As it turns out, buying Whiting Petroleum (NYSE:WLL) stock in bankruptcy wasn’t a great deal. Between shares of the “new” WLL stock and warrants, early trading suggests that pre-bankruptcy prices were too high, even after a big pullback.
Investors were wise to stay away. Former shareholders only are getting about 3% of the company; bondholders are getting the rest. Warrants have some value, but even accounting for that value pre-bankruptcy shareholders paid too much.
But the same won’t necessarily be true going forward. The bankruptcy process significantly improved Whiting’s balance sheet. Even with a rally in WLL stock over the past few sessions, valuation looks attractive.
Certainly, the new Whiting has plenty of risks as well. Crude oil prices remain low. U.S. production still needs to come down to match demand, and that will take some time, if it happens at all.
Meanwhile, it’s certainly fair to ask if WLL stock is necessarily the best producer out there – and if the sector’s history of value destruction means investors should own producers at all. For those investors still interested in oil plays, however, there’s a real case for the “new” WLL stock.
Certainly, some investors were far too optimistic toward Whiting stock before the bankruptcy. In June, for instance, WLL stock soared as part of a pack that included Hertz and Chesapeake Energy (OTCMKTS:CHKAQ). (Chesapeake hadn’t yet filed for bankruptcy, but such a move seemed imminent, and indeed arrived later that month.)
Investors who bought that rally are down big. Those who waited for it to fade, however, didn’t get hurt quite as badly.
In the restructuring, pre-bankruptcy Whiting shares were converted to “new” WLL stock at an exchange ratio of roughly one share for every 75 shares previously owned. With WLL closing Tuesday at $20.93, new equity was worth about 28 cents per “old” Whiting share.
But the warrants have real value as well. Shareholders received one Series A warrant (OTCMKTS:WLLAW) per every 19.1 shares. Those warrants expire in 2024, with an exercise price of $73.44. They last traded Tuesday at $4.40.
Shareholders also received one Series B warrant (OTCMKTS:WLLBW) for every 38.2 shares. Those warrants mature in 2025, with a strike of $83.45. They closed Tuesday just shy of $5.
Add it up, and investors received about 63 cents in value for their Whiting stock. (28 cents for the equity, 23 cents for the Series A warrant, and 13 cents for the Series B issue.) That may change in a hurry: both WLL stock and the warrants already have shown significant volatility, and likely will continue to do so.
At the moment, the payout suggests that investors were too optimistic toward the bankruptcy process. WLL stock closed on Aug. 31 at 80 cents; it disclosed the exchange arrangements the following day. The simple wisdom was (mostly) correct: it’s almost always unwise to buy a stock in bankruptcy.
WLL Stock Going Forward
After bankruptcy, however, is a different story. Former Whiting shareholders only received 3% of the equity, but they’re receiving a much smaller portion of a company in far better shape.
After all, in the bankruptcy Whiting managed to cancel some $3 billion in debt. Borrowings now total just $425 million. As the company noted in an investor presentation, that gives Whiting one of the lowest leverage ratios in the industry – after it had one of the highest before the restructuring.
Valuation looks reasonable as well. In the same presentation, Whiting noted that its 2021 business plan forecast $300 million in EBITDA (earnings before interest, taxes, depreciation and amortization). Pro forma market capitalization sits just under $800 million; enterprise value (market cap plus net debt) is just over $1.2 billion.
An EV/EBITDA multiple around 4x is rather attractive for the sector – even with low crude prices. (That business plan, issued in June, likely will be updated later this year. But the estimated oil and natural gas prices aren’t far off from where they sit right now.) An advisor to the bankruptcy valued the enterprise at closer to $1.5 billion. Meanwhile, Whiting should be free cash flow positive, assuming its business plan is on point.
There’s also a qualitative argument for the stock, as detailed in the same presentation. On Slide 4, Whiting detailed where U.S. independent producers had “gone wrong” – and how the company’s strategy would be different. No longer will Whiting outspend free cash flow or chase production over profits. This time, under largely new management, will be different.
Of course, that strategy in its own way highlights a key risk. Investors have heard those promises before not just in oil and gas, but in other industries.
The most obvious example is airlines. They, too, promised they wouldn’t chase growth for growth’s sake. Capital allocation would be smarter. Shareholder value would be a priority. The industry promptly spent nearly all of its free cash flow on stock buybacks, leaving it reliant on federal assistance when disaster struck earlier this year.
Will this time really be different for Whiting? The new managers come from Kodiak Oil & Gas, which Whiting purchased for $6 billion in 2014. Obviously, that acquisition was a disaster for Whiting, and in fact the key driver of this year’s bankruptcy. Will Kodiak’s executives learn from their acquirer’s mistake?
The other question is whether the sector as a whole is investable. The shale revolution has made a lot of money for executives and even oil field workers. Investors, with only a few exceptions, have generally lost out. If WLL stock is one of the better plays in the space, is it necessarily a good play?
Oil bulls might argue that it is. But on that thesis, a post-bankruptcy Whiting has some concerns as well. Perhaps the best “go big or go home” play in the sector probably is highly leveraged Occidental Petroleum (NYSE:OXY). Chevron (NYSE:CVX) offers a more diversified (and lower-risk) option. And there are no shortage of independent producers which are far cheaper than they were years ago.
Add it up, and it’s hard to necessarily pound the table for WLL stock. But the stock is cheap. The bankruptcy has served its immediate purpose. This can work – but oil prices and management need to cooperate.
On the date of publication, Vince Martin did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Vince Martin has covered the financial industry for close to a decade for InvestorPlace.com and other outlets.
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