Seeking Alpha
Long/short equity, deep value, special situations, arbitrage
Profile| Send Message|
( followers)  

(Editors' Note: This article covers micro-cap stocks. Please be aware of the risks associated with these stocks.)

Introduction:

It is easy to estimate the value of Whiting USA Trust I (NYSE:WHX), and we strongly believe it currently should be trading at around $2.30. Investors shouldn't pay much attention to current yield, because WHX will trend towards zero until the trust terminates on or around March 31, 2015. Consequently, we assign a sell rating on the stock with a $2.30 price target.

Overview:

  1. We exposed Gyrodyne Co. of America Inc. (NASDAQ:GYRO) as grossly overvalued, and GYRO has lost almost half its value in the past month.
  2. Citron Research called attention to WHX and Great Northern Iron Ore Properties (NYSE:GNI), both of which are trusts that will liquidate in mid-2015. GNI has fallen about 68 percent this year, and we expect WHX to do the same.
  3. We are 100-percent certain WHX will trend toward zero until the trust terminates on or around March 31, 2015. We expect the remaining dividends to add up to $2.30.
  4. We strongly believe WHX is worth $2.30 (conservatively) and is likely to lose half its value in the coming days.

(click to enlarge)

GYRO has fallen almost 50 percent in less than a month:

On Jan. 6, 2014, we wrote an article for Seeking Alpha on Gyrodyne Co. of America Inc. and initiated a sell rating on the stock with a $5.70 price target. Prior to that article's release, the stock closed on Jan. 3, 2014 at $10.79. Immediately following the article's release, the stock plummeted to $6 in less than a month. WHX is similar to GYRO in that both securities are within a trust and both are liquidating. Just as we were highly confident in our prediction that GYRO would lose half its value, we believe WHX will do the same when investors realize the degree to which it is overvalued.

(click to enlarge)

GNI has fallen around 68 percent in 2014:

Citron Research is a company noted for identifying and exposing greatly overvalued stocks. Citron published an article on its web site on Jan. 24, 2011 calling attention to the gross overvaluation of WHX. The article blames the overvaluation on investors relying too heavily on computer dividend screens and trading based on the high yield while forgetting, ignoring or failing to understand the fact the trust has a finite lifespan. The article concludes that WHX should be priced at a value more in line with the remaining distributions of the trust.

On Dec. 28, 2010, Citron also published an article calling attention to the gross overvaluation of GNI, a trust structurally similar to WHX that pays a high dividend with a finite lifespan. GNI is set to terminate in April 2015 and, like WHX, was trading at a gross overvaluation to the value of remaining distributions. In 2014, Great Northern Iron has fallen about 68 percent, putting it much closer to the fair value of its remaining distributions.

(click to enlarge)

WHX and GNI will terminate around the same time. GNI recently plummeted to a level much closer to fair value, and we feel WHX will be next.

About the trust:

WHX is a statutory trust created in October 2007. Immediately before the closing of the IPO, Whiting will acquire interests in certain oil- and natural gas-producing properties located primarily in the Rocky Mountains, Mid-Continent, Permian Basin and Gulf Coast regions of the U.S. The net-profits interest will entitle the trust to receive 90 percent of the net proceeds from the production and sale of oil, natural gas and natural-gas liquids attributable to the underlying properties until the time when 9.11 MMBOE have been produced from the underlying properties and sold. This amount is the equivalent of 8.20 MMBOE with respect to the trust's right to receive 90 percent of the net proceeds from such reserves pursuant to the net-profits interest. WHX will pay a quarterly dividend consisting of quarterly cash receipts of net proceeds minus fees and administrative costs. This dividend will be paid until said 9.11 MMBOE has been produced, then will wind up its affairs and terminate with zero remaining assets.

(click to enlarge)

Worth zero when trust terminates:

With 100-percent certainty, WHX will head toward a zero! According to its own press release dated Feb. 7, 2014, WHX estimates the trust will terminate on March 31, 2015. It has no other assets and minimal cash. Therefore, WHX's value should be based solely on the remaining cash distributions, which are estimated in the next paragraph.

Estimated value of the trust:

On Nov. 7, 2013, WHX announced 6.86 MMBOE (84 percent) of the trust's total 8.20 MMBOE had been produced and sold. On Feb. 7, 2014, WHX announced 7.12 (87 percent) of the trust's total 8.20 MMBOE had been produced and sold by the end the fourth quarterly payment period of 2013. Unit holders of record as of Feb. 19, 2014 will receive a distribution of $.55712 per unit. That will leave only 1.18 MMBOE still to be produced, and WHX expects that production to be met by March 31, 2015. Shortly thereafter, the trust would terminate. Using the most recent volumes, average sales prices and net profits, for every .01 MMBOE produced, unit holders will receive $.021428 in dividends. WHX expects a decline rate of approximately 12.6 percent from 2014 through March 31, 2015, during which time cash distributions to unit holders may decline at a rate faster than that of production because of fixed and semi-variable costs attributable to the underlying properties. Therefore, it is likely unit holders will receive less than $.021428 in dividends for every .01 MMBOE produced. However, to make it simple, we will use $.021428 to calculate the value of WHX. If we ignore the TVM (time value of money) in our calculation, unit holders will receive approximately $2.31 in cash distributions until the trust terminates at zero. Therefore, WHX should be trading around $2.30 per share.

Conclusion:

We believe WHX is overvalued because naive investors are purchasing shares for the high yield. What these investors don't understand is that WHX is a trust that will trend toward zero until the trust terminates on or around March 31, 2015. Therefore, WHX's value should be based solely on the remaining dividends. Consequently, we assign a sell rating on the stock with a $2.30 price target.

Source: Whiting USA Trust Is Likely To Lose Half Its Value In The Coming Days