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Why Bulls Still Love Whiting Petroleum Corp (WLL)

What:

Whiting Petroleum Corp (NYSE:WLL) shares have shown some relative weakness in recent sessions, falling below the $9 per share when comparable peers such as Oasis Petroleum Inc. (NYSE:OAS) have kept more of their value. Sentiment in Whiting Petroleum Corp (NYSE:WLL) has been hurt due to declining WTI prices, which have broken below $50 per barrel and have recently traded even below $48 per barrel in previous sessions. Moreover, bullishness in the shale name has been tempered due to Betty Jiang of UBS downgrading the stock to ‘Sell’ from ‘Neutral’, citing the company’s unconvincing execution record in the Niobrara shale play. Jiang has a $8 price target, down from the previous $12 per share. In terms of execution, Whiting also didn’t blow away any traders with its fourth quarter earnings report, which the market didn’t like due to the company’s rather high capex expenditures guidance for this year and rather tame production guidance. Despite the negative sentiment, many bulls still love Whiting Petroleum Corp (WLL) and its long term prospects. Here’s why:

What Will OPEC and in Particular Saudi Arabia Do?

We think that Saudi Arabia still has every incentive to steady the oil market if the Saudi Aramco IPO is still on and every indication is that the Saudis still plan to do the initial public offering next year. Similarly, OPEC has incentive to try to get as much money from its crude production as possible, particularly in light of many member’s big budget deficits. If oil falls further, we expect more OPEC statements or leaks that send prices higher. Whether those spikes due to OPEC jawboning are temporary or they can be sustained depends on how shale production reacts to the lower prices. Some bears think that if shale production continues to be hyper-productive at the high $40’s, low $50’s, Saudi Arabia could potentially abandon its strategy and let market forces correct the market. If that happens, oil prices could plunge. If shale oil production, particularly in the Permian, isn’t as competitive at lower prices or even again in the low $50’s, then oil prices could trend higher, particularly if emerging markets show more crude demand growth. Needless to say, the price of oil obviously is the number one factor for Whiting Petroleum Corp (WLL) and its prospects. If oil prices plunge and stay low for a long time, Whiting Petroleum Corp (WLL)’s float could balloon or the company could go under.

With that said, no one really knows how shale production will react in the $40’s until the numbers come out. In that regard, monitoring the rig count, which is normally a leading indicator of oil production, is important for Whiting Petroleum Corp (WLL) shareholders. The EIA inventory numbers are also vital.

What does Smart Money Sentiment Say About Whiting Petroleum Corp (WLL)?

The smart money metric in the stock has been a push. Of the 742 elite funds we track, 34 funds owned $934.4 million of Whiting Petroleum Corp (NYSE:WLL) and accounted for 27.30% of the float on December 31, versus 35 funds and $635.86 million respectively on September 30. Although one fewer elite fund owned the stock, the smart money owned more of Whiting by almost 50%. The increase in amount of total holdings has been due to the increase in Whiting Petroleum Corp (NYSE:WLL)’s stock price, however, which has increased from the high $8 per share range at the end of September to over $12 per share on December 31. That also translates to a jump of around 50%. So all in all, the smart money has mostly kept its stake in Whiting pretty much the same.

Similarly, although short interest in the name has fallen somewhat over the previous two quarters (declining short interest is normally a bullish sign in terms of smart money movement), the decline in short interest has more to do with Whiting Petroleum Corp (NYSE:WLL)’s previous capital raise and how management decided to swap $377 million in aggregate principal amount of nonconvertible notes and $687.9 million in aggregate principal amount of convertible notes for mandatory convertible notes in the middle of last year. Due to that mandatory convertible swap, many institutions shorted Whiting to lock in their profits or to reduce risk. Once Whiting’s stock price stayed above a certain level for a period of time, those mandatory convertible notes were converted, and the same institutions likely reduced their short exposure to maintain their flat profile. That reduction of short exposure likely caused a big part of the decrease in terms of the short percentage of  Whiting Petroleum Corp (NYSE:WLL)’s float, which presently stands at 12.7%. While that is considered high for a broader market stock, Whiting Petroleum Corp (NYSE:WLL)’s short percentage is not out of line versus comparable peers.

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Why the Bulls Love Whiting Petroleum Corp (WLL)

At its present valuation, Whiting Petroleum Corp (WLL) is worth the risk reward for many bulls. There is still a convincing argument that oil prices could remain robust given Saudi Arabia’s interests. Shale production and emerging market growth just needs to play ball. If oil prices rise to above $50, sentiment in Whiting Petroleum Corp (WLL) could recover and the stock could bounce back. Shareholders should still position size accordingly however, as no one really knows what will happen, particularly in the energy sector, where oil prices have plunged and soared, all in the same year.

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