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For most of the readers Whiting USA Trust I's (WHX) story is well-known. It's a trust that will cease its operations once 9.1 MMBOE is produced and 90% of profits from the sale are distributed among the shareholders of the trust. The latest quarterly distribution was announced on February 7th and amounts to 55 cents per share. However, the most significant piece of information in the press release was that the estimated date of trust termination is now March 31, 2015 instead of June 30, 2015.
I will attempt to calculate the remaining value of WHX, as it is not quite as simple as multiplication of the latest distribution per share by the number of remaining distributions, and show the actual extent of its current mispricing by the market.
1. Quarterly production estimate
If one reviews the summary of previous distributions it's pretty obvious that production was declining quite steadily each year since the trust's inception in 2008. However, in 2012, Whiting (the parent company) decided to speed up the production. The annual report for 2012 has the following information on page 63:
Whiting incurred capital expenditures of $6.8 million on the underlying properties during 2012, compared to $1.8 million in 2011 and $1.0 million in 2010. Such expenditures were not deducted from gross proceeds or Trust distributions, but they may have the effect of ultimately accelerating the receipt of NPI net proceeds and thereby benefiting the Trust unitholders by accelerating their return on investment.
The 10-Q from the third quarter of 2013 states on page 8 that during the three and nine months ended September 30, 2013, Whiting incurred capital expenditures of 11.1 million and 13.4 million respectively.
These capital expenditures prevented production levels from dropping off significantly in 2012 and 2013 and as a matter of fact Q4 of 2013 registered the highest production levels since Q3 of 2012.
The annual production throughout 2014 is expected to decline around 12% and I am modeling the following total production levels for the next five quarters (please note WHX shareholders are entitled to profits from 90% of the volumes stated below):
- Q1 2014 -- 292,000 BOE (184,000 Oil, 648,000 Natural Gas)
- Q2 2014 -- 280,000 BOE (176,000 Oil, 624,000 Natural Gas)
- Q3 2014 -- 269,000 BOE (169,000 Oil, 600,000 Natural Gas)
- Q4 2014 -- 258,000 BOE (162,000 Oil, 588,000 Natural Gas)
- Q1 2015 -- 101,000 BOE (64,000 Oil, 222,000 Natural Gas)
In essence, the trust for all practical purposes will be exhausted by the end of 2014!
2. Revenue estimate
Revenue is dependent on the production mix and prices of oil and natural gas. The production mix for WHX averages 63% oil and NGL, 37% natural gas. Historically, WHX's quarterly price mix for oil and NGL ranged 12-16 dollars below NYMEX's average oil price. WHX has no hedges, therefore pricing is pretty straightforward. The average NYMEX Q4 2013 oil price was around 97 dollars, whereas WHX fetched 81.30 for its liquids based on its latest distribution report.
Natural gas pricing has been slightly higher or slightly lower than NYMEX price throughout the life of the trust, but in 2013 it's been mostly lower. Q4 NYMEX average was around 3.80, whereas WHX reported 3.50 in its latest report.
My assumption is that oil and natural gas prices will remain basically unchanged or move slightly lower for the next twelve months and as of January 2014 NYMEX averaged 95 dollars, but since I'm on the short side of this trade I will rather generously model WHX liquids average price of 85 (which would correspond to average NYMEX of 97-101) and natural gas of 4.50 (which corresponds to 4.60-4.80 NYMEX).
Thus:
- Q1 2014 Revenue -- 18,556,000
- Q2 2014 Revenue -- 17,768,000
- Q3 2014 Revenue -- 17,065,000
- Q4 2014 Revenue -- 16,416,000
- Q1 2015 Revenue -- 6,439,000
3. Lease Operating Expenses and Production Taxes
Based on information in WHX quarterly and annual reports, production taxes range between 6,8% and 7,3% of total revenues. In the latest quarter that number was actually 7,4%. For the purposes of this analysis I will model an average rate of 7%.
Lease operating expenses are slightly more difficult to calculate as they have been climbing steadily since the trust's inception. They were 17.69 dollars in 2010, 20.44 in 2011, 23.99 in 2012, and 25.56 in 2013. The following excerpt from 2013 third quarter 10-Q on page 13 explains the rationale for LOE going higher:
The increase in overall LOE coupled with the decrease in overall production volumes between periods resulted in an increase in LOE on a per BOE basis of 10%, from $23.28 during the first nine months of 2012 to $25.54 for the same period in 2013. LOE per BOE may continue to be subject to increases in the future as overall production declines at a faster rate than the fixed and semi-variable costs attributable to the underlying properties.
I will model LOE increasing gradually throughout 2014, i.e. 26,5 in Q1, 27,5 in Q2, 28,5 Q3, 29,5 in Q4, and 33 in Q1 2015 due to very low volume of production in the last production quarter.
Thus:
- Q1 2014 Costs -- 9,036,000
- Q2 2014 Costs -- 8,943,000
- Q3 2014 Costs -- 8,861,000
- Q4 2014 Costs -- 8,760,000
- Q1 2015 Costs -- 3,783,000
4. Net Profits attributable to WHX
This calculation is pretty easy as costs are deducted from revenues and 90% of profits is available to WHX shareholders:
- Q1 2014 Net Profit available to WHX -- 8,568,000
- Q2 2014 Net Profit available to WHX -- 7,942,000
- Q3 2014 Net Profit available to WHX -- 7,383,000
- Q4 2014 Net Profit available to WHX -- 6,890,000
- Q1 2015 Net Profit available to WHX -- 2,390,000
5. Trust administration expenses and Montana taxes
Trust administration expenses for 2013 were 990,000 compared to 845,000 in 2012, which in their turn were 100,000 higher than in 2011 and 2010. For the purposes of this calculation I will keep these expenses in line with 2013 levels, i.e. around 250,000 per quarter.
Montana state income taxes are mostly a function of generated profits and in 2013 they were 216,000. For 2014 given slightly lower profits, my expectation is that they will average around 50,000 per quarter and 20,000 in the last distribution period in 2015.
6. Remaining distributions per share
Finally, given all the data above we can estimate the nominal value of remaining distributions based on total share count of 13,863,889
- Q1 2014 -- 0.596
- Q2 2014 -- 0.551
- Q3 2014 -- 0,511
- Q4 2014 -- 0,475
- Q1 2015 -- 0,153
Total remaining distributions: 2,29 plus 0.55 that has just been announced for Q4 2013 compared to 5.98 WHX share price at the time of this writing.
Conclusion
The price of WHX is currently grossly inflated compared to its remaining distributions. Whiting, the parent company, is increasing production to finalize the trust termination earlier than previously anticipated.
As the termination date is only a year from now (for practical purposes by the end of 2014), the convergence to value will occur quite quickly.
Disclosure: I am short WHX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)
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