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WLL AT A GLANCE

P/E ► -27.6   EV/EBITDA ► 11.6 AVG ROA ► -1.1% AVG ROE ► -5.4% AVG Debt to Equity ► 0.735 AVG Current Ratio ► 0.638 LOW Interest Coverage Ratio ► -1.26 AVG

 

 

 

 

 

 

Whiting Petroleum Corporation (NYSE: WLL) is an independent oil & gas company that produces oil and natural gas throughout the United States. Whiting produced 14.7 MMBOE in FY 2007^[1] and had reserves totaling 250.8 MMBOE^[2] (78% oil, 22% natural gas^[3]) at the end of 2007. Oil and gas sales accounted for the bulk of $818.7M in revenues in 2007.^[4]

Record oil prices reaching over $120 a barrel have shot up oil sales' revenues, particularly in 2008. Whiting's selling price of oil per barrel was $101.88 in June 2008, nearly double the $53.48 price in 2007 (before hedging).^[5] Historic prices have lifted operating margins and pushed record first half revenue to $609.2M. ^[6] However, Whiting's hedging activities, which set the selling price of oil between a protective floor and ceiling, have cut Whiting's earnings from the oil price spike by $119M^[7] in the first half of 2008.

In 2004 and 2005, Whiting focused on acquiring proved reserves with a combined investment of over $1.431B^[8] but has since placed more emphasis on the development of reserves. The most significant of Whiting's acquisitions over this time was the 83,033 net acres^[9] in the Bakken Shale Formation in North Dakota. The Bakken Shale is a gigantic and relatively new oil field in the US with potential yields of over 400 billion barrels^[10] of oil. Whiting's play in the Bakken along with other other acquisitions, have increased first half production from 7.26MBOE to 7.76MBOE^[11] over 2007. Strong development in the Bakken in conjunction with high oil prices is driving record revenues and growth for Whiting Petroleum.

Company Overview

Whiting Petroleum's growth plan is based on an oil and gas portfolio with low risk, long-lived projects that provide steady cash flows. ^[12] It acquires properties in the United States for future development and also sells them along with oil and gas reserves to contribute to its cash flow. 98.8%^[13] of Whiting's revenue in 2007 came from oil and gas sales; Whiting generally sells its commodities to companies with nearby pipelines and production facilities. In 2007, Plains All American Pipeline, L.P. (PAA) and Valero Energy (VLO) accounted for 13% and 14% of oil and gas sales, respectively.

2004 and 2005 were years dedicated primarily to acquisitions for Whiting as it invested over $1.431B^[8] in new reserves. The initial investment appears to be paying off as proved developed reserves have increased 12.51MMBOE to 168.04MMBOE^[3] from 2005 to 2007. Also consistent with this strategy, Whiting had no significant acquisitions in 2007, but had several divestitures totaling $29.7M ^[13] to add to its $809M^[13] in sales of oil and natural gas.

Business Segments by Geography

Proved Reserves by Region, 250.8MMBOE Total as of Dec. 31, 2007 ^[15]

Whiting Petroleum's conducts business in five core regions in the US that contribute to its 250.8MMBOE of reserves^[16] as of December 31, 2007.

• The Permian Basin (45% of Proved Reserves^[17], 3.905MMBOE in Production^[17] production in 2007 ) includes Whiting's assets in Texas and New Mexico. In the giant 58,000 acre^[18] North Ward Estes field, Whiting used a technique called carbon dioxide (CO2) flooding where the gas is injected into oil reservoirs to increase output^[19]. In the second quarter of 2008, Whiting will start to separate the carbon dioxide from the produced gas. ^[17]
• The Rocky Mountains (25%^[9], 5.402MMBOE^[9]) region includes North Dakota, Montana, Colorado, Utah, Wyoming, and California. ^[9] One of Whiting's most important fields is located in North Dakota in the Bakken Formation as it is considered one of the largest oil fields in the United States today with potentially 400B^[20] barrels of recoverable oil; in Q2 of 2008, Whiting reported a first half production increase from 7.26MBOE to 7.76MBOE^[11] largely due to an 8,400BOE/d^[11] production rate in the Bakken Formation.
• The Mid-Continent (20%^[21], 2.628MMBOE^[21]) region includes Oklahoma, Arkansas, and Kansas. The majority of the region's operations are related to the Postle Field in Oklahoma; through carbon dioxide flooding, production has been increased from 4,200BOE/d in 2005 to over 6,000BOE/d in 2008. ^[3]
• The Gulf Coast (5%^[21], 1.496MMBOE^[21]) region involves properties in Texas, Louisiana, and Mississippi with about 79%^[15] of the reserves located in Texas.
• The Michigan (5%^[22], 1.277MMBOE^[22]) region involves conventional oil and gas production as well as Antrim shale wells; Antrim shale deposits generate methane gas from the activity of billions of microbes ^[23]. Subsequently, this is the only region where gas production is greater than oil with 68%^[22] of production as natural gas.

