Thursday, November 21, 2013

Company Review: Whiting USA Trust II (WHZ)

WHZ is pretty straight forward. 33 more distributions until it terminates.
You buy it for $13, collect $17-$20 in distributions, then lose $13. net 30%-50% gain.
This adds in a level of safety even with the downward pressure. For me, I require a wide margin of safety in case the estimates of distributions are off.

Now of course I do not have to hold until termination. I can sell at anytime and get my money out of my position. Ideally that is the best way to treat trusts. Get some nice yield for a few years then sell and move on to the next one.

One last thought before my review of WHZ. Due to the downward pressure of the unit price it will always look like a big losers. -19% right now for me. However because its yielding 22% a year the returns goes into the cash category. I am actually only down about -3%. WHZ looks to have stabalized and presuming oil prices stay at $95 or higher, I expect to start turning a profit with next quarters distribution.

Last Updated: Q3-2013

Description: Whiting USA Trust II (the Trust) is a statutory trust. It will own a term net profits interest in oil and gas producing properties located in the Rocky Mountains, Permian Basin, Gulf Coast and Mid-Continent regions of the United States. These producing properties are owned by Whiting Oil and Gas Corporation, which is a subsidiary of Whiting Petroleum Corporation (Whiting). The term net profits interest (NPI) entitles the Trust to receive 90% of the net proceeds attributable to Whiting’s interest in the sale of oil and gas production from these properties.

How do they make money: WHZ owns the rights to 90% of the net proceeds from the sale of oil and natural gas extracted and sold by Whiting Petroleum Company (WLL)..

Company Organization
WHZ is organized as a grantor trust and not subject to federal income taxes (from 10-Q report)
State taxes are withheld prior to distribution where wells operate, primarily Montana.

Location of Oil and Nat Gas fields
Rocky Mountains (Colorado, Wyoming, North Dakota, and Montana)
Permian Basin (Texas and New Mexico border region)
Gulf Coast (Texas, and Mississippi)
Mid-Continent (Michigan, Arkansas, Oklahoma, and Texas)

WLL estimates an 8% depletion rate. Q4 2013 will be critical as I will be able to estimate 1 full years of production (2013) as the trust started last year.

WHZ has a Collar option hedge on oil between $80 - $122.50
If oil is under $80 the put options bought will help cover losses
If oil is over $122.50 the call options sold will give up some profit. This paid for the put options.
The collar expires in Dec 2014 and cannot be renewed.
The average sale price of oil has been in the middle of this collar and it should not impact future estimates.

The trust terminates when the LATER of these two events occurs.
1: December 31, 2021.
2: Total Energy production of 11.79 MMBOE (10.611 MMBOE as WHZ only gets 90% of the field’s production).
Estimates are that the trust will hit 11.79 MMBOE before Dec 31, 2021. Therefore the trust will terminate December 2021. (Q3-2013)

Remaining estimated distributions
Remaining payments: 33 quarterly distributions (Q3-2013)
Average sale price of oil: $95.62
Average sale price of natural gas: $3.48

Average distribution estimate: $25.74 ( $0.78 average quarterly distribution since trust creation x 33 payments)
8% depletion rate estimate: ~$17.00 ($2.91 paid in 2013 and decreasing by 8% annually until termination)
Estimates will change when energy prices are above or below the average sale prices.

Using lowest estimated payout: 30% gain from $13 if held to termination and unit price is $0
3.75% average annual return (30% over 8 years)

Earning Report Notes
Total production to date: 2.8 MMBOE (26% of the 11.79 MMBOE termination limit).
Estimates are that the trust will hit 11.79 MMBOE before Dec 31, 2021. Therefore the trust will terminate December 2021.
Estimated remaining payments: 32 distributions.
Average sale of oil: $105.82
Average sale of natural gas: $3.58

Company and Industry specific commonly used acronyms and terms
bbl: One barrel of oil. 42 U.S gallons.
BOE: Barrels of equivalent. Way to calculate cubic feet of gas and compare to barrel of oil.
MBOE: 1 thousand BOE
MMBOE: 1 million BOE (technically 1 thousand groups of 1 thousand BOE)
NPI: Net profits interest. Ownership or interest in the net profits of the fields

Company Website: None
Morningstar: None

Disclaimer: The investments and trades discussed are not recommendations for others. I am not a financial planner, financial advisor, accountant, or tax adviser. The financial actions I talk about are for my own portfolio and money and only suited for my own risk tolerance, strategy, and ideas. Copying another person's financial moves can lead to large losses. Each person needs to do their due diligence in researching and planning their own actions in the financial markets.


  1. Pulling, as the number of distributions remaining decreases, will you continuously monitor and pull the trigger to sell should the stock become over-valued? Or would it be wise to just ride it out and continuously invest the distributions as you receive them?

    1. Thats pretty much exactly how you play it. Each distribution you readjust your fair value estimate of the remaining distributions. If that is a premium you consider selling when it gets too high because it has two things giving downward pressure 1: termination of trust 2: profit takers. If its below you hold because we know we can at least break even given enough time.

      Personally, I never roll my distributions back into the trust. With each passing payment you get less and less due to depletion rates. I establish and buy my full position in the first year or two that I am going to be in a trust and then use the payments to buy other things that wont terminated.
      From that point of view I am getting 15%+ short term yields to buy the companies with long term high growth rates of dividends