Whiting Petroleum Corp (NYSE:WLL) told investors this week that it was delaying the announcement of its 2015 capital spending in light of the volatility within oil prices. That said, the company did announce an update to its proved reserves as well as its liquidity. Meanwhile, it also noted that its taking steps to further improve its liquidity as it prepares for what looks like a very uncertain operating environment as we head into 2015. Let's take a look at what all of this means for the company's investors.
Where things stand right now
With its deal to acquire Kodiak Oil and Gas closing earlier this month, Whiting Petroleum is heading into 2015 filled with uncertainty. While the company didn't pay much of a premium to acquire Kodiak, it did buy the company at what now appears to be the top of the oil market. Because of that, the company paid a heavy price as its stock has been decimated by the sell-off in oil prices as well as the uncertainty over what Kodiak brings to the table in this new environment.
One of the reasons its stock has been beaten down so badly is because Kodiak brought a lot of debt with it, and that debt could prove to be a big risk down the road if oil prices don't improve. The deal added $2.2 billion in debt to Whiting's balance sheet, which is a lot considering that the much larger Whiting only had $2.7 billion in debt before the deal closed. We can see the difference in size by looking at the slide below.
From those numbers, we can deduce that 36% of Kodiak's $6 billion enterprise value at the time of the deal was debt while just 23% of Whiting's enterprise value was debt. Given the dramatic fall in Whiting's stock price, its debt ratio as a percentage of enterprise value has only worsened since the deal closed.
That being said, the company still has plenty of liquidity. The announcement this past week updating the markets on its reserves showed a 29% increase in the combined reserves of the company. These reserves enabled the company to have its credit commitments increased to $4.5 billion, which after factoring out the $1.4 billion drawn on its credit facility leaves the company with $3.1 billion in liquidity. Further, the company's credit rating was actually just increased by a rating agency to Ba1 from Ba2, which is just one notch below investment grade. So, while its debt picture hasn't improved, its liquidity is still really strong.
What's next on the agenda?
Still, while Whiting has plenty of liquidity at the moment, it's not taking any chances given the current uncertainty in the oil market. The company is reviewing its spending plans for 2015 and says it has a lot of flexibility with its plan so it can maintain its strong liquidity. While this means spending is likely heading lower, the company still plans to deliver moderate production growth next year, so it's not going to cut back too deeply.
In addition to reeling in spending, the company is planning to take additional steps to boost its liquidity just to be safe. It's looking to sell assets so it can cut its debt and create another $1 billion in liquidity. These asset sales are likely to be non-core assets, which could come from the 2% of the company's production that isn't from its three core assets, which are noted in the slide below.
Alternatively, the company does have a very large enhanced oil recovery project in the Permian Basin that it could sell. This asset does provide steady production, but it doesn't offer the same growth potential as the company's shale plays in the Williston Basin or Redtail plays. However, because of that steady production, it's likely to be a valuable asset that could be cashed in if it needed the additional liquidity.
Whiting Petroleum might be entering 2015 with a lot of uncertainty, but the company does have a lot of liquidity to see it through the year no matter where oil prices go. Further, it's taking steps to boost its liquidity by monetizing assets. These steps should ensure that the company survives the downturn in oil prices while also putting it in a better position to thrive whenever oil prices do recover.
Matt DiLallo has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.