Already-Bankrupt Whiting Is Not Worth the Gamble

The novel coronavirus has caused traders to reevaluate their prior assumptions. While many of these shifts have been positive, we’ve seen one unfortunate trend develop: People are aggressively buying up the equities of bankrupt companies. Whiting Petroleum (NYSE:WLL) is one such example; even after the company filed for bankruptcy, speculators have aggressive bid up WLL stock.

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Whiting is far from the only such firm. Traders have set off furious rallies in Chesapeake Energy (OTCMKTS:CHKAQ), Hertz (NYSE:HTZ), LatAm Airlines (OTCMKTS:LTMAQ) and other bankrupt stocks. These appeared to be possible due to market dynamics. With sufficient buying interest, particularly involving stock options, it was easier to generate huge short squeezes. And once the first bankrupt equity soared, traders started looking for the next “hot” one.

This created a trend, and the next thing you know, Whiting stock was soaring. However, there’s nothing to underpin the recent gains, and the stock is set for a dramatic decline as the restructuring process plays out.

Whiting Is Already In Bankruptcy

Normally, when a company goes bankrupt, its stock quickly plunges to almost nothing. Shares usually trade for pennies, or at most a few dimes. And, in fact, that’s what happened with Whiting initially. The company filed for bankruptcy April 1, and the stock plummeted to 25 cents per share. That’s normal and as expected.

However, then things got weird. A few weeks later, the stock surged back above $1 per share. Then, in June, following a rush of buying on the trading platform Robinhood, WLL stock surged to as high as $3.50 per share. Quickly, analysts pointed out that the stock was still close to worthless, despite the run-up. And indeed, the run-up in WLL stock coincided with similar spikes in Hertz, Chesapeake, and other bankrupt equities.

Hertz crashed back to earth after a bankruptcy judge forbade the company from raising new money, ensuring that it was, in fact, bankrupt. And Chesapeake plunged when it became clear that there was nothing fundamental supporting its rally. Chesapeake stock has fallen 90% from its June short squeeze peak. Whiting, however, is still wildly overvalued, as traders haven’t had that same realization.

WLL Stock Owners Will Get 3% of New Company

Often, in bankruptcy, it’s not certain what value, if any, the existing stock owners will receive. In this case, however, there’s a clear plan already in place. According to an official company press release, Whiting intends to convert its existing bondholders into new majority owners of the firm. The company’s current bond owners will get 97% of equity in the reorganized Whiting.

This leaves a 3% sliver that will be reserved for the holders of existing WLL stock. The press release lays out a three-point plan with this language specifically for the equity owners: “existing equity holders to receive 3% of the new equity of the reorganized Company and warrants to purchase additional equity of the reorganized Company.”

WLL stock recently had a market capitalization of about $105 million. So, if you bought Whiting shares that day, you’d think 3% of the company was worth more than $100 million. By this logic, the entirety of WLL stock would go for more than $3 billion when you account for the other 97% of the firm.

This is, however, nonsensical. WLL stock’s market cap fell below $3 billion back as early as 2015, and it’s been under $1 billion since last fall. In no universe is the company now worth $3 billion as oil prices have declined even further.

At the start of the year, Whiting had a market cap of around $600 million. If the business is worth that much post-bankruptcy, a 3% stake should be valued at $18 million. That’d imply that the current WLL stock has roughly 80% downside from here. And even that estimate may be generous. Back in January, oil stocks were still relatively healthy, as geopolitical tensions had lifted sentiment and there was minimal Covid-19 impact yet.

WLL Stock Verdict

Let’s not mince words here: Whiting stock remains profoundly overvalued. Rarely, in fact, is the stock market this clear. It’s hard to imagine a scenario where current stockholders could make money on this as anything other than a day trade. The equity soon will be reorganized, with existing owners getting only a minuscule stake in the new firm.

Yet shareholders are still paying a premium price for their position, even though the bond holders are calling all the shots. Current WLL stock buyers are valuing Whiting as if it’s worth as much as it was way back in 2015. It’s as if the last five years of the oil bust hadn’t happened and fracking was still a booming industry.

However, there’s no going back to that time, at least for Whiting’s investors.

If you do want to bet on a recovery in the exploration and production industry, please stick to companies that aren’t in bankruptcy. Energy investing is hard enough without buying into firms that are already insolvent.

Ian Bezek has written more than 1,000 articles for and Seeking Alpha. He also worked as a Junior Analyst for Kerrisdale Capital, a $300 million New York City-based hedge fund. You can reach him on Twitter at @irbezek. At the time of this writing, he held no positions in any of the aforementioned securities.

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