Whiting optimistic about borrowing base, emphasizes cutting debt

By Paul Deckelman

New York, Sept. 9 – Whiting Petroleum Corp. said that after having slashed its capital spending in response to the sharply lower oil prices seen since last fall, it can operate within its cash flow generation at current oil prices in the $50 per barrel area – and it has no worries about its lenders reducing its credit facility borrowing capacity.

The Denver-based oil and natural gas exploration and production company’s chairman, president and chief executive officer, James J. Volker, told participants at the Barclays CEO Energy-Power Conference on Wednesday in New York that Whiting ended the second quarter on June 30 with $60 million of cash “and nothing drawn on our $4.5 billion borrowing base, so we do have a great unused borrowing base. It’s more than enough to pay off all of the maturities of our bonds going forward through 2020.”

Redetermination not a worry

Volker said that even though the price decks for oil and natural gas that the banks are coming out with as they redetermine the borrowing-base levels of Whiting and other energy producers are based on new estimates of the reduced value of those companies’ reserves in light of current prices, “I believe we will maintain the $3.5 billion commitment on our borrowing base from our group of banks.”

During the question-and-answer session that followed his formal presentation, Volker explained that even if the banks were to reduce the overall borrowing base from its current $4.5 billion level “to, say, $3.75 [billion], we’ve only asked for $3.5 billion of commitments, so no change” in the amount of money the company could actually borrow, if it chose to do so.

And he added that “to be honest with you, we don’t intend to use any of that $3.5 billion anyway. We intend to stay within discretionary cash flow in the second half of the year and into 2016,” which he estimated at $1 billion annually, an amount that he said would take care of the company’s capex needs for its energy operations in the Bakken/Three Forks area of North Dakota’s Williston Basin geological formation and its Redtail Niobrara play in eastern Colorado.

“We don’t intend to use it. It’s just there to show our strength and [the] ability of our banks to lend money against that base should we ever want to use it. But [we] have no plans to do so,” he reiterated.

Kodiak deal adds debt

Whiting last year acquired cross-town Denver rival Kodiak Oil & Gas Corp. in a transaction announced in July 2014. The combination of the two created the biggest company operating in the lucrative Bakken oil field.

However, that deal closed just before the end of the year, when oil and gas prices had already begun their precipitous slide. Although there was little cash outlay associated with the acquisition, since it was a straight exchange of Whiting stock for Kodiak shares, the $6 billion transaction value included the assumption by Whiting of $2.2 billion of Kodiak’s net debt, including three series of outstanding junk bonds.

That boosted Whiting’s total debt as of the end of fiscal 2014 on Dec. 31 to $5.63 billion. Whiting had managed to whittle that debt figure down to $5.25 billion by June 30, having taken out $351 million of then-outstanding Kodiak 5½% notes due 2021 and $401 million of Kodiak’s 5½% notes due 2022 under the notes’ change-of-control provisions. It paid $760 million in cash, funded through draws on its revolving credit facility.

Earlier this year, it issued $1.25 billion of 1¼% convertible notes due 2020 and, in the junk market, $750 million of 6¼% senior notes due 2023. It also sold $1.25 billion of new common stock, with the proceeds from those stock and debt transactions used to repay revolver borrowings and for general corporate purposes.

As of June 30, with the Kodiak 5½% 2021 and 2022 notes having been extinguished and all revolver borrowings repaid, Whiting’s capital structure consisted of $350 million of 6½% senior subordinated notes due 2018, $819 million of Kodiak 8 1/8% senior notes due 2019 that remained outstanding after the acquisition, $1.1 billion of its own 5% senior notes due 2019, the 2020 convertible notes, $1.2 billion of 5¾% senior notes due 2021 and the new 2023 senior notes.

Debt paydown vs. stock buyback

Asked by a conference participant whether it might make more sense in the current low-oil-price environment to cut back its capex and use the company’s anticipated cash flow to instead buy back its shares in order to create investor value, Volker replied that Whiting has already slashed capex to $1 billion from the $4 billion level seen before oil prices slid, and he said that in the hypothetical case of further cutting capex, “our first order of business would not be to buy back stock but would be to pay down debt.”

He explained, “I can assure you that if we paid off, let’s say $800 million of debt, what that does to our net asset value per share [is] it raises it by $800 million, whereas nobody in the room can assure me what oil prices are going to be one year, two years, three years out. So we would prefer to pay down debt.”

He said that Whiting had actually used cash flow to buy back stock in the low-oil-price environment of the 1980s, so he said that he doesn’t find such a prospect “distasteful,” but said he would “prioritize the paydown of debt above the purchase of stock at this time.”

Volcker said that a key part of the company’s strategy at this point is to continue selling off non-core assets. It completed $300 million of such divestitures in this year’s first half, including $185 million in the second quarter alone.

He said that Whiting had idled or unloaded its highest-operating-cost assets, looking to lower its lease operating expenses per barrel of oil equivalent by concentrating its operations in lower-cost areas such as the Bakken and Niobrara plays.

“We’re concentrating on the very best parts of our plays, obviously, and trying to keep production pretty flat at these lower oil and gas prices while we pay down some debt,” he concluded.

© 2015 Prospect News.
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