Whiting Petroleum Buys Time To Survive Oil Blowup

Timing hasn’t been Whiting Petroleum ’s strong suit. The shale oil driller agreed to buy debt-laden Kodiak Oil and Gas when oil was near its $100 highs over the summer, only to see its shares routed by a swift 50% drop in the price of the commodity. But now, after a failed effort to sell itself, the company is trying to get time back on its side, raising roughly $3 billion in debt and equity to provide financial flexibility that should allow it to hold out for a market recovery.

Whiting's highly dilutive 35 million share equity offering, a yet-to-be priced $1 billion convertible bond offering, and a $750 million note deal is a major short-term disappointment for investors. Only weeks ago, there was speculation that large-cap drillers with a toehold in the Bakken shale such as Marathon Oil , Hess , Exxon Mobil and Statoil would buy Whiting as a means to bolster their drilling inventory and production.

However, without an attractively priced deal on its hands and a potential billion dollar 2015 cash flow shortfall given its unhedged oil production, Whiting decided shore up its finances now so it wouldn't be a forced seller if markets continue to slump. While capital raises, especially one priced at a 22% discount are rarely popular, they often can prove to be savvy over the long-term, especially if industry competitors try and fail to muddle through a market rout.

Consider the real estate investment trust (REITs) during the credit bust from 2007 through mid-2009. REIT moguls like David Simon of Simon Property Group , Steven Roth of Vornado Realty Trust and Kimco Realty's Milton Cooper collectively raised billions in new equity capital at the stock market bottom in early 2009 as a means to survive a credit market freeze that felled competitor General Growth Properties . Those bargain priced equity offerings, while likely highly disappointing to investors at the time, created the breathing room to survive the downturn and see gains from the subsequent recovery.

In the case of Whiting Petroleum, the same may hold true. The company, with its over $6 billion market cap, was supposed to fetch takeover buyers. However, in light of an attractively priced deal, Whiting chose to sell just a piece of itself at discount prices. That may prove to be good corporate stewardship over the long run.

"We believe Whiting has substantial upside given its sizable ~812K net acre position in the core of the Williston Basin. Last year’s acquisition of Kodiak significantly bolstered its inventory of high-quality Williston locations and the company is a leader in adopting enhanced completion techniques in the play... The planned sale of common stock, along with both convertible and non-convertible debt, should help alleviate near-term liquidity concerns, but dilution from the equity and convert issuance should put pressure on the share price in the short term," state Canaccord Genuity analysts.

Monday's capital raise is expected to help Whiting pay down a revolving credit facility it used to assume Kodiak's debts and bolster the company's cash position so that it can weather up to $2.6 billion in combined cash flow deficits over the next two years, according to Cannacord's estimates. Meanwhile, Whiting now can take its time in divesting non-core midstream assets, potentially fetching better prices.

Whiting's capital raise comes at a time when the smart money is betting that oil patch C-Suites won't adequately prepare for the downturn. In recent months, private equity firms like Blackstone, KKR, Apollo and Oaktree have raised billions for distressed energy investments, seeking ways to profit from the energy rout. If there is no swift recovery in the price of oil -- something that appears increasingly likely -- those bottom feeding bond investors are sure to find a nice set of energy deals to pore over.

However, Whiting Petroleum, likely one of the most highly sought after distressed targets, may now be out of the picture. For shareholders who invested in Whiting for its exposure to the Bakken shale, there's no way to paper over the company's bad timing on its Kodiak takeover or its lack of preparedness for sub-$50 oil.

Monday's capital raise is a direct response to both missteps. Nonetheless, it may also prove to be a winning deal over the long-term.