In early April, Denver-headquartered oil producer Whiting Petroleum (NYSE:WLL) filed for bankruptcy. WLL stock is currently hovering at $1.16, down from the $9-level of January 2020.
With crude oil prices collapsing to negative for the first time in history recently, oil companies have been struggling of late. The novel coronavirus pandemic has reduced the demand for oil. And OPEC price wars have disrupted, or rather increased, oil supply. As a result, earlier in March and April, a large number of market investors decided to throw in the towel and get out of their oil investments such as Whiting.
Shareholders are usually the ultimate losers in a bankruptcy process. Yet recent weeks have seen new wave of day traders riding the thrill of volatility in newly bankrupt names such as WLL stock.
Such traders are not interested in the intrinsic value of the stock. Therefore today, I’ll discuss if long-term investors should consider buying the company’s shares. Whiting Petroleum may well lose more of its value in the coming weeks. Therefore, it does not belong in an investment portfolio.
Hardly Any Excitement Here
The oil and gas company develops, produces, acquires and explores for crude oil, natural gas and natural gas liquids, primarily in the U.S. Rocky Mountains. On April 1, the group filed for bankruptcy with a restructuring plan that would likely cut $2.3 billion from its $3.6 billion debt.
The shale producer was indeed one of the first energy firms to file for bankruptcy. Since then, it has further revealed how the firm will likely be split between current lenders and shareholders after bankruptcy. In short, there will hardly be any money left for investors in WLL stock.
In the coming months, Whiting may not be the last oil firm to go bankrupt. Most energy firms have been taking steps to protect their cash flows by, for example, selling assets, cutting dividends and raising fresh capital. Yet, in some case, those steps may simply prove not enough.
According to recent research by Marcus Arcanjo of the Climate Institute in New York, “Although production cuts are now in place and price has rebounded, there is still a significant likelihood that several oil and fracking companies will go bankrupt. Some believe that Covid-19 will reshape the oil industry altogether, with the recovery focusing on investing in renewables instead.”
Yet InvestorPlace contributor does not think Whiting has a footprint in this new energy future. He wrote earlier this month that “even as it emerges from bankruptcy, there’s nothing at the moment for investors to get excited about. And that means that WLL stock is still going to be under pressure even as it emerges from bankruptcy.”
At this point, it is not quite possible to know where WLL stock will trade post-bankruptcy.
Bankrupt Companies Draw Daytraders
When a company goes bankrupt, legal advisors, lenders, and suppliers get paid before shareholders do. Bankruptcy, therefore, means a total wipe-out of investment for shareholders.
On the other hand, there has been daily trading interest in WLL stock as well as other bankrupt names, such as Hertz (NYSE:HTZ) and JCPenney (OTCMKTS:JCPNQ). Needless to day, this rather bizarre trading activity shocks veteran investors.
A year ago, in late June 2019, WLL stock was just shy of $20. The shares then started 2020 around $9. By February, market speculation regarding a possible bankruptcy sent WLL stock tumbling down to $4. And on April 2, it hit an intraday-low of 25 cents.
But on June 8, the shares saw an intraday-high of $3.59. Now they are around $1.16. Robintrack, which monitors interest in stocks held by Robinhood platform members, has shown a sizable surge in ownership in WLL stock in recent days.
Put another way, a group of traders seem to target various bankrupt names on a regular basis. That kind of market activity is not investing, but rather speculating, and somewhat recklessly, too. In case WLL stock falls further, I’d not want to be among those holding the shares.
Bottom Line on WLL Stock
Seasoned market participants do not consider bankruptcy to be an investing theme. Yet, some post-coronavirus traders seem to enjoy the thrill in participating in these daily moves.
Are you one of those traders who may stand ready to lose all your capital in such a game? If not, then you’d be better off keeping away from WLL stock or any other bankrupt name. After a given bankruptcy, a company’s shares are mainly divided among current debt holders. And in most cases, there is no money left for shareholders.
If you are interested in investing in oil or oil companies for the long run, then you may want to research several exchange-traded funds (ETFs). They include the United States Oil Fund, LP (NYSEARCA:USO), the Energy Select Sector SPDR Fund (NYSEARCA:XLE) and the Global X MLP & Energy Infrastructure ETF (NYSEARCA:MLPX).
I believe that buying these ETFs or other solid oil companies may be a dependable wealth builder over time. Instead of speculating on bankrupt companies like WLL stock, you may want to do further due diligence on oil firms that are likely to be trading for many decades to come.
Tezcan Gecgil has worked in investment management for over two decades in the U.S. and U.K. In addition to formal higher education, including a Ph.D. degree, in the field, she has also completed all 3 levels of the Chartered Market Technician (CMT) examination. Her passion is for options trading based on technical analysis of fundamentally strong companies. She especially enjoys setting up weekly covered calls for income generation. As of this writing, Tezcan Gecgil did not hold a position in any of the aforementioned securities.
