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What The Recent Debt-For-Equity Deal Means For Whiting Petroleum

Debt and liquidity management is the main theme in the oil and gas industry as the businesses in this industry try to get through the down cycle in oil prices. Whiting Petroleum (NYSE:WLL) is also making these moves to enhance its debt profile and reduce some interest expense. The options become limited for the oil companies when the oil prices go down as the value of assets also takes hit, and unless the business is sitting on some extremely lucrative assets, sources of funds become limited. Selling rich, lucrative assets is a difficult decision to make as the eventual recovery in oil prices will mean that these assets can contribute significantly to the business.

At the moment, however, converting debt into equity is becoming a preferred way of managing debt. This causes dilution for the current shareholders but helps the business in its bid to survive. As a result, current shareholders do not look too bothered about the prospect of dilution as long as the debt is being taken off the balance sheet. The underlying assumption here is that if the business is able to survive this down cycle then the stock might give a healthy return once the oil prices recover. This is apparent from the reaction given by the Whiting Petroleum shareholders as the stock lost about 6.5% when the expected dilution will be considerably larger.

The company is exchanging $1.06 billion worth of convertible notes for mandatory convertible notes of the same value. While the previous notes also had the option of conversion, these new ones have this feature mandatory in them. The interest rate, principal amount and the maturity is the same, so you can say that only a single term of the notes has been changed. However, this term is particularly important and changes the whole mechanism of the notes. The image below shows the notes being exchanged.