What Is Whiting USA Trust II's Breakeven?

| About: Whiting USA (WHZT)
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Summary

I estimate Whiting USA Trust II's crude breakeven to be around $42 per barrel.

Because it still produces natural gas, Whiting USA Trust II will likely still pay a modest dividend if WTI goes below $42 per barrel.

It is safer to buy strong integrated companies like BP or Exxon Mobil than it is to buy Whiting USA Trust II.

Given the recent dip in WTI prices, many investors are wondering what the breakeven price for Whiting USA Trust II (WHZ) is.

Breakevens are important because if Whiting USA Trust II does not make a profit, it will not pay a dividend. Given that Whiting USA Trust II's dividend is its most important quality, a small to zero cent dividend will likely translate to a low stock price.

Whiting USA Trust II's breakeven point is composed of two different segments, one segment for crude oil and another segment for natural gas. Given that Whiting USA Trust II does not break down each individual segment's production costs, all estimates are approximate.

For 3Q, Whiting USA Trust II had an average production cost of $29.56 per barrel of energy (with $ 25.62 in lease operating expenses per barrel of energy and $3.94 in production taxes per barrel of energy). It also had development cost of $3.69 per barrel of energy and a realized differential of $6.66 per barrel of energy. Adding the costs and differentials together gets me roughly $40/barrel. Given that natural gas accounted for 24% of the total barrels of energy, and assuming that it costs approximately $20 to produce one barrel of energy of natural gas, that gets me a production cost of approximately $46 a barrel of crude for breakeven.

Because the realized price differential between the Permian/Rocky Mountains/Gulf Coast regions and Cushing should narrow as more infrastructure is built, and capital expenditures/development costs and production taxes should shrink as production is decreased, I estimate that Whiting USA Trust II's crude breakeven point could be reduced to $42 per barrel next year. If WTI goes below $42 per barrel, Whiting USA Trust II's crude production will not yield any distributable income for the trust.

If crude becomes uneconomic, Whiting USA Trust II does have its natural gas segment to pay for dividends. Due to the modest nature of its natural gas operation, however, the natural gas dividend distribution will be small. For the third quarter, natural gas made up only ~10% of the revenues. Given that producing crude oil has historically been higher margin than producing natural gas, and given that a significant part of natural gas likely comes from dual producing wells, it would be prudent to assume that a standalone natural gas operation would comprise at maximum 5-8% of the total distributable income, which last quarter was 64 cents. So the average natural gas distribution would be 3 to 5 cents a quarter. Given that Whiting USA Trust II is prohibited from hedging natural gas production after 2014, and given that natural gas is historically cheaper in some quarters than other quarters, the natural gas distribution will likely be 1 to 3 cents in some quarters and 5 to 8 cents in other quarters (natural gas depends on weather and supply and demand. I also factor trusts expenses and Montana income tax with the natural gas segment to make things easier).

Given that the implied volatility of WTI is currently around 35% and WTI currently trades at $56 a barrel, an one standard deviation move for WTI for a quarter would be $9.73, and an one standard deviation move for an entire year would be $19.6. Assuming normal distribution, the probability of WTI prices reaching breakeven of $42 a barrel would be 7.5% for the quarter, and 23.75% for the year.

So there currently is a ~7.5% chance that Whiting USA Trust II will realize breakeven prices for Q1 2015 and a ~23.75% chance that it will realize breakeven prices at some point in 2015. If Whiting USA Trust II realizes breakeven prices on WTI, it would likely only pay $0.03 to $0.05 a quarter from its natural gas production segment.

I believe crude prices will rally in the long term as the Chinese economy rebounds. Because crude prices will likely rise in the long term, Whiting USA Trust II will have option value even if it realizes breakeven prices or lower. At some point Whiting USA Trust II could even be a buy because its option value may be higher than its market cap.

But at the current moment, Whiting USA Trust II's net present value is lower than its market cap, and there is no margin for safety. It is far safer to buy a strong integrated company like Exxon Mobil or BP or a strong service company like Schlumberger than it is to buy Whiting USA Trust II.

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 (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.