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Summary

  • Both GYRO and WHX fell by more than 50 percent after we exposed them earlier this year.
  • 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 $1.50.
  • Don't become a naive investor and chase high yields, as WHX is a trust that should be valued solely on the remaining dividends.

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 $1.50. 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 $1.50 price target.

GYRO has fallen by more than 50 percent since our article was published:

On Jan. 6, 2014, we wrote an article for Seeking Alpha on Gyrodyne Co. of America Inc. (NASDAQ:GYRO) and initiated a sell rating on the stock with a $5.70 price target. On Jan. 3, the Friday before that article's release, the stock closed at $10.79. In the 5 ½ months since the article's release, the stock plummeted by 52 percent. It now is trading at $5.19.

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WHX has fallen by more than 50 percent since our original article was published:

On Feb 18, 2014, we wrote an article for Seeking Alpha on Whiting USA Trust I and initiated a sell rating with a price target of $2.30. In the four months following that call, WHX has fallen to $2.03. After distribution payouts are accounted for, that is a 55-percent drop.

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About the trust:

WHX is a statutory trust created in October 2007. As stated in the recent 10k, immediately before the closing of the IPO, Whiting acquired 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.

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Worth zero when trust terminates:

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

Estimated value of the trust:

On Feb. 7, 2014, WHX announced 7.12 (87 percent) of the trust's total 8.20 MMBOE had been produced and sold. On May 7, 2014, WHX announced 7.37 (90 percent) of the trust's total 8.20 MMBOE had been produced and sold by the end the fourth quarterly payment period of 2013. That will leave only .83 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 $.018736 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 $.018736 in dividends for every .01 MMBOE produced. However, to make it simple, we will use $.018736 to calculate the value of WHX. If we ignore the TVM (time value of money) in our calculation, unit holders will receive approximately $1.56 in cash distributions until the trust terminates at zero. Therefore, WHX should be trading around $1.50 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 value should be based solely on the remaining dividends. Consequently, we assign a sell rating on the stock with a $1.50 price target.

Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.

Source: Whiting USA Trust: Likely To Drop Back To Its Fair Value In The Coming Days; $1.50 Price Target