Whiting Petroleum Corp (NYSE:WLL) is seeing red, and given Wednesday’s awful news for energy prices, there’s little to believe that’s going to change anytime soon. My suggestion for those interested in trading the oil patch get bearish on WLL stock in a hurry.
Crude oil prices were slammed today amid reports that domestic crude supplies fell less than expected. Meanwhile, the American Petroleum Institute said yesterday that crude inventories actually rose by 2.8 million barrels last week, versus analyst expectations that inventories would decline. Lastly, the International Energy Agency is predicting that despite OPEC’s cutbacks, oil oversupply is on track to continue through at least the end of this year.
The United States Oil Fund LP (ETF) (NYSEARCA:USO) cratered by roughly 4% in response, but Whiting is really getting hammered. WLL stock is off by about 10% this morning, continuing an awful run for the Colorado-based oil and gas exploration outfit.
The past couple of years have been punishing overall for many companies in the sprawling energy complex, but few have seen the sheer destruction of shareholder value like Whiting Petroleum. WLL stock is off from highs around $93 in August 2014, down to all-time lows in 2016 near $3.35. Today, it has only recovered to roughly the $6 level.
The last bit of math is relative, of course — Whiting shares are up almost 100% from its absolute bottom. Still, could WLL’s trend be nearing an end (other than an eventual bankruptcy)?
From where I’m sitting, it’s hard to know how the situation will pan out. On the one hand, Whiting is trading well below book value, and the company’s most recent quarterly results showed better-than-expected improvements to the top and bottom lines.
There’s also a contrarian’s RSVP courtesy of Goldman Sachs’ recent sell recommendation. Two analysts have now slapped the ignominious rating on WLL of late, begging the question, “What were they selling to investors at $92?” We can guess the answer to that.
But WLL is far from digging itself out of a hole. Not only is Whiting Petroleum still losing money, it also has bet aggressively and wrongly thus far on improving oil prices with ramped-up spending and production this year.
There’s also the question of debt. Whiting Petroleum is in position to significantly spend more than it’s taking in through cash flow. And with a sizable obligation of $1.5 billion in maturing debt coming due over the next few years; the current situation isn’t sustainable.
Bottom line: This company needs help, and I’m not sure where it’s coming from.
Whiting Petroleum’s Stock Chart
Click to Enlarge
As is apparent on this weekly chart, WLL stock has come a long way — just in the wrong direction.
Despite a typical willingness to embrace potential turnarounds, there’s nothing here that suggests shares are pointed anywhere but lower, positioning the stock to re-challenge its 2016 low.
How to Trade WLL Stock
I want to minimize the risk that oil magically gushes higher, or that Whiting Petroleum somehow receives a Hail Mary. Thus, we’ll trade out-of-the-money bear put spreads. Reviewing the options board, I like the Sep $5/$4 put vertical.
This spread currently is priced at 23 cents. By selling some offsetting premium at $4, you reduce the cost of the purchased $5 put by 36%. That’d decent enough.
But what I also like is that if WLL stock does revisit the 2016 lows over the next three months, your reward is 77 cents at expiration. That’s a return of 335%!
A more opportunistic idea would be take a carefully constructed position and hedge it further if Whiting simply continues to weaken in the coming weeks.
Investment accounts under Christopher Tyler’s management do not currently own positions in any of the securities or their derivatives mentioned in this article. The information offered is based upon Christopher Tyler’s observations and strictly intended for educational purposes only; the use of which is the responsibility of the individual. For additional market insights and related musings, follow Chris on Twitter @Options_CAT.
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