Whiting Petroleum (WLL) introduced that it was planning on enterprise a reverse stock split at anyplace from a 1 to 2 to a 1 to six ratio. It intends to carry a particular stockholder assembly in This fall 2017 to achieve approval for its proposal.

I do not see a reverse cut up as altering Whiting’s complete worth. Nonetheless, there may be in all probability an elevated likelihood of Whiting doing an fairness providing someday after the reverse cut up. Oil costs are close to Whiting’s breakeven level and it additionally has a serious 2019 unsecured debt maturity that it’ll need to take care of with out rising curiosity prices. Subsequently, fairness proceeds can be helpful to both fund progress or pay for a part of the notice redemption.

Reverse Split Efficiency

The longer term share efficiency of corporations that do reverse splits is often poor, however that’s skewed by the massive quantity of corporations which can be basically compelled to do a reverse cut up in an effort to keep its inventory itemizing. These corporations are usually drowning in debt and at a very excessive threat of chapter.

When you deal with corporations that are not close to loss of life, the long-term impact of reverse splits is extra combined. There are some companies that even see vital share value appreciation (adjusted for the cut up) within the 12 months following the reverse cut up. Nonetheless, that robust efficiency is generally tied to general market circumstances and the working efficiency of the corporate in query, moderately than something particular to the impact of the reverse cut up.

I see Whiting as having a fairly low risk of bankruptcy right now, though it does nonetheless have a major quantity of debt and I would not think about it to be a very robust firm amongst upstream producers. Whiting might be going to carry out fairly nicely at $55 oil and poorly at $45 oil, with the reverse cut up not affecting its pre-split mid-single digit vary worth at $50 oil.

Split Rationale

Whiting’s share value is nicely above the $1 mark, so it does not must do a reverse cut up to keep up its itemizing. The concept that institutional buyers cannot buy shares which can be beneath $5 additionally seems to be primarily a myth, so getting its inventory above $5 for that motive does not seem like the impetus for Whiting’s reverse cut up. For instance, the mutual fund possession stays vital for an organization like Denbury Resources that has been sub $5 for a pair years.

Whiting did point out that the reverse cut up “may improve marketability and facilitate its trading,” and it’s true that the a share value appears higher for optics, even when the precise market capitalization of the corporate does not change. A reverse cut up could enhance Whiting’s capability to do an fairness providing, as promoting say 25 million shares at $15 per share in all probability is less complicated than promoting 100 million shares at $three.75 per share even when the relative % dilution is identical.

Makes use of Of Fairness Proceeds

I do not assume an fairness providing is a foregone conclusion at this level, however Whiting might use the money to both take care of its upcoming 2019 unsecured debt maturity or develop manufacturing. Whiting might refinance its unsecured 2019 debt or make the most of its credit score facility to repay that debt. Whiting cannot repay its $961 million in 2019 notes with the proceeds from an fairness providing at this level (because of the large dilution that will entail), but it surely might use a mixture of fairness proceeds and its credit score facility.

The curiosity price distinction between refinancing that debt at eight% curiosity and addressing it with a mixture of credit score facility debt and proceeds from an fairness providing is sort of substantial and will quantity to over $55 million per 12 months. That may make a distinction of round $2 to Whiting’s oil breakeven level.

The desk beneath exhibits the annual curiosity prices from refinancing the $961 million in 2019 unsecured notes with numerous combos of recent unsecured notes at eight%, utilizing the credit score facilty and doing an fairness providing.

2019 Observe Refinancing/Redemption

$ Million

$961 Million – Unsecured Notes @ eight%

$77

$461 Million – Credit score Facility @ three.5%, The rest Unsecured Notes

$56

$961 Million – Credit score Facility @ three.5%

$34

$600 Million – Credit score Facility @ three.5%, The rest Through Fairness Providing

$21

As Whiting’s oil breakeven level is true round strip costs proper now, any price financial savings it may possibly obtain will make a fairly large distinction. A $2 distinction in its oil breakeven level makes round a 2% distinction in its manufacturing progress at breakeven money circulation. Over 5 years that would imply round a 10% distinction in manufacturing ranges.

Whiting additionally might try to develop manufacturing with the proceeds from an fairness providing. As oil costs are near Whiting’s breakeven level proper now, it basically cannot develop manufacturing with out borrowing more cash. Whiting doesn’t need to tackle vital further debt after having tried to cut back debt via many asset gross sales and debt for fairness swaps, so an fairness providing could also be mandatory if it needs to develop manufacturing.

Conclusion

Whiting’s reverse cut up proposal could also be paving the way in which for a future fairness providing. Whiting does not must do a reverse cut up, however a better share value could look higher for “marketability.” The proceeds of an fairness providing may very well be used to assist with Whiting’s 2019 notice maturity or to fund manufacturing progress. I believe Whiting is an OK worth at $four (historic valuation multiples would have it at round $5 to $6 primarily based on $50 oil and anticipated finish of 2017 manufacturing ranges), however the potential for additional dilution is one thing to concentrate on.

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Disclosure: I/we’ve no positions in any shares talked about, and no plans to provoke any positions inside the subsequent 72 hours.

I wrote this text myself, and it expresses my very own opinions. I’m not receiving compensation for it (aside from from Searching for Alpha). I’ve no enterprise relationship with any firm whose inventory is talked about on this article.