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Here's Why Whiting (WLL) is Worth Holding Despite All Odds

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Whiting Petroleum Corporation’s (WLL - Free Report) stock has plummeted 83.9% in the past 12 months compared with the industry’s 53.9 decline.  Apart from lower oil prices, the company recently saw its discretionary cash flow decline below capital spending, reflecting a negative free cash flow (FCF). Investors were further spooked by Whiting Petroleum's downward revision of its 2019 production guidance.

However, this upstream player boasts an enviable acreage of top-tier assets and a multi-year drilling inventory. Moreover, the company’s continually improving oil well costs has driven drilling efficiency while leading to lower cash expenses in the process. Reportedly, Whiting Petroleum’s deal talks with its smaller rival Abraxas Petroleum (AXAS - Free Report) might expand the company’s acreage in North Dakota's Bakken Shale and spread the burden of its operating expense over larger production. These are likely to impact the company’s near-term results.

Let’s delve deeper.

Factors Impeding Whiting Petroleum's Growth

Whiting Petroleum has revised its 2019 production outlook due to issues related to infrastructure constraints that are expected to persist in the remaining year. The firm expects 2019 production in the range of 45-46.5 million barrels of oil equivalent, down from 46.7-47.7 million barrels of oil equivalent projected before.

Whiting Petroleum also announced its streamlining initiative that will include a 33% cutback in headcount including the elimination of 94 positions at the executive and corporate levels. Management predicts this strategic move to save $50 million annually.

The consistent ramp-up of domestic production, courtesy of soaring shale output dragged down oil prices toward the psychologically critical $50 threshold. This will keep Whiting Petroleum — with around 80% liquids-weighted production — under pressure. Moreover, at the current oil price level, the company is unlikely to fund its operations, thereby making it heavily dependent on other sources of financing.

On a further discouraging note, the company’s second-quarter discretionary cash flow of $225.4 million was lower than the capital spending of $232 million. This further accounts for a negative free cash flow of $6.6 million. At a time, when maximum companies are exercising caution by trimming the respective 2019 capex, Whiting Petroleum’s spending forecast remains almost unchanged from last year’s level. This may further put pressure on its cash flows.

Factors Likely to Fuel Growth

Whiting Petroleum has adopted a strategy to grow beyond its familiar itineraries and announced a restructuring this summer, which is designed to curtail its annual expenses by $50 million as well as concentrate more on unconventional assets.

Whiting Petroleum’s well economics continues to show progress. The company has been able to achieve a 64% reduction in its spud-to-total-depth time since 2011 while lowering well costs by 24% since 2014. The increased drilling efficiency allowed Whiting Petroleum to reduce cash costs by 27% from 2014-level.

Meanwhile, the Colorado-based company focuses on reducing its completion cycle time wherein it emphasises more on modifying pumping procedures and downhole equipment to lower pump time per stage for comparable stage volume.

Amid this dull scenario, the company’s last reported quarter’s earnings offered something positive to buoy long-term investors’ optimism as total operating expenses decreased 24.4% from the prior-year level to $360.4 million.

Zacks Rank & Key Picks

Considering the above-mentioned factors, the stock is expected to perform in line with the broader market. This is also reflected in Whiting Petroleum’s Zacks Rank #3 (Hold). Better-ranked players in the energy space include BP Midstream Partners (BPMP - Free Report) and TC Energy Corporation (TRP - Free Report) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

BP Midstream’s earnings beat the Zacks Consensus Estimate in three of the trailing four quarters.

TC Energy earnings beat the Zacks Consensus Estimate in each of the last four quarters.
 

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