This year is turning into the year of the shale company bust with Whiting Petroleum (NYSE:WLL) standing as a prime example of that ominous trend. Year-to-date, WLL stock is down an astounding 85.15%. If that’s not enough to keep investors, perhaps the following ought to be: in April, the Colorado-based company filed for Chapter 11 bankruptcy protection.
There was a time – literally just a few a weeks – when the Robinhood crowd was rushing to bankrupt companies, supposedly turning some tidy profits in the process. WLL stock delivered one of those pops. It traded around $1 early last month before surging above $3 in just a few days. Guess where Whiting resides at this writing? Barely over $1.
There is one “perk” of Chapter 11 bankruptcy relative to its Chapter 7 counterpart. Under Chapter 11, the filer can continue operating. For common equity investors, there ends the good news. In any corporate bankruptcy, common shareholders are basically in trouble because they essentially have no claims to the filer’s assets as do creditors.
That’s the trade-off when embracing the upside potential of equity relative to corporate debt. Whiting is highlighting that risk for investors, all but saying it’s not worth buying the stock here and now because when the newly formed entity emerges from Chapter 11, current equity investors will only own about 3% of the company.
Translation: although the stock is down more than 35% over the past month, closing at $1.09 on July 15, it still has further to fall because its current price isn’t indicative of what equity investors will control in the post-bankruptcy Whiting.
A Pandemic Unto Itself
This year, everyone is getting all too familiar with the novel coronavirus pandemic. However, the shale industry is the midst of its own pandemic – one that’s been ongoing since 2015, crippling an array of once proud and financially flimsy firms in the process.
Since 2015, more than 200 North American shale oil and gas producers filed for bankruptcy protection. Seven exploration and production firms did so last month, tying the monthly record from 2015, according to Bloomberg.
Hindsight is always 2020, but with Whiting, the writing’s been on the wall for some time. Last year, the company reduced its staff count by a third. Said differently, many energy companies can exploit the coronavirus for their failings, but that’s not the case with Whiting. There are other signs that Whiting, at least right now, isn’t the energy play prudent investors should consider.
If you’ve followed Chesapeake Energy, perhaps you heard that in advance of that company’s Chapter 11 filing, it doled out $25 million to retain its top 21 executives. That’s akin to an NFL team retaining a coach that went 0-16 last season and giving him a raise. Whiting did something similar, spending $14.6 million to retain high-level executives in the name of “stability.”
Smart investors are right to ask where are bankrupt companies coming up with that money and why should captains of sinking ships be retained?
Bottom Line on WLL Stock
A couple of other things to consider if you’re eager to embrace WLL stock right now or after it’s reorganized. First, the company sources the bulk of its production in the Bakken Shale in North Dakota, not the more lucrative West Texas shale regions.
Second, oil demand and prices remain challenged. Sure, prices and consumption should move higher from here, but 2019 demand levels could be years away or may not return at all.
As for the $135 per barrel high seen in 2008, that’s as good as gone forever. Think $45-ish on West Texas Intermediate next year and that’s probably not enough to be meaningful for downtrodden explorastion and production names like Whiting.
Todd Shriber has been an InvestorPlace contributor since 2014. As of this writing, he did not hold a position in any of the aforementioned securities.
