I wrote several weeks ago that Whiting Petroleum (NYSE:WLL) needed to fall 50%. At the time, on June 25, WLL stock was at $1.265. It has fallen 25 cents to $1.01 by July 14, but it still needs to fall further to reach its real value. That is a drop of just 20%, so it is still overvalued by 30% or more.
This is because in my prior article I estimated that, at best, WLL stock is worth only 66 cents per share, not the price of $1.01 where it is today.
I based my assessment of the stock’s agreed bankruptcy formula with its creditors. Whiting shareholders will be allowed to own 3% of the eventual newly reorganized company.
Valuation of WLL Stock in a Nutshell
I showed in my prior article that the value of Whiting Petroleum will likely be worth about $685.6 million. This was based on the trading value of the company’s notes. It implies the stock is worth only $20.6 million, or about 22.5 cents per share.
However, I increased the value of the stock based on the value of other small-cap oil stocks. Based on this, Whiting Petroleum would be worth $1.3 billion. Therefore, the existing shareholders’ shares should be worth $39 million. Since there are 91.4 million shares presently outstanding, that makes their value at least 42.6 cents.
But I also increased their potential value by another 56% simply due to what I expect will happen by the time of the reorganization this fall.
For example, I estimated that oil would rise by 50% and the market for oil stocks would rise by 50%. This increases the overall valuation by 56%. This is because when you multiply 50% by 50% geometrically you get 56%.
That puts the most generous value I can give WLL stock at 66 cents per share. So stretching everything I can, I still get a price 35 cents below today’s price. That means WLL stock is overvalued by 35 cents per share.
Shareholders Should Be Thankful
But Chesapeake Energy shareholders will get nothing. Their stock will be worthless when the restructuring occurs sometime likely in February 2021.
WLL stock owners should be very thankful. Maybe that is one reason they continue to pay over what the stock is really worth. They believe that the restructured stock will be worth even more than what I estimate by the time the restructuring occurs. I estimate that will be sometime in late September or early October.
What Should WLL Stockholders Do?
The best thing WLL shareholders can do now is to follow the legal developments with the creditors and the court. Go to the news article on the Whiting Petroleum investor relations page that discusses the restructuring on April 24.
Next, if you read that article carefully, you will see there is a link in the article to the court proceedings and pleading. That link is from the company’s noticing agent, Stretto, who can be contacted at (800) 330-2531. This is for Case number 20-32021 (DRJ) in the Southern District of Texas.
Obviously I am not giving you any legal or financial advice here. I am just helping you to see what is going on if you are a shareholder in WLL stock. I want to stress again that my valuation clearly shows that WLL is set for a fall either before or after the restructuring closes.
The one thing that could change this, though, is if the price of oil starts to rise. Keep in mind that my evaluation already presupposes a 5o% increase in the price of oil between now and October. If the market assumes there will be huge spike in the price of oil, maybe 66 cents per share is too low. But I doubt it.
I am probably being way too optimistic. If there is no Covid-19 vaccine by then, economic activity may not pick up enough to increase oil demand and price. So be very careful about taking a new position in WLL stock before the restructuring occurs.