Whiting USA Trust I - 35%-Plus Arbitrage Profit Opportunity

Aug.18.14 | About: Whiting USA (WHX)


WHX is worth $1.40 and is trading at $2.23.

WHX will be liquidated by March 2015.

This is an excellent short opportunity with a definite end date and easy fair value calculations.

Whiting USA Trust I (NYSE:WHX) is an excellent short prospect. This is an easily understood company that is easily valued and has a definite end date. It's more like a bond nearing maturity than a typical company/stock.

A Brief Summary

  • The short profit opportunity is greater than 35% return within the next seven months.
  • As of Aug. 15, 2014, WHX is trading at $2.23.
  • Shareholders will receive circa $1.40 in dividend payments between now and March 31, 2015.
  • WHX will have no assets and will be liquidated around March 31, 2015. Its shares will go to zero.
  • There is an option trade available, which may enable early realisation of profits.

The Company

WHX owns a 90% net profits interest conveyed from Whiting Oil and Gas on certain oil and natural gas properties located in the Rocky Mountains, Mid-Continent, Permian Basin, and Gulf Coast regions. The trust will expire when 9.11 MMBOE have been produced and sold from the underlying properties. This is expected to occur by March 31, 2015.

The trust's press release from Aug. 7, 2014, states:

The net profits interest will terminate when 9.11 MMBOE (which amount is equivalent to 8.20 MMBOE attributable to the net profits interest) have been produced and sold from the underlying properties, and the Trust will soon thereafter wind up its affairs and terminate, after which it will pay no further distributions. Consequently the market price of the Trust units will decline to zero around or shortly after the net profits interest termination date, which is currently estimated to occur during the quarterly payment period ending March 31, 2015. Therefore, to the extent that the Trust units are trading at a price substantially in excess of the aggregate distributions that may be reasonably expected to be made prior to the termination of the Trust, the market price decline in Trust units is likely to include one or more abrupt substantial decreases. As described in the Trust's public filings, since the assets of the Trust are depleting assets, a portion of each cash distribution paid on the Trust units should be considered by investors as a return of capital, with the remainder being considered as a return on investment or yield.

As of June 30, 2014, on a cumulative accrual basis, 7.60 MMBOE (93%) of the Trust's total 8.20 MMBOE have been produced and sold. Based on the Trust's reserve report for the underlying properties as of December 31, 2013, the 9.11 MMBOE of reserves (8.20 MMBOE to the 90% net profits interest) are projected to be produced from the underlying properties by March 31, 2015, shortly after which the Trust would terminate.

The Dividend Valuation

Estimated additional dividends before liquidation: circa $1.40 (see calculations below).

Profit Opportunity

Short the stock and receive $2.23 now. It will pay out $1.40 in dividends over the next seven months. Profit will equal $0.83 per share (37%).

Estimated additional dividends before liquidation:

Sales volumes:
Oil (NYSE:BBL) 378,637
Natural gas (NYSEMKT:MCF) 1,328,180
Total (NYSE:BOE) 600,000
Average sales prices:
Oil (per Bbl) 94.57
Natural gas (per Mcf) 5.21
Gross proceeds:
Oil sales 35,806,569
Natural gas sales 6,925,130
Total gross proceeds 42,731,700
Lease operating expenses 18,060,286.14
Production taxes 2,739,477.65
Realized gains on hedging settlements
Total costs 20,799,764
Net profits 21,931,936
Percentage allocable to Trust's Net Profits Interest
Total cash available for the Trust 19,738,742
Provision for estimated Trust expenses - 250,000
Montana state income taxes withheld - 50,000
Net cash proceeds available for distribution 19,438,742
Trust units outstanding 13,863,889
Cash distribution per Trust unit 1.40
Click to enlarge

Notes: Oil vs. gas split based on current production levels; average sale prices for oil and gas increased by 10% on the previous quarter.

Disclosure: The author is short WHX. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it. The author has no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: I am short both the stock and call options at a range of maturities. I will be increasing these positions over the coming few weeks.

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.