Whiting Petroleum (NYSE:WLL) said on Aug. 14 it expects to emerge from bankruptcy on Sept. 1. The problem is that WLL stock will be severely weakened by losses just revealed in its recent second-quarter earnings. This was released in a 10-Q filed on Aug. 7. So, even though the company will exit Chapter 11 relatively debt-free, its ongoing losses could be crippling.
Under the restructuring plan, existing shareholders will receive 3% of the new common stock plus some warrants. Existing creditors and management will receive the rest of the new restructured equity. It appears that the stock will continue to trade under the same symbol. This has not yet been confirmed by the company.
Earnings Took a Big Hit in Q2
Most of Whiting Petroleum’s oil and gas assets are in the Bakken mineral field in North Dakota and Montana. Partly because it has higher transportation costs, the company lost $517 million in operating income in Q2.
Moreover, on a free cash flow basis, Whiting Petroleum bled out $156.6 million in the past six months ending June 30. It can’t keep on doing this — it has limited resources.
For example, it had just $492 million at the end of the quarter. And this was after it borrowed $1.18 billion under its credit agreements during the past six months. So, even though it will emerge relatively debt-free on Sept. 1, it can’t keep on draining its cash reserves.
Moreover, the potential shutdown of the Dakota Access Pipeline could affect the prices that Whiting Petroleum receives. Here is the story in a nutshell. On July 6, some court decided to shut down the pipeline. But on Aug. 5 an appeals court granted a stay of the shutdown. This could end up being temporary.
Whiting Petroleum said on page 32 of its 10-Q that it transports only about 30% of its oil as of August through the pipeline. Moreover, it is arranging alternative methods of moving its oil production. So this may not end up being a great problem.
The main issue is the company is not producing oil and gas at a profit. Moreover, it did not provide any guidance about when it will achieve at least free cash flow breakeven.
Little Guidance From the New CEO
On Aug. 14, the old CEO, who took Whiting Petroleum through the reorganization, resigned and took a nice severance package. The new CEO, Lynn Peterson, really did not much provide guidance going forward.
All he said was that they “expect to focus on the development of our top-tier Bakken acreage, further reducing our leverage, and driving down operating and G&A costs.”
I can’t predict earnings and forecast free cash flow with that kind of generic statement. By contrast, look at the statements that Marathon Oil (NYSE:MRO) provided which I described in a recent article: “Marathon Oil’s Free Cash Flow Guidance Will Push The Stock Over $13.”
What To Do With WLL Stock
The problem with the new restructuring is that a large number of new shareholders, i.e., former creditors, will want to sell their shares in order to obtain cash. This will put tremendous selling pressure on WLL stock.
Moreover, there will be a good deal of disruption. Existing shareholders will have to wait until their brokerage firm exchanges their old common stock for the new common stock. In addition, they will receive warrants.
But from what I can tell reading through the documents, the terms of the exercise prices of the warrants have not yet been set. Moreover, there will be two different kinds of warrants, some expiring in four years, and some expiring in five years.
Moreover, as I pointed out above, the potential for the company to run profitability, especially on a cash flow basis, is not yet clear. Therefore I suspect that most investors should just wait and see if they can buy WLL stock at a much cheaper price.