In times of depression for a particular industry, there are short-term opportunities that can provide stellar returns. Just as an example, Whiting Petroleum (WLL, Financial) was depressed due to lower oil prices and leverage with the stock trading at $3.53 on Feb. 25.
Over the next 10 months, the stock surged by 243% to current levels of $12.12. As oil trends higher and the company makes efforts to reduce debt, this article discusses whether Whiting Petroleum is worth considering at current levels.
I want to start by mentioning that Whiting Petroleum has surged in the 10-month period, but the stock is at the same level where it was trading on April 27. In other words, the big upside for the stock came in two months from year-to-date lows, and the stock has largely been volatile to sideways following the initial surge.
To analyze whether the stock can move higher in 2017, the most important point to discuss is the company’s debt. On Dec. 9 Whiting Petroleum announced the conversion of $721.0 million of mandatory convertible senior notes and mandatory convertible senior subordinated notes to 77.6 million common shares. On Nov. 21, Whiting Petroleum announced the sale of North Dakota midstream assets for a consideration of $375 million.
Related to these two recent transactions and the company’s effort to reduce debt, the following points are worth noting:
- On debt conversion coupled with debt reduction from proceeds of asset sale, Whiting Petroleum will see total debt decline by $2.3 billion since March. The company is moving in the right direction; as oil trends higher, there might be hopes of better valuation on asset sale.
- Debt reduction has involved equity dilution, and I expect further equity dilution in the next 12 months. Just to put things into perspective, Whiting Petroleum has converted debt of $1.1 billion to equity this year.
- Even with the debt reduction, Whiting Petroleum reported total debt of $3.4 billion (including debt reduction from the North Dakota asset sale). For the three and nine months ended Sept. 30 Whiting Petroleum reported cash interest expense of $4.64 and $4.72 per barrel. With cash interest expense still higher per barrel of oil equivalent, there is need to further reduce debt and potential equity dilution can keep the stock sideways.
- Among the positives, Whiting Petroleum has no debt maturity until 2018 and no significant debt maturity until 2019. Therefore, debt refinancing is not a near-term concern, but debt reduction is likely to continue, and that will be aided by oil trending higher.
Therefore, my broad view on the company’s deleveraging is that the initiative has been successful toward achieving lower leverage and reducing debt servicing cost. However, I see more debt reduction coming in 2017, which can be equity dilutive. This should keep the stock sideways even if the assets deliver strong production and relatively better cash margin.
Whiting Petroleum has core positions in the Bakken formation of Montana and Niobrara region of Colorado with exposure to bounce back in oil prices. The company also has strong hedged positions for 2017 and 2018. While assets have the capability to deliver long-term returns, I would wait for oil prices to sustain at higher levels and for further deleveraging before fresh exposure.
As I mentioned above, the stock has already surged by 243% from year-to-date lows and sideways movement can sustain in the medium term. Also, there are other stocks in the industry that have low leverage, and production growth remains robust. Stocks like Parsley Energy (PE, Financial) and Pioneer Natural Resources (PXD, Financial) can be relatively superior picks in the industry.
Disclosure: No positions in the stocks discussed.
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