Whiting Petroleum (NYSE:WLL) filed an 8-K indicating the results of its borrowing base review. Although not highly publicized, the filing indicates that Whiting's borrowing base was cut significantly, but not quite as much as the potential reduction discussed earlier in March. Whiting's updated $2.75 billion borrowing base (and $2.5 billion in commitments), combined with some tweaks to the credit facility covenants should allow the company to go until 2018 without liquidity issues in nearly all scenarios.
Whiting also exchanged some unsecured notes for similar notes with an added conversion feature. This may help the company in its efforts to deleverage, but also reduces its upside by a bit should oil recover fairly strongly.
Credit Facility Availability
Whiting previously believed it would end up having at least $1.5 billion in availability left on its loan after its borrowing base redetermination. The actual results of the borrowing base redetermination may have left the company with slightly more availability. Its borrowing base was reduced from $4.0 billion (with a $3.5 billion elected commitment) to $2.75 billion (with $2.5 billion in commitments). This would leave Whiting with approximately $1.7 billion in availability based on its outstanding borrowings at the end of 2015.
The amended credit agreement also increases Whiting's interest costs for the credit facility by 0.5% and increases the commitment fee to 0.50% from 0.375-0.50% (depending on utilization). The effect of this will be a minor increase in the company's interest costs, but it should only amount to an extra few million per year.
Other changes to the credit agreement include an increase in the permitted ratio of total senior secured debt to EBITDAX from 2.5-to-1.0 to 3.0-to-1.0 now, while Whiting is now also allowed to issue up to $1.0 billion in second lien debt. These changes and Whiting's capital expenditure discipline should allow the company to make it to 2018 without any liquidity issues, even if oil prices remain low. It would probably take an average of $30 oil in both 2016 and 2017 for the covenants to become an issue now.
Whiting also recently completed the exchange of $476.7 million in unsecured notes for the same amount of unsecured convertible notes. The primary effect of this transaction is that it will likely result in a fair amount of debt being converted into equity, especially if oil prices go up modestly. The effective conversion price is approximately $11.00-11.50 per share, and there are various incentives for early conversion (such as a payment equal to 18 months' interest if one converts within six months). If Whiting trades at around $10.50 per share within six months, converting the note would result in a return equal to roughly 100% of the note principal between the early conversion payment and the value of the converted shares.
If the notes are fully converted into shares, it would result in modest deleveraging (reducing debt by around 9%), but would also increase outstanding shares by 20%. This probably helps Whiting if oil recovers to $50 in the near term, but also reduces its long-term upside by a bit if oil gets to the $60-70 range.
The new convertible notes trade for approximately 10-15 cents on the dollar more than the old notes due to the value of the conversion features.
One item that I am keeping an eye on is Whiting's Redtail crude oil delivery commitments. The company is contractually obligated to deliver increasing amounts of oil over the next few years from its Redtail field. Undelivered barrels will result in a deficiency payment ranging from $4.00 to $4.75 per barrel. Whiting paid $15 million in deficiency payments in 2015, and with the commitment volumes increasing, this could become fairly significant in future years. It does have a lot of DUCs in the Redtail, so completing those would significantly close the gap. Based on the current guidance for 2016, though, I think the deficiency payments could potentially reach over $30 million in 2016. While this is a relatively modest sum given Whiting's size (it has a similar effect on the company's finances as a $0.90 per barrel change in the price of oil), it is still something that should be noted and tracked.
Whiting appears to be in a stable position with regard to liquidity during the next couple years. Although the company's borrowing base was significantly reduced, it has plenty of availability remaining. The covenants for its credit facility were also tweaked to make it even more unlikely that they will be violated.
The company also made some moves that may help with deleveraging, although if the notes are converted into equity, its outstanding share count will increase by 20%. While I still believe Whiting offers considerable long-term upside, dilution from deleveraging efforts may reduce this upside somewhat.
Disclosure: I am/we are long WLL.
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.