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Sunday, February 5, 2023

Whiting Petroleum Stock Looks Even Worse After Coming Out of Bankruptcy

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As I write this, the day after Whiting Petroleum (NYSE:WLL) emerged from Chapter 11, WLL stock is up more than 3,000%. But there’s a catch.

stacks of oil barrels (WLL)

Source: Shutterstock

Before you run out and buy some of this bad boy, keep in mind that it’s only trading around $23 because the old equity shareholders got one new share in Whiting for 75 of the old. Reverse that, and it’s trading at something closer to 25 cents, nearly 50% below where it closed on Sep. 1.

Whiting’s stock opened at $28 on Sep. 2 before losing altitude shortly after the opening bell. It dipped to $19 and struggled back.

If you think that Whiting’s emergence signals a second coming, you might want to hang on to your wallet. There’s a lot that still has to go right before anyone makes money from the struggling oil and gas company.

In July, I wrote that the sexual-misconduct allegations against former Chief Executive Officer, Brad Holly, did not bode well for its stock. Just because he’s no longer around doesn’t mean it gets WLL out of the doghouse.

Here’s why.

Owners of WLL Stock Getting Clipped

Seeking Alpha contributor, WYCO Researcher does an excellent job explaining why the old shareholders might not be all that happy with the reorganization plan. 

As WYCO points out, the old shareholders own 3% of Whiting’s new equity with the creditors owning the rest. In addition to an exchange ratio of one share for every 75 of the old, investors also got Series A warrants exercisable at $73.44 anytime before Sep. 1, 2024. They also got Series B warrants exercisable at $83.45 anytime before Sep. 1, 2025. 

Based on the Aug. 31 closing price of 80 cents, a new share was valued at $60.15. However, based on 57 cents, where it closed Sep. 1, the new share fell to a value of $42.86. As I said above, they’re trading around $19 more than halfway through Sep. 2 trading.

That’s a 69% haircut over two days. About the only glimmer of hope is that the WLL share price is still trying to find its footing. 

So what are the odds WLL will return to $60?

The Odds of Returning to $60 Aren’t Good

Based on WYCO’s additional assumptions, including an enterprise valuation from Moelis & Co., the mid-point equity value per share is $27.46. The unsecured note holders, who’re getting 97% of the stock, are estimated to receive 15.5 shares per $1,000 in principal. That puts the share value at $15.48, a long way from $27.46. 

However, given oil prices are trending slightly higher, and investors get Series A and Series B warrants with their new shares, WYCO believes speculative investors might want to buy WLL stock below $25. 

There is no question that Whiting’s debt of $425 million is much lower today than it was as of March 30, 2020, when it stood at $3.4 billion. The reorganization’s effectively eliminated 88% of its debt while providing $336 million in effective liquidity

If you’re new CEO Lynn Peterson or any of the other senior managers, you’ve got to be much happier about the future than you were a week ago.  

The question is whether it’s enough to get WLL stock moving toward $60. 

The Bottom Line

According to the company’s reorganization documents, Whiting is going to generate estimated annual revenues over the next five years averaging between $623 million on the low end and $688 million on the high end. In terms of earnings before interest, taxes, depreciation, and amortization, it will range between $272 million and $340 million.

In fiscal 2018, when oil prices traded above $73, Whiting finished the year with $202.6 million in EBITDA from $2.08 billion in revenue. That’s an EBITDA margin of just less than 10%.

For the next five years, Whiting’s estimating oil prices of between $38 and $47 a barrel, so I have a hard time understanding how it’s going to deliver anywhere near $300 million in EBITDA in the near term. 

While the warrants are a nice throw-in on the deal, I find it hard to believe that its share price is going to rise by 344% over the next five years, given the state of the oil industry at the moment. 

That could change–and pigs could fly. 

“New” WLL stock is just like “old” WLL stock. It’s only for speculative investors. If this is for your kid’s education, step away from the buy button. It’s not worth it.  

On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article. 

Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.

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