January 8, 2015 (Chinavestor) With oil prices down to $50 and under a barrel, shale oil stocks play for time. It is estimated that companies like Continental Resources (NYSE:CLR) and Whiting Petroleum (NYSE:WLL) need at least $60/barrel to survive.
We also know that Whiting Petroleum (NYSE:WLL) covered 50% of her oil production via derivatives till the end of 2014. But those times are over and now WLL, among other shale plays like CLR and Hess Corp. (NYSE:HESS), are facing a cash crunch. Unless they build a large enough cash reserve to make through the tough times.
And this is exactly what Whiting Petroleum (NYSE:WLL) just did. There is an SEC filing dated December 19, 2014, where JP Morgan Chase (NYSE:JPM) increases credit line from $3.5 billion to $4.5 billion. See details below.
"The Increase Agreement amends the Credit Agreement to, among other things, increase the amount that the Company may borrow under the revolving credit facility from $2.5 billion to $3.5 billion. Consequently, on December 19, 2014, the Credit Agreement will provide for a revolving credit facility in an amount up to $3.5 billion and a term loan facility in an amount up to $1.0 billion, in each case subject to an initial borrowing base of $4.5 billion. " Form 8-K.
Given that Whiting Petroleum (NYSE:WLL) has had just a miniscule amount of cash on her 2014 Q3 balance sheet, credit is key in the following year. The question is: how much of a cushion can $4.5 billion provide?
WLL had a long term debt of $2.7 billion of her own in September, plus acquired $2.4 billion from the Kodiak acquisition. That together is $5.1 billion. Adding new credit line of $4.5 billion to that, we are talking about a potentially $9.6 billion in total debt. ( It is unclear how much of the former $2.7 billion was already drawn from the $4.5 billion credit JP Morgan Chase (NYSE:JPM) credit line.) WLL had a total assets of $9.6 billion on her 2014 Q3 balance sheet. So it look like that WLL can get 100% leveraged. And probably that is it. The company will not be able to borrow more most likely.
Now the question is: how much cash will WLL burn each quarter when oil stays below $50/barrel. This is the real question. To find answers, we will have to wait until the end of the first quarter though. 2014 Q4 will be harder to read for two reasons. One, oil price was above $90 at the beginning of September and has steadily eroded ever since. So there has been a lot of variation in oil prices. And for two, WLL covered 50% of her oil production via derivatives. This will mitigate the effect of falling oil prices.
But the truth will come out sometime in the spring of 2015. Until then it's anybody's guess.