Trading Idea - Whiting Petroleum (NYSE: WLL) has surged by 202% since February 25, 2016 on higher oil prices and slashing of investments for 2016, but the stock is due for correction as the Doha deal failed and oil is likely to decline. A 20% to 25% correction from current levels is entirely likely from current levels of $10.7.

Idea Rationale

First, Whiting Petroleum’s surge by 202% within 2 months itself has take the stock to overbought levels in the near-term and a correction was expected as investor’s book profits. The failure of the Doha deal to freeze output serves as trigger for correction.

Second, from a balance sheet perspective, the company is not well positioned with debt of $5.2 billion as of December 2015. While the company has no near-term debt maturity, the debt is still a burden if oil trends lower and sustains at lower levels.

Third, Whiting Petroleum expects interest expense per BOE in the range of $5.9 to $6.3. Debt servicing burden is therefore significant and this will keep sentiments bearish as oil trends lower in the near-term.

Fourth, Whiting Petroleum has $500 million in investment for FY16 that will be serviced through OCF, but the company’s cash buffer will not be enough to deleverage through internal cash flows. In a low oil price environment, asset sales to deleverage are unlikely to fetch desired valuations.

While none of these factors imply that Whiting Petroleum is in big trouble, market sentiments are such that they will start focusing on the negatives as oil declines in the foreseeable future. Further, as mentioned above, the markets have a trigger for correction after a rally of 202% in less than 2 months for the stock.