Whiting Petroleum Corp. (WLL) exited Ch.11 bankruptcy on September 1 and shareholders are getting 0.0133557960 of “new” WLL shares (use new CUSIP 966387508 when entering orders) and warrants for each “old” WLL share (8-K12B) While it is somewhat unusual for shareholders to receive a recovery under a Ch.11 reorganization plan when higher priority classes are not getting full recovery, some WLL shareholders are unhappy because the actual market value of their recovery package is much lower than the stock’s trading price prior to exiting bankruptcy. Unsecured noteholders, however, are happy that the value of their recovery is higher than the note prices prior to emergence.
Ch.11 Bankruptcy Recoveries
“OLD” WLL shareholders received 3% of the new stock plus warrants:
*1,233,580 new WLL shares (0.0133557960 per old share)
*4,837,387 Series A Warrants (0.0523756707 per old share) exercise price $73.44 and expires 9/1/24
*2,418,840 Series B Warrants (0.0261878353 per old share) exercise price $83.45 and expires 9/1/25
For example, a holder of 10,000 “old” WLL shares would get 133 “new” WLL shares plus 523 Series A warrants (966387110 CUSIP) and 261 Series B warrants (966387128 CUSIP). (Many brokers pay cash for most of the fractional securities.) Using the “old” WLL stock trading price on August 31 of $0.80, a shareholder was valuing the new WLL at $60.15 (NOT factoring in the value of the warrants). Using the September 1 closing price of $0.57, which was after the announcement of the details of the effective plan, the value of the new shares is $42.86 (NOT factoring in the value of the warrants).
The amended Disclosure Statement (docket 566) includes a valuation analysis by Moelis & Co. that estimates the enterprise value at a mid-point of $1.55 billion (range is $1.35 billion-$1.75 billion) with an implied mid-point equity value of $1.045 billion. Using 38,051,210 new WLL shares outstanding on the effective date, the estimated mid-point equity value per share would be $27.46.
The value of the warrants is difficult to estimate without knowing the actual current WLL trading price. Often warrants trade higher than their values using standard warrant valuation models. In addition, warrants usually have very wide bid/asks spreads.
Whiting Petroleum Common Stock Prices
Source: Seeking Alpha Charts
The $2.368 billion in unsecured notes are getting a total of 36,817,630 new WLL shares – 97% of the new stock. (At the time I submitted this article for publication, there were no specific figures for the various note issues for the number of shares to be received. With almost everyone working from home I was not able to get the figures from other sources.) Based on the currently available information, it seems that unsecured noteholders are getting about 15.5 new WLL shares per $1000 principal.
Using the latest prices on September 1 for the unsecured notes of about 24 and the 15.5 figure, the noteholders were valuing the new WLL shares at about $15.48 per share. It seems, therefore, the equity and debt market have very large differences in their estimated equity values, which makes a very large potential arbitrage trade of selling old WLL short and buying notes. Still using 15.5 shares and $27.46 mid-point equity value per share, the unsecured notes should be trading at about 42.5.
Whiting Petroleum Options
According to OCC 47524, this is how options trading on the “old” WLL shares will be settled:
“POSSIBLE SETTLEMENT PROCEDURES: An OTC or OTCBB (Bulletin Board) market may develop in the U.S. for the Warrants, although there is no assurance this will happen. OCC anticipates that if an OTC or OTCBB market develops, NSCC will accept transactions in the warrants which arise as a result of option exercise and assignment activity. In that event, WLL1 option exercise and assignment activity will settle in the normal fashion through NSCC. However, if a market does not develop or NSCC does not accept transactions in the warrants, OCC anticipates requiring broker to broker settlement for WLL1 options after the final distributions are determined. Pursuant to customary OCC broker to broker settlement procedures, inability to effect delivery may subsequently occasion cash settlement as determined by OCC.”
At least Whiting Petroleum has greatly reduced their debt under the reorganization plan from $3.438 billion to $425 million, which makes it very unlikely they will be back in bankruptcy, unlike too many other companies that exit bankruptcy still having too much debt.
Pro Forma Debt Structure
The financial projections by Moelis in the amended disclosure statement were based on May 26 NYMEX prices. Since prices have moved higher since then, the projections might seem a little conservative, but they have hedged much of their expected production. (See below.) Using the 2021 EBITDA projection of $300 million and their $1.55 billion mid-point enterprise value estimate, they are valuing Whiting at a 5.17x multiple.
Note: 2020 is just for the last 4 months and not the entire year.
Source: Amended disclosure statement (docket 566)
Prices Used In Making Projections
These figures are based on May 26, 2020 NYMEX figures.
Source: Amended disclosure statement
I was somewhat disappointed in their September 1 Presentation hedge portfolio numbers, especially for oil because current prices are higher. The hedges reflect about the same numbers used in the May 26 projections.
Speculators trading WLL common shares have been very irrational and have greatly overvalued their equity recovery. In my article earlier this year, I recommended investors sell WLL common and for those who were bullish on energy prices, to consider buying the notes, which were trading around 10 at the time of the article’s publication.
Because of the very large arbitrage spread between the recovery for WLL shares based on stock trading prices and the recovery for notes based on current note prices, I began shorting WLL shares and going long the notes about 10 days prior to the announced September 1 plan effective date. Due to difficulty in borrowing shares I had to use many firms to facilitate the trades. After the distribution of the various new securities, I will be long a modest amount of new WLL shares (my short WLL shares will be closed out using my long new WLL shares) and short Series A and Series B warrants.
Since I am somewhat bullish on energy prices, the new WLL shares trading below $25 (Moelis estimate effectively was $27.46) might be worthy of consideration for speculative investment accounts.
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.
Additional disclosure: I will be long new WLL shares and short Series A and Series B warrants after the distribution is completed this morning. I was short “old” WLL shares and long WLL notes.
Originally published on Seeking Alpha