I noted a few months ago that Whiting Petroleum’s (WLL) stock was severely overvalued compared to its bonds. At the time, Whiting’s shares were trading at $2.35 per share (equivalent to a new price of $176 per share). The bond prices at the same time indicated that Whiting’s shares were worth a new price of approximately $11 per share. I mentioned that the bonds could be worth more than double that with improved oil prices, and that has largely come true. It should come as no surprise that the bond prices were much more accurate (compared to its stock) in predicting Whiting’s post-restructuring price, given that the bonds converted into 97% of Whiting’s new equity, compared to only 3% for its stock.
Whiting’s share price appears fairly reasonable now and it appears to have a modest amount of upside assuming $44 WTI oil in 2021. Whiting’s new warrants have become quite inflated in price though, allowing old shareholders the opportunity to sell the warrants at a good price.
Effect On Whiting’s Common Stock
Whiting’s old stock was converted into new stock at a 75 to 1 ratio. That means that the new $23 share price is equivalent to an old share price of approximately 31 cents.
In addition to the new stock, shareholders also received warrants. For every one new share, shareholders gained approximately four series A warrants with an initial exercise price of $73.44 per share, expiring on September 1, 2024, along with approximately two Series B warrants with an initial exercise price of $83.45 per share, expiring on September 1, 2025.
These warrants are well out of the money, with the Series A warrants already requiring Whiting’s share price to more than triple. Whiting’s stock should be less volatile going forward than in the past due to its market cap accounting for more of its enterprise value as well. Still, the warrants may have a true value of a bit over a penny each due to the time value. This would potentially make the combination of new shares and warrants worth around 40 cents (old share price equivalent).
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These warrants (trading as WLLAW and WLLBW) have traded at around 5 to 6 cents each recently, but this is quite overpriced, allowing old shareholders an opportunity to get a good price for their warrants. A value of 5 to 6 cents per warrant is more in line with Whiting’s current share price being around $35 instead of $23.
A reasonable valuation for Whiting would involve an EV to forward EBITDAX multiple of approximately 3.0x to 3.5x. Whiting previously projected delivering $250 million EBITDAX in 2021 at mid-March strip prices, but that involved $36.59 NYMEX oil in 2021. At $44 WTI oil instead, Whiting would be able to deliver approximately $375 million EBITDAX. A 3.0x to 3.5x multiple would then result in a total valuation of $1.125 billion to $1.313 billion for Whiting.
Source: Whiting Petroleum
Whiting had $425 million drawn under its credit facility at emergence, and could potentially pay this down substantially by the end of 2021. It originally projected delivering $172 million in positive cash flow in Q4 2020 and 2021 with a well below maintenance capex budget. With mid-$40s oil, it may increase its capex budget compared to those prior projections, but could still potentially pay down its credit facility to $200 million by the end of 2021 with the benefit of those higher oil prices.
This would leave $925 million to $1.113 billion for Whiting’s market cap, resulting in an estimated value of around $24 to $29 per share.
Whiting’s debt level appears reasonable, assuming that it generates some positive cash flow over the next five quarters. The $425 million in credit facility borrowings is approximately 1.1x 2021 EBITDAX at $44 WTI oil, and it may be able to pay that down to around 0.5x.
Whiting’s stock price was clearly inflated prior to its reorganization being completed, with new equity costing much less to acquire via the bonds. Thus, Whiting’s share price fell considerably from its post-bankruptcy filing highs of several dollars per share.
Whiting’s post-restructuring financial shape is pretty solid, with only $425 million in credit facility debt and a reasonable path to paying that down further. At current strip prices, Whiting’s stock may have a modest amount of upside as its valuation is estimated at $24 to $29 per share based on $44 WTI oil.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.