The market has been overrun by speculative, semi-professional traders who have made profiting off the stock market their lockdown hobby of choice. Their frequently irrational trades have pushed up the valuation of bankrupt companies such as Whiting Petroleum (NYSE:WLL). WLL stock jumped to $3.50 per share at the start of June but has since deflated back to $1.18 over the past month.
The firm is expected to emerge from Chapter 11 bankruptcy sometime between now and August, which could explain why investors have begun taking an interest in the stock again. But for the majority of investors, buying Whiting now is pointless, as InvestorPlace’s Mark R. Hake previously discussed.
Still, some seem determined to turn a profit on WLL stock. Perhaps, if we’re talking about intraday trades, that’s possible. But for the average investor, the only conceivable reason to pick up WLL stock is that you believe the company has a strong future moving forward.
The Future of Oil Essential to WLL Stock’s Recovery
That’s a difficult argument to make, and the fundamentals bear that out.
The crux of the issue for Whiting is the fact that a sharp, sustained recovery in oil prices simply isn’t in the cards. Over the past few weeks, oil prices have stabilized significantly since dropping below zero early in the pandemic. But they’re nowhere near the levels they need to be for investors to go making speculative bets on failing oil firms.
Even when a vaccine is developed and the novel coronavirus removed from the equation completely, the shift toward virtual work will put a damper on oil demand for a long time to come. Not only that, but the financial dent that many companies suffered during the first quarter is going to require heavy budget cuts through at least the end of the year. One of the first cuts they’ll make will be business travel.
Whiting is simply not equipped to deal with that.
Whiting Isn’t Set Up for The New Normal
Plus, that’s an absolute best-case for oil producers like Whiting. In reality, a second surge of coronavirus looks highly likely based on the skyrocketing number of new cases in the U.S. The earliest potential vaccine might be ready in October but again, that’s another big if. There’s no promise that a usable vaccine is a possibility at any time, let alone October.
Times are terrible for the energy sector, so buying up one that’s trying to emerge from bankruptcy is just ludicrous.
What’s more, Whiting hasn’t made any inroads into alternative energy. That’s a huge strategic error, especially as oil prices struggle to make a full recovery. There is a palpable shift away from fossil fuels happening around the world. Yes, it will likely take years for the majority of cars to become electric, but the trend is here.
Renewable energy could become an even larger priority in the U.S. if Joe Biden is elected and Democrats gain control in the Senate. A Democrat majority across the federal government could open the door for progressive policies like shifting demand from traditional fossil fuels toward sustainable energy sources.
The Bottom Line
Some investors might be looking at WLL stock’s ultra-low share price thinking the firm’s emergence from bankruptcy could be a great chance to make some money. But even the best restructuring plans need some kind of growth catalyst on the other side. Whiting is lacking there because the industry as a whole isn’t on a steady road to recovery.
Without a renewable play or some other source of growth, WLL is completely reliant on a strong recovery in oil prices. That looks unlikely even in a best-case scenario. For that reason, most investors should stay well away from WLL stock.
If you’re looking for an energy bet, stick to big names with a diversified business and deep pockets that will carry them through a prolonged downturn. Chevron (NYSE:CVX) is one such play that represents a better long-term buy.
Laura Hoy has a finance degree from Duquesne University and has been writing about financial markets for the past eight years. Her work can be seen in a variety of publications including InvestorPlace, Benzinga, Yahoo Finance and CCN. As of this writing, she did not hold a position in any of the aforementioned securities.