“It’s water under the bridge.”

Nowhere is that more relevant than today in oil and gas.  Stocks are down 30-95% and the forward price deck looks like a prison sentence.  Fortunately for some, bankruptcy wipes clean the sins of the past and with a new capital structure, investors must look to the future. So in this week’s Technical Tuesday, we look at the first major Chapter 11 in 2020.  And sure, we could dive into the financials and the assets and the SMOG valuation (remember when those mattered pre COVID??). but why bother?  None of those things matter.  I’ve said in the past: “The best execution in the world can’t make up for poor strategy” and Whiting is the poster child.  It’s time to focus on strategy, and only strategy.

Pre-bankruptcy Whiting got caught in the downdraft of commodity prices in 2014 and for 6 years, the company was unable to get out from under the burden of their debt, in spite of a new management team, substantial lay-offs, and a phenomenal ESG policy put in place by some incredible consultants…. (what?!  are you saying ESG didn’t save the company!?  Say it ain’t so!).  Here’s what the next few months look like:

Step one.  Through bankruptcy, Whiting will convert $2.3 billion of debt into equity and the current debt holders will become the 97% equity owners of the new company.  So they will emerge from bankruptcy with a new name, circa Battalion, and reconstitute the board that includes the creditors, and add a couple of randoms that fit “diversity hire” criteria.  The new name… “Green-ing” will make shareholders forget that the company is run by the same management team as pre bankruptcy and to really drive that point home, many board members will resign and there will be a nice press release, thanking the old board members for their service, blaming them for the ridiculous compensation package they approved, but focusing on the future.  After all, they changed the name!

Step two.  With much lower debt and substantial new equity (in the form of the debt to equity conversion), they will start making phone calls to the existing Private Equity backed teams in the Bakken.  I won’t mention any names but now seems the time for an interesting side story:  I once saw a large Bruin while staying at the Rimrock Hotel because I had already been to Philadelphia to see the Liberty bell and was being Resource-ful with my vacation time.  I’d better get Kraken back to the main point of the post.

As each PE equity sponsor desperately needs a liquidity event for their LPs who dislike oil and gas even more than before, a post restructured Green-ing with fresh equity makes it the obvious consolidator in the Bakken.  That should take the rest of 2020.

Step three.  Having consolidated a much larger asset footprint at a reasonable relative value, and with the increased cash flow from additional producing assets to help make the remaining debt to equity metrics look better, they will be ready for more.  Again, I won’t mention names but public companies with assets in the Bakken and high debt (so SM and QEP and Oasis, who might be evaluating bankruptcy as well), will emerge as candidates for further consolidation.  By this point in the cycle, the banks will be less willing to give the reins back to the old management team and, knowing that consolidation is a must for the industry to survive, will look for a company with a new name.  Boom!  Green-ing strikes again.  A quick debt for equity swap in TargetCo and a no premium equity deal for the company and are left with one large pure play Bakken player.

Step four.  As prices come back, Green-ing can raise additional equity, utilize substantial hedging which is totally en vogue now, and further consolidate assets from the super majors that want nothing to do with North Dakota (think Conoco, XTO) OR can evaluate what further consolidation with Continental looks like as a liquidity event for the PE and creditors types that were forced to take shares in the first place two years before.

A post March 7th/Post COVID world is different than oil and gas from 2005 – 2020, and in some ways, it’s more simple because there are fewer options. Strategy will win in 2021, and Green-ing has a unique opportunity:  the first to a fresh balance sheet, and the ability to move past the sins of the past with a clean slate.

With all that water under the bridge, here’s hoping for some oil…