Whiting Petroleum (NYSE:WLL) stock is going to get a massive haircut. That will occur when a new set of shareholders are granted 97% of WLL stock. That means that the present stock price, not necessarily its market value, will take a big hit.
I have written several articles recently describing the math behind Whiting’s agreed bankruptcy. But I want to delve even more carefully into the actual process of what will occur with the reorganization.
I suspect that will happen sometime this fall.
What WLL Stock Is Worth
The basis of this is the company’s press release on April 24, 2020. This indicates that existing equity owners receive just 3% of the “new equity” of the reorganized company. In my previous article, I showed that the company will likely have a market value of about $624 million.
This is based on the existing notes that are trading at market prices of between 16% and 18% of par. Since there are at least $3.565 billion of notes and debts outstanding, that implies a $624 million market value at 17.5% of par. But there could be other debts when all is said and done.
It appears that claim holders have until Sept. 28 to file their claims.
So even if there are let’s say $3.8 billion of debts and that debt trades for 17.5% on the dollar, the implied value of the new equity is $665 million for the notes, at best. Now since that amount represents 97% of the total value, the implied market value is a little higher, or $685.6 million.
Therefore, the existing WLL stock will be worth just 3% of that amount, or $20.6 million. That is far lower than today’s price. There are 91.412 million existing shares outstanding. So that means its present market value is $106 million at Whiting’s price today of $1.16 per share. That means the stock is over 5 times overvalued.
In other words, if you believe the notes have the “real” market value of the reorganized company, then Whiting should trade at just 22.5 cents per share. But is that what really will happen when the bankruptcy closes?
Estimating What Will Happen At Bankruptcy Close
I pointed out in my last article that actually the value of the equity should be about $1.3 billion after the reorganization. So that implies that the WLL stock should be worth 3% of that amount or $39 million.
But that raises the implied value of Whiting to just 42.6 cents. This is still well below $1.16.
Let’s also take into account the following two factors. First, the price of oil might be higher by the fall. Let’s say there is only a 50% probability of it rising 50%. That means the “expected value” of the new WLL stock is 25% higher.
Second, let’s estimate that there will be a multiple expansion, or what I would call a “momentum” effect once the new stock starts trading. Let’s again say there is a 50% probability that the stock will rise 50% based on momentum. We can add on another 25%.
So, altogether, these two factors could push up the stock’s expected value by 25% each. That works out to a combined “geometric” rate of increase of 56.25% (i.e. 1.25 times 1.25 less 1.0).
Therefore, here is the result. WLL stock’s new expected value is 42.6 cents times 1.5625 minus 1. That works out to 66.6 cents per share. That is the best I can do to estimate its implied value. It still means that the stock is over 51% overvalued.
What To Do With WLL Stock
I am going to wait for the existing stock to fall over 50%. The other thing you might do, as I pointed out in the last article, is to buy the notes and have them convert to new equity.
This article shows the math behind how to figure out what you might rationally do with WLL stock.