Whiting Petroleum (WLL, Financial) has faced a stiff challenge since the decline in oil prices, and the stock has fallen by 77% in the last year. With oil trending higher recently and with several names in the oil and gas sector trading at deep value, I have discussed some quality names in the sector worth buying. However, even after deep correction, Whiting Petroleum is still not on my buying radar.
The first concern is that Whiting Petroleum had cash and equivalents of just $16.1 million as of December 2015. While the company’s overall liquidity buffer as of December 2015 is $2.7 billion, it would have been comforting if cash and equivalents were higher than liquidity buffer coming from undrawn credit facility.
The second concern is the fact that the company still has meaningful debt of $5.2 billion as of fiscal year 2015. The positive for Whiting Petroleum is that the company has no bond maturity until 2018 and no significant debt maturity until 2019. However, with oil remaining sideways, $5.2 billion in debt implies that debt covenant headroom will remain restricted and credit metrics will remain under pressure. In fiscal year 2015, Whiting Petroleum sold $512 million in assets to reduce debt, but I see the need for further debt reduction in the next 12 to 24 months.
As a result of significant debt, Whiting Petroleum has restricted its 2016 capital expenditure program to $500 million, and this is another concern. The company’s financial flexibility will remain restricted and production growth will be impacted in the coming years. This can only change if the company is able to reduce debt by $1.5 billion to $2 billion in the next 12 to 24 months through asset sales and internal cash flows.
From an operating cash flow perspective, Whiting Petroleum reported OCF of $1 billion for fiscal year 2015. Assuming that the OCF remains the same for fiscal year 2016, Whiting Petroleum is likely to report free cash flow of $500 million for the year, and this can be utilized toward deleveraging.
Whiting Petroleum has significant proved reserves of 821mmboe, and there are no concerns from the company’s asset perspective. The company’s production is focused on the Rocky Mountains with 5.9% of fourth quarter 2015 production coming from the Permian Basin and 2% from other assets. These two noncore assets will be lined up for divestment in the coming quarters.
From a valuation perspective, Whiting Petroleum is trading at TTM EV/EBITDA of 5.3, price to book of 0.35 and price to sales of 0.8. While valuations seem attractive, investors are urged to refrain from fresh exposure to the stock. The stock will be attractive only if the cash buffer is enhanced and debt is reduced significantly. If overall sentiments for the energy sector improve, it would not be surprising to see equity offering from Whiting Petroleum. This is yet another reason to stay away from the stock in the foreseeable future.
There are several names in the energy sector that have a strong cash buffer to navigate the current crisis. Whiting Petroleum has significant debt and minimal cash in the balance sheet. The stock can be avoided as the outlook for exploration sector still remains uncertain.
Disclosure: No positions in the stock.
