Hey pardner! Cast your gaze over yonder at the dust bowl known as the petroleum sector. Well, what in tarnation! Was that a gusher we all saw just days ago? And did it come from Whiting Petroleum (NYSE:WLL), with WLL stock going up an astounding 4,053% in 48 hours, from 57 cents to $23.67 per share?
Investment scenarios like this rival Powerball fantasies, so let’s put things in perspective. Yes, you could’ve bought WLL stock for a buck or less anytime beginning in mid-July. And if you got in at rock bottom on Sept.1—when the stock was at the aforementioned 57 cents a share—1,000 shares would’ve set you back $570. Come back two days later and BAM! You now have close to $24,000 and the divine right to say, “Bartender, a round of root beers for everybody.”
WLL Stock and the Lottery Ticket Long Shot
If only it were so simple. For starters, you probably did have more chance of hitting the lottery, as lassoing these investment rocket ships at just right time almost always comes by way of dumb luck or the Psychic Friends Network.
Second, the rise factors in Whiting’s emergence from Chapter 11 bankruptcy. Thus equity investors from prior to September got one new share of WLL stock for 75 old shares. For them, the true rise in value is more on the order of … well, no rise at all. At the current share price of $21, in fact, it’s as if their old shares were worth 28 cents, which is actually off by 51% from Sept. 1.
Bartender, hold those root beers.
Behold, a Sagging, Slumping Sector
Value investors, who make their money with patience and proven principles, will remind you that a roadworthy WLL stock resurgence will depend in large part on the long-term prospects of the energy sector. And right now, unless you’re on the bleeding edge of solar, wind and renewable sources, that sector has all the sex appeal of a sow’s ear.
As I’ve written in previous pieces both here and elsewhere, the energy sector has waited and waited and waited some more, and waited even more than that, for a long-promised rebound. It’s beginning to sound like the boy crying wolf, and he can cry me a river, because petroleum stocks may never rebound from where they stood during the glory days when gas cost $3 a gallon.
The slump for energy stocks dates back four-plus years at this point. Ironically, the industry created the headache in the first place. The massive scaling and efficiency of hydraulic fracturing (or “fracking”) produced an oil glut that has meant cheap gas for all—and depressed share prices to match.
For Whiting, It’s Pain at the Pump
That’s the scenario a post-bankrupt WLL muddles into, which resembles a perfect storm when you factor in the novel coronavirus and the plummeting consumer demand that came with it. As of Sept. 14, the average price of a gallon of gas had fallen for two consecutive weeks to $2.17, according to GasBuddy. The last time the good folks at Whiting saw that $3-a-gallon gas mentioned earlier, President Barack Obama was in the middle of his second term.
You’re still slightly in the red if you’ve held WLL stock since mid-2019, and held on for dear life if you brought the stock this time last year and watched it do a death-spiral loss of 91%. For now, you’ve more than doubled your investment dollar. But a company that cheers investors with a clean bankruptcy exit must do something substantial for an encore. Something like make money. Which Whiting isn’t doing.
But here’s what they are doing: giving 97% of their equity away to creditors. And let’s face it, creditors are far from the buy-and-hold types. They’ll watch everything Whiting does, and especially what Whiting fails to do. Maybe the one bright spot is that three of five analysts rate WLL stock a “buy“, putting it in the overweight category. But they’re also predicting that the stock will be underwater in terms of earnings per share for the remainder of the year, which betrays low expectations.
It’s highly likely the analysts see something along the lines of short-term gain in buying WLL stock while it remains 60% off the mark from September 2018. But in the long run, a Whiting buy amounts to betting on a trudge back to mediocrity. What in the company’s performance, or the prospects of its sector, suggests that your value investment dollar belongs here?
If you’re still wondering, then maybe this is a good time to channel the Psychic Friends Network.
On the date of publication, Lou Carlozo did not have (either directly or indirectly) any positions in the securities mentioned in this article.