Whiting Petroleum: Breakeven Estimated At $57 Oil In 2017

| About: Whiting Petroleum (WLL)

Summary

Whiting converted $476.7 million in convertible notes into 41.8 million shares of common stock.

This reduces its debt by around 8%, but increases its share count by around 20%. This is still a positive incremental step though, given Whiting's fairly high leverage.

Whiting should be fine for liquidity through 2017, but probably needs to do more to get its debt down to a more reasonable level.

2017 breakeven point is around $57 oil if Whiting wants to produce around 133,000 BOEPD.

I expect Whiting to have additional dilution in the future to reduce debt and fund production.

Whiting Petroleum (NYSE:WLL) recently converted $476.7 million in outstanding convertible notes into 41.8 million shares of common stock. It also paid accrued and unpaid interest on the notes and may pay up to $41.9 million in cash for the early conversion payments. This helps reduce its debt and interest costs, but Whiting still has a significant amount of work to do to get its debt down to a more comfortable level. Whiting has plenty of liquidity remaining, so I think it should be fine through 2017. However, its decreasing production (especially oil) and the probability of future dilution makes me neutral about Whiting at $11 and continuing to utilize sell strangles.

Notes About The Conversion

I previously mentioned this conversion was likely to happen (either mandatorily or voluntary) due to the ability for noteholders to effectively get over 100% of their principal back if the stock rose above $10.50. The result of the conversion is that Whiting reduces its outstanding debt by around 8% and reduces its interest cost by $27.9 million per year, at the cost of increasing its outstanding shares by 20%. It still remains significantly leveraged, but this is an incrementally positive move. It does also reduce Whiting's potential upside by a bit due to dilution, although I already accounted for this when I estimated Whiting's valuation range at $7 to $12.

2017 Breakeven Point

A challenge for Whiting is that the combination of reduced production (due to a tight capital expenditure budget in 2016) and reduced oil production as a percentage of total production will increase Whiting's estimated breakeven point in 2017. I'm using 133,000 BOEPD in production and a 74% oil split for these calculations. Whiting's oil split has come down to 74.6% in Q1 2016 from 81.1% in Q1 2015, but the company indicates that the current oil split shouldn't change significantly.

This results in an estimate of $1.919 billion in revenue in 2017 at $57 WTI oil and $2.75 natural gas. Whiting has some 2017 hedges, but they don't appear to come into play at these prices.

2017 Production

Realized Price Per Bbl/Mcf

Revenue ($ Million)

Oil (MMBbl)

35.92

$49.50

$1,778

NGLs (MMBbl)

5.83

$12.00

$70

Natural Gas (Bcf)

40.78

$1.75

$71

Total Revenue

$1,919

Click to enlarge

I've estimated that the CapEx required to maintain 133,000 BOEPD in production is approximately $900 million. Thus, cash expenses would be roughly $1.918 billion in this example, factoring in the reduced interest expenses.

Expense

$ Million

Lease Operating Expense

$447

Cash G&A

$144

Cash Interest

$220

Production Taxes

$177

CapEx

$900

Delivery Deficiency Payments

$30

Total

$1,918

Click to enlarge

Leverage Decreasing But Remains Elevated

Whiting's debt to EBITDA is reduced by the conversion of the notes but still remains at about 4.5x projected 2017 EBITDA at $55 to $60 oil. I continue to believe that Whiting should be fine in terms of liquidity through 2017, but expect there to be further debt to equity swaps in the future. This will increase Whiting's chances of successfully dealing with upcoming debt maturities, but would also serve to limit the upside of its stock. I remain neutral on Whiting based on its current valuation, and anticipate that its valuation range may narrow from my $7 to $12 estimate as it uses equity to reduce its debt.

Conclusion

Whiting is making progress reducing its debt, with the conversion of the convertible notes into equity helping to reduce its debt by around 8%. This does come with a significant cost in terms of dilution though, and I would expect this to continue if Whiting's shares remain near its current levels or above.

Whiting's breakeven point in future years will go up if it cannot increase production and/or its oil splits. Whiting's current breakeven point in 2017 is around $57 oil. This (funding capital expenditures) is another reason that dilution is likely if Whiting's share price is relatively strong.

Whiting did have an optimistic shareholder meeting, but it should be noted that it appears that Q2 and full-year guidance is unchanged from what it mentioned during its Q1 earnings.

Note From The Author: If you found this article informative, please scroll to the top of the article and click on follow to see my newest articles as they are published.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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.

Additional disclosure: Utilizing neutral options strategies currently.