Loading...

Whiting Petroleum Corp. (WLL), an independent oil and gas company, engages in the acquisition, exploration, and production of crude oil, natural gas, and natural gas liquids. It primarily operates in the Permian Basin, Rocky Mountains, Mid-Continent, Gulf Coast, and Michigan regions of the United States. The company’s largest projects are in the Bakken and Three Forks plays in North Dakota, and in its Advanced Oil Recovery fields in Oklahoma and Texas.

As of June 30th, proved reserves were 281 million barrels of oil equivalent, 82% of which was oil. This compares with 275 million at December 31, 2009.  At the mid-year point, total production was 5.88 million barrels of oil equivalent per day (mmboe/d), compared with 5.03 mmboe/d at June 30, 2009. The average realized sales price of oil increased 40% over the same time period, to $69.10, and the average price of natural gas per million cubic feet rose to $4.56, from $3.13.

The reason this oil and gas company is so interesting is because it has reached an inflection point in its lifecycle, what could be termed “critical mass”. Share net is expected to reach $5.20 in 2010, and rise to about $6.60 in 2011, compared with a bottom-line deficit of $2.36 in 2009.

With oil prices remaining firm, despite the lack of strong energy demand due to the sluggish economy, Whiting is well positioned to capitalize on any uptick in the economy, which would likely boost demand for, and the price of, oil thanks to its 80% weighting toward oil. Moreover, only an estimated 16% of this figure is extracted from the deepwater Gulf of Mexico. Too, the fact that this company’s oil is not imported from the Middle East, is looked upon favorably by those sectors of the public who are concerned about the high U.S. consumer reliance on foreign oil. Also, lower transportation costs make Whiting’s product less costly than oil imported from abroad. In addition, the deepwater drilling moratorium in the Gulf of Mexico is keeping oil inventory relatively low, which is supporting oil prices.

Whiting’s holdings are expanding rapidly. Its proved reserves have risen at a 5% average annual rate, and are expected to increase at a 6% clip over the next five years. Too, its Advanced Oil Recovery technology in Oklahoma and Texas is actually looked upon favorably by environmentalists. This is because it uses carbon dioxide injection methods, which helps to reduce greenhouse gas emissions, instead of chemical cocktails.

Investment Thesis
We envision the stock rising to $100-$120 a share by the 2013-2015 timeframe, based on an average annual P/E of 12, and share net of $9.15. We consider this profit expansion reasonable, given our expectation for a modest recovery in the domestic economy, a likely subsequent rise in the price of oil and gas, and the rapidly growing quantity of proven reserves, which we believe the company will be able to mine efficiently. Investors may also want to consider the company’s 6.25% convertible preferred stock. With a liquidation value of $100 a share, this vehicle is safer than the underlying common, and has a 6.25% yield advantage over the dividendless common. The preferred is mandatorily callable on September 15, 2013, but cannot be redeemed for any purpose (other than bankruptcy) prior to that date.  Lastly, the common would have to fall some 50% from recent prices before holders of the preferred would lose money based on the Value Line Convertible Survey’s pricing models.