Sell Whiting Petroleum Going Into Earnings

| About: Whiting Petroleum (WLL)

Summary

Whiting Petroleum will report Q2 results this week that are expected to drive the company toward a huge loss.

Whiting’s revenue could miss estimates due to a decline of 25% in the average realized price of oil, along with a 20% drop in production on a year-over-year basis.

Whiting’s interest expense/barrel will rise 49% year-over-year, while G&A expenses will increase 30%, thereby forcing the company toward a huge loss as its revenue will drop by 37% at least.

On July 27 this week, shale oil producer Whiting Petroleum (NYSE:WLL) will release its second-quarter results. Now, the company has enjoyed a strong run on the stock market in the past five months, rising almost 120%. But, will it be able to sustain the momentum post earnings? Let's find out.

Is Whiting about to miss expectations?

On a year-over-year basis, Whiting Petroleum's revenue is expected to go down almost 37% to $375 million. This massive decline in the company's revenue is not surprising as Whiting has decided to reduce its capital expenditure by a huge margin of 80% this year, and this will eventually have an impact on its production.

More specifically, Whiting is expected to produce somewhere in the range of 12.2 to 12.7 million barrels of oil in the second quarter of 2016, down from volumes of 15.49 million barrels recorded in the year-ago period. This means that Whiting's production will go down around 20% on a year-over-year basis.

Along with the drop in the production, the weakness in oil prices on a year-over-year basis will be another headwind for the company. This is because the average price of WTI oil in the second quarter of 2016 was just under $45 a barrel. This was way below than the average WTI oil price of $60.45 a barrel in the year-ago period, indicating that oil prices have dropped 25% on a year-over-year basis.

Thus, a decline of 25% in the average realized price of crude oil, along with a 20% drop in production on a year-over-year basis will lead to weakness in Whiting's top line performance. In fact, the company could miss the revenue estimate set by Wall Street since the combination of a drop in oil prices and its production is far greater than the revenue decline projected by Wall Street.

What about the bottom line?

The bottom line forecast for Whiting Petroleum is highly negative. In fact, the company is expected to slip into a loss of $0.51 per share in the second quarter as compared to a profit of $0.04 per share last year. However, the good thing to note here is that Whiting has managed to deliver an average earnings beat of almost 120% for the past four quarters on the back of its cost-cutting efforts.

But, will it be able to do the same this time? Let's take a look.

As discussed above, the average crude oil prices were down substantially in the second quarter. This means that Whiting needs to cut its costs by a high enough margin to beat the bottom line estimate.

Now, in the year-ago quarter, Whiting's overall expenses had come in at $22.06 per barrel. This is shown below:

Source: Whiting Petroleum

As seen above, Whiting Petroleum was able to generate a cash margin of $22.59 per barrel on each barrel of oil last year. Moreover, investors should also note that the company received an oil price of $44.65 net of hedging. In the second quarter of 2016, Whiting is expected to lower its costs on certain fronts.

For instance, its lease operating expenses are expected to go down to $9.10 per barrel at the mid-point of its forecast. However, other heads of expenses such as general and administrative expenses, along with the cash interest expense, are expected to rise. More specifically, Whiting's interest expense per barrel of oil will come in at $6.85 at the mid-point of its forecast, which is almost 49% higher than last year. Similarly, the general and administrative expenses will come in at $3.20 per barrel of oil equivalent, 30% higher than last year.

Therefore, Whiting will see a rise in its expenses in the second quarter. When combined with the anticipated drop in the company's revenue, this rise in costs will have a negative impact on its bottom line and push it toward a loss. For comparison's sake, in the year-ago period, Whiting's adjusted net income was $9 million, but this year, the company is certain to post a loss as its revenue will drop to the tune of $215 million, or even greater, as estimates suggest.

Driven by this huge revenue drop and a rise in costs, Whiting is certain to slip into a deep loss in the second quarter.

Conclusion

Whiting Petroleum shares have enjoyed a strong run on the market in the past few months, but due to a weak second-quarter report, that run might be about to come to an end. So, it might be a prudent idea to book profits in Whiting Petroleum before the earnings are out and take advantage of the solid gains recorded by the stock in the past few months.

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.