Whiting USA Trust I Worth No More Than $1.38 Per Share - Will Expire Worthless First Half 2015

Aug.19.14 | About: Whiting USA (WHX)

Summary

Whiting Trust 1 is extremely overpriced, trading at a 62% premium over its intrinsic value of $1.38.

WHX will expire worthless after the last dividend during the first half of 2015.

Given the expiration in less than a year it's unlikely that the dividend run phenomenon will be sustained in the future.

Overview

Whiting USA Trust 1 (NYSE:WHX) is a highly misunderstood royalty trust. Holders of WHX are entitled to distributions from underlying oil and gas properties until 8.2 MMBOE have been produced and sold. The company estimates this to occur by March 31, 2015. Afterwards the trust will terminate and expire worthless.

The high current dividend yield of 98% per Google Finance is continuing to lead yield chasers to buy the stock. They don't realize that by 3/13/2015 WHX will be terminated due to maximum production targets being reached. Dividends will stop early next year and the security will expire worthless afterwards.

Until then WHX will distribute no more than $1.38 per share to shareholders. Last Friday shares changed hands at $2.23 per share - a 62% premium over fair value. Given the dramatic premium over fair value and expiration as catalyst to drive the share price back down this situation provides a unique opportunity for WHX holders to exit positions at a premium. More enterprising investors can play this situation from the short side.

Estimate of future distributions

The proceeds of last quarters sales of 243 MBOE will be distributed to shareholders on 8/10/2014 resulting in a dividend of 56c per share. Clearly 1 MBOE resulted in a distribution of 56c / 243 = .23c.

The shares traded ex this dividend last Friday. If you held the shares on Thursday you will receive the dividend no matter if you sell now or not. The intrinsic value of the shares thus do not include this months 56c of distribution starting last Friday.

According to the companies last 10q as of 6/30/2014 7.6 MMBOE have been sold out of the Trust's maximum of 8.2 MMBOE. That leaves 600 MBOE to be sold which at last months rate would result in 600 MBOE * .23c = $1.38 of future distributions.

Now energy prices have been coming down and it's unlikely that similar prices will be achieved during the remainder of the year. So $1.38 likely represents a ceiling of the expected distributions which will likely be lower.

In fact, this article cited estimates of $1.63 to $1.82 for the intrinsic value of WHX before the current distribution - resulting in fair values of $1.07 to $1.26 after the current distribution of 56c.

WHX's management itself has stated that the shares are highly overvalued. The company's 2013 annual report had this to say: "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."

Careful with the dividend run

Traders have observed that this stock and many other high yield stocks tend to trend up during the last 6 weeks before a dividend and the tend to decline into the ex-date and for a period of time afterwards. This phenomenon has been successfully used by traders to capture outsized profits.

While this effect does exist I caution traders to only buy into WHX once the stock comes down to the more conservative cited intrinsic value range of $1.07 - $1.26: Given expiration is now little more than half a year away I expect selling pressure in the name to increase as long as a premium exists. Trading the dividend run will become higher risk and should only be approached by purchasing at or below intrinsic value.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

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.