Whiting Trust I: New Strategy For Profits

| About: Whiting USA (WHX)

"When the well's dry, we know the worth of water." -Benjamin Franklin (or oil in our case!)

The purpose of this article will be to analyze the charts and determine the clear cycles of buying and selling in the Whiting USA Trust I (NYSE:WHX) which closely follow the quarterly dividend payments. After analyzing the cycles we will discuss the probability of future waves and how to profit from our observations. We will pay more attention to WHX as it has an earlier trust termination date, but will also discuss Whiting Trust II (WHZ) and lastly we will briefly look into other similar high dividend paying equities with similar attributes. There have been many articles written about WHX and the purpose of most of them has been to attempt to make readers aware of the imminent loss of investors' money when the trust expires and equals $0/share sometime in the summer of 2015. This is not one of those. The purpose of this article is to observe the odd but consistent behavior of the share price in relation to the timing of the dividend payments and to target a simple and profitable strategy for the next 2 years (actually 22 months) for WHX and the next 8 years for WHZ.

General Mechanics Of These Trusts:

Both WHX and WHZ are nearly identical vehicles and truly differ only in their trust expiration dates, price of their stock, and percentage of the dividends they currently pay. Both equities are set up as oil and gas royalty trusts and are both REITs. Both pay large dividends from their profits in production of oil and gas. And both have an expiration date after which their stock price will be worthless, literally $0, with one final payment and all remaining assets will fall back to the parent company, Whiting.

The first thing to realize about these assets is that they are NOT like other equities which have the possibility of growing with unlimited upside over unlimited time. Having an expiration date gives them a very finite range of price which SHOULD (but is generally not) be based on the amount of future dividends which are left to be paid as those are truly the only value of these equities. But of course, as with any equity, the P/E or price of the stock versus its earnings can get inflated from traders betting on volatility in the share price. WHX suffers from this malady in a big way.

Brief Overview of Yield:

WHX's current dividend amount is .53 cents, paid quarterly. Adding up the last four dividends paid (.53+.45+.57+.51=$2.06) gives an annual yield of 49.04% of the current share price of $4.22. A yield like that is awe inspiring, and simple math will tell you that 2.03 years of collecting that dividend will give you 100% of the current share price back in your wallet. The problem...WHX is expected to expire sometime near June of 2015. This gives only 22 months or approximately 7 more dividend payments until expiration, giving a current holder the approximate possibility of receiving 87.5% of their money back in dividends before shares are worthless. Or in other words, if you bought WHX at current levels and held until expiration, odds are you would lose 12.5% of your money after collecting all the dividends (and that's only if every dividend averages .515 cents, very unlikely). As promised above, this article will not go into detail about the valuations, current or future, of WHX. If you would like more information on hypothetical scenarios of the true value and future pricing of WHX I recommend reading Colin Livasy's article titled, "WHX: A Misunderstood Security...". Mr. Livasy has been kind enough to allow this recommendation and he does a nice job of analyzing the potential yield from current price to expiration of the trust.

Waves You Can Set Your Watch To:

All readers need to be aware that when a stock goes ex-dividend, the price of the dividend is removed from the share price on that day. That means "chasing dividends" is logically fruitless since if you are buying a stock to receive the dividend it is a wash. (Example: WHX @ $5.00....pays $.53 dividend....new price with dividend removed from share price $4.47 + dividend received of $.53 = $5.00 Right back where you started if the stock doesn't move at all, also unlikely.) This is what happened today, before the share price fell further from the open.

The basic movement we are speaking of is a series of consistent waves in share price moving up as the ex-dividend date approaches (dividends for WHX are paid quarterly, every FEB, MAY, AUG and NOV, and go ex-dividend between the 14th-18th of those months) then falling sharply just before the ex-div date for at least a week if not a month. Why is this obscure? If it were a normal stock, one might expect the share price to increase approaching the dividend but with only a modest pullback the day of ex-div after which the price should continue upward, especially if the dividend was higher than expected. In our case, the stock begins to crash BEFORE the dividend is paid. I can only conclude from this observation that there are traders out there who have caught on to the movements in this stock and know that they need to get out just before the dividend comes then wait for it to crash to a satisfactory low and buy it back again to ride the wave back up to just before the next dividend. Let's take a look at a one-year chart of WHX this time looking at the downslides which begin only days before the stock goes ex-div (chart courtesy of freestockcharts.com):

In the last year the 4 dividends paid experienced very similar selling action beginning days before ex-div date and lasting between 8 days (for the immediate short slide) and 50 days (the longest move to the bottom of the trough before jumping up again). The smallest drop was 23% and the largest was 52.96%.

How to profit?

If past movements prove true for the future, which it sure looks like they will, the cheapest way to take advantage of this part of the wave is to buy puts which are out of the money with an expiration at least one month past the ex-div date. (Example: Buy Dec $2.5 put, currently bid .25 ask .35.....when WHX drops 30-40%, sell them. As the price of WHX gets close to or below $3.5 these puts should have gone up in value near 100%. If it actually gets to $2.5....hard to say but that would be a very nice profit) From the current chart and where the price of WHX is today, I conclude the downturn which began today will continue, not stopping until it falls at least 30% and very possibly 50%. From $5.00, the price the day before the ex-div date:

  • -30%, WHX = $3.5
  • -50%, WHX = $2.5

It must be noted that any pure option play like this is about as risky an investment as you can find as options also have an expiration date after which they have no value and therefore this strategy must be executed prior to the option expiration date to be successful. That said, in this case I feel this is a good way to play this side of the wave.

