Recently, I was asked by my editors to discuss Whiting Petroleum (NYSE:WLL), the oil and gas company that went bankrupt in April and emerged from Chapter 11 proceedings on Sep. 1. Investors wondering what could happen to Hertz (NYSE:HTZ) and Hertz stock post-bankruptcy might want to take a closer look at Whiting’s situation.
While it’s possible the same thing could play out with Hertz, the result doesn’t necessarily mean you’ll be rewarded for your patience. Here’s why.
The Future Price of Hertz Stock
Before getting into Hertz’s future share price, let me give you the Reader’s Digest version of what happened to Whiting. If you already know the details of Whiting’s reorganization, my apologies.
So, as I said in the beginning, Whiting emerged from bankruptcy at the beginning of September with $3 billion less debt and a new $750 million revolving credit facility that matures in April 2024. The facility’s based on the company’s oil and gas reserves. It’s in a much better financial position today than it was when it entered Chapter 11 in April.
As part of the bankruptcy arrangement, old Whiting shareholders got one new share for 75 of the old ones. So, the company’s bondholders got 97% of the new stock while the old shareholders got 3%.
As I write this on Sep. 8, WLL stock is trading down 5.2% early in trading, at the equivalent of 29 cents before the 1-for-75 exchange as part of Whiting’s emergence from bankruptcy.
The biggest issue for Whiting investors at this point is figuring out what the shares are worth. According to Seeking Alpha contributor, Elephant Analytics, it values the company’s shares between $24 and $29 a share, which translates to 39 cents a share at the top end. That’s based on a $44 barrel of West Texas Intermediate (WTI) oil.
Suffice to say, WLL stock has a long way to go to get back to its all-time high of $370.64, a level it hit in August 2014.
What’s This Mean for Hertz?
At the moment, it’s looking for a bankruptcy loan for as much as $1.5 billion. Given it lost $852 million in its latest quarter ended June 30, it needs this cash pronto if it’s going to remain operating through the end of the year.
If you remember, Hertz tried to pull a fast one, attempting to sell $500 million in stock in June, only to be stopped from doing so by the Securities and Exchange Commission, but not before somehow managing to convince investors to buy 13.9 million of its shares at more than $2 a pop.
Unfortunately, Hertz needs a lot more than $28 million. In August, my InvestorPlace colleague, Patrick Sanders, reminded readers that there were much better investments than Hertz.
“Hertz says that it sold off 100,000 cars in June and July and needs to dump another 182,000 vehicles. It says it has $1.4 billion in cash on hand, and needs to see a recovery in key markets, as well as an extension from creditors in Europe and the United Kingdom beyond Sept. 30,” Sanders wrote on Aug. 21.
“For the second quarter, Hertz lost $587 million on $832 million in revenue. The per-share loss came in at $3.51, which was worse than the $2.33 per share analysts expected.”
Throwing In the Towel?
I’ve said all along that if Carl Icahn, a billionaire many times over, can throw in the towel on Hertz and take a loss of $1.6 billion, the odds of HTZ stock living to trade beyond bankruptcy proceedings is remote.
However, after seeing what Whiting pulled off, I’ve got to say, “never say never.”
In Whiting’s case, it could ride a higher oil price to possible future success. For Hertz to get out of this mess, travel has to return to normal. That’s likely not happening until the summer of 2021 or later.
First things first, Hertz has got to get debtor-in-possession financing so that it can tread water until a bankruptcy plan can be negotiated with creditors, who are owed more than $19 billion.
After Whiting, I won’t say it can’t happen, but even if it does, Hertz’s business model is dated despite its efforts to play the ride-sharing game. It can’t rely on the sale of its used vehicles to pay down debt over the long term.
It needs a new business model. I don’t think investors should be optimistic it will be successful in doing so.
Investing: Opportunity cost
If you are betting on Hertz stock to survive and thrive, you’re done so at the expense of another opportunity. As my colleague said, there are plenty of better investments out there.
Hertz stock might survive post-bankruptcy. That doesn’t mean you should care. It’s a long-term dud, dead or alive.
On the date of publication, Will Ashworth did not have (either directly or indirectly) any positions in the securities mentioned in this article.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia.