Whiting Petroleum (NYSE:WLL) stock reached the end of the line earlier this year.
The company, buried by its excessive debt load, filed for bankruptcy. Whiting has already prepared a plan to restructure and it intends to emerge from bankruptcy at the beginning of September. This plan will leave current WLL stock owners with just a 3% stake in the new company.
Thus, in a few days, current WLL shares will be retired and current holders will get mere table scraps as the bond holders take the lion’s share of the new company. Given Whiting’s huge debt-fueled spending in prior years, it’s only logical that those lenders will now get the chance to try to pilot a new path forward for the company.
Why Isn’t The Stock Nearly Worthless Yet?
Normally when a company goes bankrupt, the stock falls to nearly zero almost immediately. In bankruptcy, shareholders tend to get either very little – as will happen with Whiting – or nothing at all. So, the share price should drop to the low pennies as folks close out their investments.
Yet, WLL stock still trades for almost a dollar per share. Given Whiting’s formidable share count, this amounts to a market capitalization of more than $80 million. Eighty million is a lot of money for a company that has already gone bust. Don’t just look at the “cheap” share price, Whiting is extremely expensive with folks paying $80 million for just 3% of the soon-to-be-recapitalized company.
That valuation implies that new Whiting will be worth more than $2 billion. If you look at past financial results, that valuation simply seems fanciful. That $80 million price tag is backed by real trading volume. On average, 12 million Whiting shares have been exchanged each trading day over the past month.
Recent News Isn’t Great
There hasn’t been much news flow out of Whiting in recent months. Once the 3% arrangement was announced, that should have been the final nail in the coffin for the old class of stock.
Yet, if investors needed another reminder of how sorry Whiting’s corporate run has been, we did get one development two weeks ago. Whiting announced that its old chief executive officer, Bradley Holly, is resigning. Holly will step down once Whiting exits bankruptcy. This is a particularly unfortunate look since Holly took a $6.4 million bonus just prior to Whiting filing for bankruptcy.
In any case, bonus secured, Holly is leaving the scene after presiding over the company’s slide. He will be replaced by Lynn Peterson, who has worked in the oil and gas industry for 40 years. With Whiting expected to exit bankruptcy Sept. 1, the change in management should become effective shortly.
WLL Stock Verdict
I wish there was something more upbeat to report. But unfortunately, little has changed with Whiting recently. The company remains in bankruptcy and shareholders are going to get a pittance when the company finishes reorganizing. WLL stock is still dramatically overvalued, given that current holders will only get 3% of the newly reorganized firm. There’s simply no reason for investors to pay $80 million in valuation today for a 3% stake in the new Whiting.
I get the appeal of trying to short-term trade the stock. InvestorPlace’s David Moadel outlined one possible strategy for trying to use a sniper-like trading strategy, dodging in and out for a quick profit. That’s great if it fits with your trading, but it’s quite speculative and requires vigilant watching over every tick in Whiting’s stock price.
And even that should be done with caution now. Whiting expects to leave bankruptcy Sept. 1. At that point, with a new capital structure, it should quickly become clear how little remaining value old Whiting shares have left.
Thus, for most people, the easiest solution with WLL stock is simply to avoid. It’s too late to bet against the stock with it trading under a buck. Only the most risk-tolerant short seller would find Whiting attractive here. But there’s no need to buy Whiting either. If you want to speculate on a turnaround in energy, you’re going to be much better off picking an oil and gas company that isn’t going through bankruptcy proceedings.
Ian Bezek has written more than 1,000 articles for InvestorPlace.com 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 position in any of the aforementioned securities.