In contradiction to everything that conventional wisdom represents, Whiting Petroleum (NYSE:WLL) has become a target of traders seeking fast action and quick gains. The daily trading volume on WLL stock would suggest, if we didn’t know any better, that there’s a bright future in store for this once-promising shale company.
But let’s not confuse volume with value. Just because the “bankruptcy trade” is gaining traction, doesn’t mean that it’s sound from a risk-versus-reward standpoint. Cautious investors can watch the decline of the Whiting Petroleum Hindenburg without feeling the need to participate.
Ironically enough, you’ll see “WHITING: PROGRESS MEETS VALUE” emblazoned across the company’s landing page. After examining the facts and circumstances surrounding this embattled energy firm, I’ll be surprised if anyone can find either progress or value, much less both.
A Closer Look at WLL Stock
Before we dive into the belly of the beast, let’s take a step back and examine Whiting Petroleum’s stats. If you can believe it, this stock was worth (or at least was trading at) $370 in August of 2014. That was a more optimistic time for the shale industry and for Whiting Petroleum in particular.
Fast-forward one year from that peak and you’ll find that stock in WLL was priced at $16.75 in August of 2015. And by early July 2020, the bulls were struggling to hold on to the $1 level.
Judging by the price action alone, it’s safe to say that only nimble short-term traders with well-timed entries and exits should participate in this stock. On a longer-term basis, even a short seller should probably avoid Whiting as there are occasional sharp spikes in the price.
When InvestorPlace contributor Mark R. Hake, CFA, asserted that Whiting Petroleum is going to get a “massive haircut,” perhaps even to the tune of 50%, I had to dig deeper. That’s a bold call even if the target is a company involved in bankruptcy proceedings.
Yet, there’s a sound basis for Hake’s bearish contention. As he duly points out, Whiting Petroleum’s press release “indicates that existing equity owners receive just 3% of the ‘new equity’ of the reorganized company.”
Hake’s calculations pinpoint the company’s likely implied market value at around $685.6 million, which might actually be on the generous side. After the company’s “reorganization,” the existing equity owners will have the privilege of divvying up 3% of that meager fiscal pie.
Eager bankruptcy-stock traders should digest this data and consider whether they really want to fight over the scraps of a company in decline. Whiting might, at best, be a scalper’s paradise. Post-analysis, though, the math doesn’t favor a long position for the long haul.
Wrong-Sized Balance Sheet
Corporate executives are known to be consummate spin doctors. Their role, beyond the leadership duties, is to promote the company they’re representing.
However, there are boundaries to responsible spin-doctoring. Whiting Petroleum Chairman, President and CEO Bradley J. Holly, may have blurred some ethical lines with this statement:
“We are pleased to have secured a highly constructive RSA with certain holders of our Senior Notes. Through the proposed terms of the plan of reorganization, we believe a right-sized balance sheet will enable us to capitalize on our enhanced cost structure, high-quality asset base and successfully compete in the current environment.”
Where to begin? Sure, the restructuring might be “highly constructive” for “certain holders,” but not for most Whiting stockholders. They’ll get the shock of a lifetime when they find out they’re collectively getting 3% of the new equity.
Next, the “high-quality asset base” is very likely in severe jeopardy. There’s a good chance that Whiting Petroleum will need to sell some or all of its assets at some point. That’s not at all unusual for a company embroiled in the throes of insolvency.
What about the “right-sized balance sheet”? During the three months ending on March 31, Whiting Petroleum reported a net loss of $3,628,571. And that was before April’s harrowing oil-price rout.
The Bottom Line
If you’re still trying to figure out how “progress meets value” with Whiting Petroleum, you’re not alone. The company’s spin doctoring can’t cover up a slew of fundamental problems. This leaves Whiting’s stockholders with few choices, the best of which is to eject and never look back.
As of this writing, David Moadel did not hold a position in any of the aforementioned securities.