Don’t Let Whiting Petroleum’s Spike Rally Tempt You

If we were to hand out dubious honors for which organizations suffered the most during the novel coronavirus pandemic, Whiting Petroleum (NYSE:WLL) would be a top candidate for consideration. With demand cratering due to lockdowns throughout the world, suddenly, no one wanted petroleum-based products. Obviously, this presented huge problems for WLL stock as independent energy firms were especially vulnerable to the pricing volatility.

wll stock
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Additionally, the oil price war between Saudi Arabia and Russia was a very nuanced affair. On the surface, the two sides were frustrated with each other. But they also didn’t have much love for the U.S. energy industry, which became a viable competitor in recent years. In a strange way, both Saudi Arabia and Russia had the same consolation prize in keeping the price war going.

Of course, this geopolitical dynamic was exactly what WLL stock didn’t need. According to Bloomberg, Whiting was once the largest oil producer in North Dakota’s Bakken shale region. However, years of losing money caused the company to pile onto its debt load.

Then, with the Covid-19 crisis dropping oil to unsustainable levels, management saw little choice but to declare bankruptcy. The news became official on April 1 of this year.

Not even a month later, though, WLL stock became unusually interesting for speculators. It poked its head above $1 in the back half of April. Earlier this month, shares jumped from 85 cents to $3.48 in a matter of days.

Fundamentally, the surprisingly positive May jobs report started the initial run. Later, with travel demand increasing and consumers showing a willingness to go out and spend money, WLL stock continued its remarkable ascent from the ashes.

Don’t Get Too Comfortable With WLL Stock

Despite the encouraging signs, it’s fair for prospective buyers to wonder if it’s too late to join the party. After all, declaring bankruptcy isn’t what you would call a confidence-inspiring decision. Just two months ago, WLL was a penny stock – and a cheap one at that.

In this case, the emotions of a potential recovery are likely getting the best of investors. After months of being forcibly cooped up in our homes, we’ve been anxious for good news. It came last Friday with the jobs report. However, it’s my opinion that the official employment picture is presenting a misleading narrative.

First, most of the jobs that the economy recovered in May came from the leisure and hospitality industry. This isn’t exactly what you would call a high-paying sector. Further, while restaurants and similar businesses are reopening, they’re doing so in mitigated fashion. Thus, we shouldn’t expect a remarkable boost in demand for petroleum products.

Second, we’ve never seen such a steep drop in the employment level in modern history. For instance, the Great Recession saw the economy lose 8.12 million jobs from April 2008 to December 2009. But during the present crisis, we lost 21.5 million jobs in three months.

Employment level data
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Source: Chart by Josh Enomoto

Further, it took more than six years for the economy to break even with pre-Great Recession peaks. But the job losses were much less severe during this time. That implies that we have many more years to recover from the coronavirus.

If so, that doesn’t help the case for WLL stock. Even with improved demand for oil, prices are still too low for Whiting. If the company was having problems with light crude oil at $60, then prices below $40 would be moving the needle in the wrong direction.

When Will Traffic Return to Normal?

An alarming sight that we all got accustomed to during the midst of the pandemic was the eerie decline of automotive traffic. From Milan, Italy to Moscow, Russia, once hectic streets became abandoned roadways.

At home, Boston experienced a 73.4% reduction in traffic in March, while New York dipped 70%. This magnitude of decline was simply unheard of prior to the novel coronavirus. It suggests that the energy market has a very steep hill to climb, perhaps too steep for an embattled organization like Whiting.

Additionally, climate activists see an opportunity in this paradigm shift. For them, the silver lining is that the environment benefited from reduced vehicular traffic. And they’re not about to let the old “dirty” paradigm return without a fight.

Then you have to factor in the push for alternative energies, which became more attractive during the pandemic. If we have homegrown energy sources, we’re less beholden to foreign influence. That’s a plus for our country. Unfortunately, it leaves WLL stock out in the dust.

A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. As of this writing, he did not hold a position in any of the aforementioned securities.

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