Trends & Forces

Soaring Oil Prices Increase Revenues

Since 2003, the price of a barrel of crude oil has risen from $33 to over $120 in 2008 (adjusted for inflation). ^[24] The increase in oil prices has supported an increase in the sales price of oil for Whiting from $53.48 a barrel in June 2007 to nearly double that at $101.88 in 2008 (before hedging).^[5] In addition, through the first half of 2008, Whiting has earned $609.2M^[6], nearly 75%^[6] of its 2007 revenues with the help of increased prices. Whiting has also increased its slumping operating margins to 36.2%^[6], up from 25.30%^[13] in 2007 as operating expenses have not kept up with the increase in oil prices.

Whiting's investment in acquisitions in 2004 and 2005 plays well into the increase in oil prices; since the company is more involved in production and drilling as of 2006/2007, Whiting has the potential to take advantage of the higher sales prices and maximize revenues.

Oil Hedges Limit the Benefits of Rising Oil Prices

Whiting uses hedges to insulate itself from the volatility of oil prices; hedges lock in the rate at which commodities (oil and natural gas) are sold between a floor and a ceiling. Although the floor protects Whiting from a drastic drop in prices, the ceiling limits some of the potential earnings associated with increased oil prices. With 78%^[3] of its reserves as oil, hedges significantly affect revenues; in 2007, Whiting hedged 53% ^[25] of its oil volumes and incurred losses of $21.2M^[1] due to hedging. Through the first half of 2008, oil hedges lost Whiting another $119M^[7] by cutting the price per barrel of oil from $101.88 to $88.71.^[5] If oil prices were to fall significantly, however, the hedges would actually earn Whiting money.

Depending on the trend of gas and oil prices at the end of the year, Whiting has the option to adjust the amount of oil and gas it hedges since all of its hedges expire in December of 2008. ^[17]

Whiting is a Player in the Enormous Bakken Shale Formation

In North Dakota in the Rocky Mountain Region, Whiting has 83,033 net acres^[9] in the enormous Bakken Shale Formation; the U.S. Geological Survey estimates there are upwards of 400 billion barrels^[20] of recoverable oil there - an amount that is sufficient to meet US oil needs for 20 years.^[10] Stretching across parts of North Dakota, Montana, and Southern Saskatchewan^[10], better technology and techniques such as horizontal drilling are giving way to the development of the full Bakken Formation; higher oil prices also make drilling there more economical.

Thus far, the Bakken has been living up to expectations for Whiting and other companies in the area; volumes of oil sales for Whiting have increased 17%^[5] primarily due to success in the Bakken. Production in the Bakken more than doubled from March to June of 2008 to 8400BOE/d.^[5] As the boom in the Bakken is still relatively new, ^[26] Whiting's plans to drill 30 to 40 wells in 2008^[9] indicate a significant potential for even more growth.

Competition

Whiting Petroleum competes with several other companies in many of the same fields and regions to produce and acquire gas and oil. Four main competitors include:

• Cimarex Energy Co (XEC) operates in the Mid-Continent, Permian Basin, and Gulf Coast regions like Whiting and 76%^[27] of its total proved reserves was natural gas in 2007.
• Anadarko Petroleum (APC) operates in the Rocky Mountains, Southern Region (primarily Texas), Alaska, and Algeria as well as in offshore locations. In 2007, 41.7%^[28] of its reserves was oil.
• Encore Acquisition Company (EAC) has properties in the Cedar Creek Anticline (Montana, North Dakota), Permian Basin, Rockies, and Mid-Continent. 81.27%^[29] of its reserves consisted of oil. Encore also competes with Whiting in the Bakken Shale with 178,000 acres^[30]
• Continental Resources (CLR) has properties in the Rockies, Mid-Continent, and the Gulf Coast. ^[31] 77% of its 134.6MMBOE^[31] of proved reserves is crude oil. Continental competes with Whiting in the Bakken with 271,667 net acres^[32] in the North Dakota Bakken as well as 64,536 acres^[32] in the Montana Bakken, all undeveloped.