Enough with the negative. Let's talk about upside potential...

Profiting on the way up:

We saw tremendous drops hovering around the dividend payments, but without tremendous gains, this stock would have already reached $0.

Same one-year chart with emphasis on upside in between dividends (chart courtesy of freestockcharts.com):

As you can see, after the downturns, there have been significant gains leading up to the dividend. The shortest timeframe from bottom to top was 14 days with a 69% gain and the longest was just over 2 months with a 74% gain. What does that mean? It is very difficult to time this trade. In all 5 of the gains shown (including the one which just ended with today's dividend removed from the share price) there were false lows, or times when the chart would have indicated a buy, only to have a small gain and then a further crash with a lower low. At least that pattern is established so that one can be careful not to enter too soon.

It would be my assumption with a stock like this that the percentage gains would be waning with each dividend paid, but that is obviously not the case. In fact this stock has become more volatile as time has gone on and the peaks and troughs have been further apart on a percentage basis. This is of course good if one has the chutzpah to play this game, as all evidence points to this pattern continuing until expiration of the trust. The most difficult part of a long position in this trade will be the entry point, as the exit is very clear, get out before the dividend is paid. It is not worth collecting .53 cents to lose $1.50 from the consistent down-turns after the dividend is paid. It would be very enticing to stay in and collect, but as the charts show, your odds of an excellent profit are greatly improved by exiting at least one day prior to the ex-dividend date.

In the case of the current run-up, if you had held till today and collected the dividend, it would still be my recommendation to sell immediately, as the downturn has begun with the .53 cents removed from the share price and if all goes as it has in the past, the price will continue to plummet at least 30% which would put WHX at $3.50.


If this style of trading is up your alley then the other Whiting Trust, #II, will give you similar opportunities with a much longer window to play in. It is not projected to expire until 2021, giving 8 more years of dividends. In the least this means that if you bought it today, and all things remained the same (no, all things will not remain the same, but for the sake of example), a purchase of 1 share for $13.78 (current price) with reinvestment of quarterly dividends would result in a gross holding of $73.59 or a 534% gain in 8 years (calculation done using compound interest calculator on thecalculatorsite.com). Not bad for an extended buy and hold philosophy.

The current yield for WHZ is 21.49% and pays on the same schedule as WHX. Its share price has suffered this year, which from the point of view of playing this particular game, is a very good thing. This has caused the yield to be higher and the P/E to be lower, currently only 4.22.


Another high yielding oil sector stock with ex-div dates in the same months as WHX and WHZ (FEB, MAY, AUG, SEPT). Northern Tier Energy (NYSE:NTI) operates differently than the 2 trusts as it engages in refining, retail and pipeline operations but also owns 166 convenience stores from which it sells the gasoline it refines, and also owns a bakery (yes, a bakery). A one year chart shows the stock up 37% and with the dividends it pays on top of that it's hard to argue with the desire to have a holding in this company. The share price does have some of the same movement noted above in regard to dips after the dividends rise into them, but I would suggest this stock as a longer hold with dividends reinvested. Current yield is around 20%.


CVR Refining (NYSE:CVRR) operates its pipelines, oil storage and refineries and turns a nice profit in the process. Year-over-year quarterly earnings growth was up +30.7% (courtesy Yahoo Finance) and with near a billion dollars in free cash flow the risk of ownership is not very high versus the reward from potential appreciation in share price plus the dividend. Paying a current yield of around 20.5% and priced 15% lower than its secondary offering 3 months ago, I call this one a buy as well. The one-year chart for this stock does show very similar price movement nearing ex-div date with a fall in price post-payment. The most recent ex-div date was 8/5/13, and the price fell 8.75%, from the RSI and Slow Stochastic, I would say we are darn near the bottom and if it's not quite there, it will be in the next day or so.


With the Spider S&P 500 (NYSEARCA:SPY) just 2.4% from its all time high, it's difficult to find a place to put your money without wondering, "Isn't the market due for a large correction?" Even if it doesn't correct, and the SPY runs through 170 again, what are the odds of it making you 15% by the end of the year? The equities mentioned in this article have very low, if any, correlation to the larger markets and are in a realm of their own. Each with an annual dividend higher than 20% which helps their appeal but also increases their volatility around dividend payments dates. The potential trades mentioned above can yield between 14-200% (or higher) every quarter if played well and carefully. Yes, the risk is high, but with the use of stop-loss and careful setting of thresholds, there is a lot of money to be made here.

WHX has already begun its downturn and is in the middle of the waves discussed above. That means this is not the time to do anything until the price finds its new low somewhere between $2.50 and $3.50, which should take between 2-9 weeks from today. At that point it will be a buy, giving a potential 70% run-up before it's time to sell and purchase puts. It seems logical that this opportunity would wane coming closer everyday to the expiration of the trust. One factor keeping this pattern going is that there are enough investors out there who think oil prices will skyrocket in 2014 which would have a very positive effect on the dividends paid from the trust. If their dreams came true, we could see even more volatility in the share price...sounds good to me. Whether or not we see a huge move in oil prices, the idea of that possibility remains and should continue to support this wild ride.

Good luck! And I look forward to your responses.

Disclosure: I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This article is for entertainment purposes only and is not a solicitation to buy or sell any equity or option. I am long Sept 13 $2.50 PUTS. I intend to initiate a long position In WHX on the next downturn.

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