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Could Whiting Petroleum Corp Really Be Worth $50?

By Matthew DiLallo – Mar 30, 2015 at 2:00PM

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Whiting Petroleum Corp recently recapitalized by raising $3 billion causing analysts to adjust their price targets with one saying shares could be worth $50.

Photo credit: Flickr user Lindesy G.

After an awful end to 2014 Whiting Petroleum Corp's (WLL) stock had been riding high over the past couple of months. At one point the stock had surged more than 50% from its bottom in mid-January. This surge was fueled by a combination of a rebound in the oil price off its bottom as well as reports that Whiting Petroleum put itself up for sale.

That sale, however, appears to be off the table for now after the company was recently able to raise around $3 billion in debt and equity to recapitalize its balance sheet. That balance sheet booster actually caused a rather dramatic sell off in the stock as many investors were hoping for a quick profit on a buyout. That being said, analysts think the company is still worth a lot more than its current $30 stock price with one analyst saying that even after the dilution the stock is worth $50. Here's why that just might be the case.

Investors sell but analysts cheer
While investors sold Whiting's stock on the news that it was recapitalizing instead of cashing out analysts largely supported the move. Wunderlich, for example, maintained its buy rating on the stock, but did lower its price target from $60 to $50 to account for the increased share count. That price target, however, is still nearly $20 per share above the current price showing just how bullish firm is on the stock. Other firms made similar calls with Macquarie and Barrington Research both keeping an outperform rating on the stock despite lowering their price target from $60 to $44 and $81 to $46, respectively. Meanwhile, UBS reiterated its buy rating and kept its price target at $44. Again, each of these price targets are well above the current stock price.  

In each case the analysts making the call saw a company that was taking advantage of the recent run up in its stock price, as well as the relative calm in the oil market, to raise capital to bolster its debt burdened balance sheet. The company clearly didn't want to sell itself at the low of the market after having just purchased Bakken shale rival Kodiak Oil & Gas at what turned out to be the top of the market to create the play's largest producer. Apparently, once its management team saw that rumored buyers like ExxonMobil (XOM -0.35%) and Continental Resources (CLR 0.04%) weren't going to meet its terms they decided to instead raise as much money as it could and stay independent in hopes of rebounding once oil prices began to rally. It can then reconsider a sale at what will likely be a much higher valuation than it was seeing during the latest sales process.

Solid foundation
Now that Whiting's financials are in better shape the company can refocus its efforts on developing its solid asset base. The company is not only the largest producer in the Bakken, but it is one of the better operators in the Basin and can earn decent returns at the current oil price. According to Drilling Info the company's wells are better than the median performance of similarly sized peers for both the initial peak production rate and the 24 month cumulative production total. Meanwhile, the company's average well in the play delivers solid returns well above the 20% internal rate of return needed that most drillers seek. Those solid returns are expected to improve substantially once the oil price rallies as Whiting's internal rates of returns in the play would grow to 48% at $60 oil and 72% at $70 oil.

In addition to its leading position in the Bakken the company is also developing its promising Redtail Niobrara prospect in Colorado. The stacked play has a number of promising oil-rich targets that can deliver compelling returns once oil prices pick up. The average well in the play costs just $5 million to drill, but needs higher oil prices to really move the needle as these wells can earn a 30% internal rate of return at a $60 oil price and a 48% return if oil returns to $70 a barrel giving Whiting a lot of growth potential once oil prices pick up.

Investor takeaway
With its balance sheet worries cleared up, all that's left for Whiting to do is execute. The company has a leading position in the Bakken that will deliver solid returns at the current oil prices. Further, it has a lot of upside to higher oil price as that would not only boost its returns in the Bakken but bring the Redtail Niobrara back into focus as another growth vehicle for the company. It's easy to see why analysts think the company is worth up to $50 per share.

Matt DiLallo has no position in any stocks mentioned. The Motley Fool owns shares of ExxonMobil. 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.

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