oil and/or gas.
He’s wrong ! WHX hedges. Between now and january 2013 the price is capped at $145 per barrel of oil and $7 per Mcf of gas (=$42 / BOE). Oil must go over $200 for WHX to get that maximum hedged price of $145.
1) Oil could run up over $200 and stay there causing distributions to come in at record levels going forward. One could hedge this out with some 2015 oil futures….. arbitrage.
2) A short squeeze can be painful. Make sure you are in a position to make this an opportunity instead of a threat. Remember, WHX is certain to go to zero eventually.
The nice thing about shorting is that the 873465 risks I haven't thought of, invert.
Even more bearish: [www.citronresearch.com]
Bullish: [www.zacks.com] [www.gurufocus.com]
Any and all questions and comments welcome as usual.
Disclosure: I don't short.