Weak financial outlook and the impact of COVID-19 led to the downfall of Whiting Petroleum

The outbreak of the COVID-19 pandemic has intensified the challenges faced by Whiting Petroleum, leading to a mediocre overall performance. As a result, in a matter of four months, stocks of Whiting Petroleum nose-dived from US$7 to less than US$1 and the company eventually filed for bankruptcy.

Kumar Nishant, oil and gas analyst at GlobalData, comments: “Due to the weak economic outlook, uncertainty surrounding the COVID-19 outbreak, and supply overhang due to the price war between OPEC and Russia, oil prices plunged below average US Shale breakeven price. As a result, the company was faced with declined revenue guidance, along with a 12% reduction in production guidance for 2020 and projected capital reductions. All of these factors led to a negative sentiment and low confidence among investors over Whiting Petroleum’s annual and quarterly filings.”

Even before the impact of COVID-19, Whiting Petroleum was grappling with multiple challenges such as lowered production due to harsh weather conditions; nearly 55% of unhedged risk exposure to oil price against production; higher average cost of production; US$64m in deficiency payments for shortfalls in delivering minimum committed volumes; and a decreased lending base under credit agreement, left the company with merely US$9 million in cash by Dec 2019.

Negative cash flow and poor liquidity ratios indicated the company’s distressed liquidity profile. In order to have working capital, the company had taken a loan of US$650m on its credit facility. It revised its capital budget in the range of US$400-US$435m representing 30% decrease relative to previously announced capital budget to preserve liquidity and improve capital efficiency.

Nishant concludes: “As the liquidity crisis was looming, Whiting Petroleum’s obligation of paying US$472m of senior notes under contractual obligations maturing within a year were expected to increase to almost US$1bn in the next two years. Additionally, downgraded credit rating hampered its ability to refinance under credit facility. Its inability to comply with agreed debt covenants and the ability to refinance its debt were deemed unsustainable, restricting the company from incurring additional indebtedness. All these circumstances have led the company to file for restructuring under Chapter 11 on April 01, 2020.”

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