Shale Shock Will Continue to Rock Whiting Petroleum

Stocks to sell

Even when a company files for bankruptcy protections, there’s still a sliver of a possibility that the company’s stock will go up. That’s why some people continue to buy shares of Whiting Petroleum (NYSE:WLL). They want to beat the odds, flout conventional wisdom and turn a sizable profit with WLL stock.

Shale Shock Will Continue to Rock WLL Stock for a Long Time

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Thus, we have a new generation of “bankruptcy trade” gamblers and Whiting’s stock is among their favorite trading vehicles. The stock’s day-to-day movements are very difficult or perhaps even impossible to predict. For the medium or long term, investors should consider the company’s prospects as well as the condition of the U.S. shale industry.

In reality, it’s an industry in shambles. And Whiting Petroleum, a major player in North Dakota’s Bakken shale-oil region, is struggling despite positive momentum in spot-oil prices. Thus, even higher petroleum prices might not be enough to save Whiting and its shareholders from complete disaster.

A Closer Look at WLL Stock

If you want to see what a bubble’s bursting looks like, just take a look at the price action in Whiting’s stock. Indeed, this stock has undergone several bubble-and-burst cycles wherein the share price doubles or more and then collapses.

The worst slow-moving train wreck of all started back in the summer of 2014, when WLL stock was trading at more than $350 per share. Today, it’s a penny stock according to the under-$5 definition of the term.

In fact, WLL stock bulls are having difficulty keeping it above $2 per share. They managed to spike it to $3.50 in early June, but that pump was promptly followed by an inevitable dump. Gamblers might attempt to catch spikes like this at just the right moment, but that’s not informed investing by any means.

You’ll Get the Short End of the Stick

On Wall Street, the average retail trader tends to get the scraps while insiders enjoy the lion’s share of the profits. If you don’t believe this, watch stock prices before, during, and after an initial public offering.

Or, see what happens when a company like Whiting Petroleum files for bankruptcy protection. The vast majority of WLL stock investors are basically last in line for the company’s dwindling equity.

InvestorPlace contributor Chris Markoch provides a jarring reminder of how low retail traders are on Whiting’s unwritten list of priorities: “Under terms of the bankruptcy, 97% of the company’s equity will be going to creditors … with only 3% of the company’s equity going to shareholders, there’s just nothing to get excited about.”

Well summarized, Mr. Markoch. If you’re just playing WLL stock for an intra-day trade, that’s one thing. But otherwise, you’re essentially playing Russian roulette by holding the shares now.

Bracing for the Great Compression

The problem here is that junk-stock traders have become emboldened by a couple of factors. One is WLL’s quick share-price pop to $3.50, which is really just an anomaly.

Another factor that encourages these speculative traders is the recent rally in the oil price. However, that rally might not be sustainable. To this point, research firm Deloitte coined an interesting term. Specifically, Deloitte advises investors to prepare for the possibility of what it calls “the great compression” in the oil market.

Precipitated by the spread of the novel coronavirus, a host of headwinds could, according to Deloitte, continue to batter the already pressured oil industry: “Oil demand … isn’t expected to return to pre-pandemic levels anytime soon due to the new norm of remote telecommuting, relatively stable and stronger prospects in natural gas, decapitalized and stable business profile of new energies, shortened supply chains, and regionalization of trade.”

American shale companies like Whiting Petroleum, already facing fiscal headwinds, can hardly afford to fend off the slew of negative factors adduced by Deloitte. Thus, it’s probably best to just sit on the sidelines and let the gamblers do their gambling when it comes to WLL stock.

The Bottom Line

In short, it would be irresponsible to recommend WLL stock now, either as a long or short trade. Longs could fall victim to an impending shale shock/great compression. And shorts could face occasional and unpredictable share-price spikes along the way.

David Moadel has provided compelling content – and crossed the occasional line – on behalf of Crush the Street, Market Realist, TalkMarketsFinom Group, Benzinga, and (of course) He also serves as the chief analyst and market researcher for Portfolio Wealth Global and hosts the popular financial YouTube channel Looking at the Markets. As of this writing, he did not hold a position in any of the aforementioned securities.

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