References

1. ↑ ^{1.0 1.1} WLL 10-K 2007, "Results of Operations", Page 44
2. ↑ ^{2.0 2.1 2.2 2.3 2.4} WLL 10-K 2007, "Proved Reserves", Page 9
3. ↑ ^{3.0 3.1 3.2 3.3} Whiting Petroleum 2007 Annual Report
4. ↑ Morningstar Financial Statement: WLL
5. ↑ ^{5.0 5.1 5.2 5.3 5.4} WLL 10-Q Q2 2008, "Results of Operations", Page 28
6. ↑ ^{6.0 6.1 6.2 6.3 6.4} Google Finance: Whiting Petroleum Company
7. ↑ ^{7.0 7.1} WLL 10-Q Q2 2008, "Condensed Consolidated Statements of Income", Page 5
8. ↑ ^{8.0 8.1} Seeking Alpha: Whiting Q2 2008 Earnings Call Transcript
9. ↑ ^{9.0 9.1 9.2 9.3 9.4 9.5} WLL 10-K 2007, "Summary of Oil and Gas Properties and Projects", Page 28
10. ↑ ^{10.0 10.1 10.2} Wealthy Daily: The Bakken Oil Field
11. ↑ ^{11.0 11.1 11.2} PR Newswire: WLL Q2 Earnings
12. ↑ WLL 10-K 2007, "Overview", Page 6
13. ↑ ^{13.0 13.1 13.2 13.3 13.4 13.5} WLL 10-K 2007, "Selected Financial Data", Page 38
14. ↑ ^{14.0 14.1} WLL 10-K 2007, "Production History", Page 32
15. ↑ ^{15.0 15.1 15.2} WLL 10-K 2007, "Summary of Oil and Gas Properties and Projects", Pages 27-31
16. ↑ WLL 10-K 2007, "Overview", Page 5
17. ↑ ^{17.0 17.1 17.2 17.3} WLL 10-K 2007, "Summary of Oil and Gas Properties and Projects", Page 27
18. ↑ SPEGCS: Permian Basin - North Ward Estes CO2 Flood
19. ↑ Wikipedia: Carbon Dioxide Flooding
20. ↑ ^{20.0 20.1} Bloomberg Special Report: Dakota Oil Fields of Saudi-Sized Reserves Make Farmers Drillers
21. ↑ ^{21.0 21.1 21.2 21.3} WLL 10-K 2007, "Summary of Oil and Gas Properties and Projects", Pages 30
22. ↑ ^{22.0 22.1 22.2} WLL 10-K 2007, "Summary of Oil and Gas Properties and Projects", Page 31
23. ↑ The University Record: Antrim shale could hold bacterial answer to natural gas supply
24. ↑ Forbes: Crude Oil Prices 1861-2008
25. ↑ WLL 10-K 2007, "Results of Operations", Page 45
26. ↑ Seeking Alpha: 5 Oil Stocks You Want to Know - Barron's
27. ↑ XEC 10-K 2007, "Reverse Replacement and Growth", Page 26
28. ↑ ^{28.0 28.1} APC 10-K 2007, "Selected Financial Data", Page 29
29. ↑ ^{29.0 29.1} EAC 10-K 2007, "Selected Financial Data", Page 35
30. ↑ Investopedia:The Bakken Shale Story (CLR, EAC, WLL)
31. ↑ ^{31.0 31.1} CLR 10-K 2007, "General", Page 1
32. ↑ ^{32.0 32.1} CLR 10-K 2007, "Bakken Field", Page 8
33. ↑ Google Finance: EAC
34. ↑ Google Finance: XEC
35. ↑ XEC 10-K 2007, "Production and Pricing Information", Page 7
36. ↑ APC 10-K 2007, "Selected Data", Page 31
37. ↑ Google Finance: APC
38. ↑ CLR 10-K 2007, "Production and Price History", Page 11
39. ↑ CLR 10-K 2007, "Management's Discussion and Analysis of Financial Condition and Results of Operation", Page 32