Whiting Petroleum (WLL) announced its Q2 2019 earnings results on July 31. In the next trading session, the company’s stock prices fell 38.7% and touched a new yearlong low. The company reported an adjusted net loss of $0.28 per share. Analysts’ consensus estimated an income of $0.28 per share. Following the earnings miss, KeyBanc Capital Markets downgraded the company from “overweight” to “sector weight.” On Friday, Suntrust Robinson and MKM Partners reduced the target price by $4 and $6 to $17 and $16, respectively.
A few days before the earnings results, Raymond James Financial (RJF) and SunTrust Robinson Humphrey (STRH) reduced their target price on the stock by $17 and $2 to $35 and $21, respectively. Analysts’ mean target price for Whiting Petroleum is $27.72, which suggests an upside of 155.8% from the last closing level. However, under current circumstances, such an exponential upside isn’t likely unless oil prices see a large upward trend.
Whiting Petroleum’s realized commodity prices
Whiting Petroleum’s total production fell by 1.6 thousand barrels of oil equivalent per day on a sequential basis. Realized natural gas prices have more than halved compared to the prices in Q1 2019 and Q2 2018. Oil prices were stronger in the second quarter than the first quarter. The consistency helped Whiting Petroleum overcome lower natural gas prices. Like Concho Resources (CXO), the transportation bottleneck impacted Whiting Petroleum’s natural gas margin. Concho Resources is the leading oil and gas producer in the Permian Basin. However, other players like Cabot Oil & Gas (COG) and EQT (EQT) have the advantage of premium pricing. Cabot Oil & Gas and EQT operate with a production mix of 100% and 95% in natural gas, respectively. Whiting Petroleum operates with a production mix of 18.8% in natural gas.
At the midpoint of Whiting Petroleum’s guidance, the total production in 2019 will likely fall by 1.45 million barrels of oil equivalent from the previous guidance. However, the company’s capital expenditure guidance remains unchanged. In Q4 2019, management expects a sharp decline in the estimated capital expenditures.
The rising tension between Iran and the West might have helped in any large upside in oil. However, with the Middle East talks, the hope is fading away. Earlier, OPEC+ decided to extend the production cut until March 2020. The decision kept oil from falling below the psychologically important level of $50. Since the IEA reduced the demand growth estimate, a growth-driven rally isn’t likely in oil prices for the rest of 2019. Whiting Petroleum’s production mix in oil prices linked to commodities is 81.2%. For natural gas prices, the summer season hasn’t lifted prices. Energy commodities’ outlook is also bearish.
Whiting Petroleum’s net debt-to-EBITDA ratio is 2.2x compared to the peer average of 1.3x. The company’s peers are upstream stocks, which are part of the SPDR S&P 500 Index (SPY). With lower commodity prices, Whiting Petroleum’s EBITDA and free cash flow could decline, which would increase the company’s financial stress. Moreover, Whiting Petroleum reduced its workforce strength by 33%.