For Whiting Petroleum Corporation’s (NYSE:WLL) shareholders, and also potential investors in the stock, understanding how the stock’s risk and return characteristics can impact your portfolio is important. There are two types of risks that affect the market value of a listed company such as WLL. The first risk to think about is company-specific, which can be diversified away by investing in other companies in order to lower your exposure to one particular stock. The second risk is market-wide, which arises from investing in the stock market. This risk reflects changes in economic and political factors that affects all stocks.
Not every stock is exposed to the same level of market risk. A popular measure of market risk for a stock is its beta, and the market as a whole represents a beta value of one. Any stock with a beta of greater than one is considered more volatile than the market, and those with a beta less than one is generally less volatile.View our latest analysis for Whiting Petroleum
What does WLL’s beta value mean?
With a beta of 2.92, Whiting Petroleum is a stock that tends to experience more gains than the market during a growth phase and also a bigger reduction in value compared to the market during a broad downturn. According to this value of beta, WLL will help diversify your portfolio, if it currently comprises of low-beta stocks. This will be beneficial for portfolio returns, in particular, when current market sentiment is positive.
How does WLL’s size and industry impact its risk?
A market capitalisation of US$4.46B puts WLL in the basket of established companies, which is not a guarantee of low relative risk, though they do tend to experience a lower level of relative risk compared to smaller entities. However, WLL operates in the oil and gas industry, which has commonly demonstrated strong reactions to market-wide shocks. As a result, we should expect a low beta for the large-cap nature of WLL but a higher beta for the oil and gas industry. This is an interesting conclusion, since its size suggests WLL should be less volatile than it actually is. A potential driver of this variance can be a fundamental factor, which we will take a look at next.
How WLL’s assets could affect its beta
An asset-heavy company tends to have a higher beta because the risk associated with running fixed assets during a downturn is highly expensive. I test WLL’s ratio of fixed assets to total assets in order to determine how high the risk is associated with this type of constraint. With a fixed-assets-to-total-assets ratio of greater than 30%, WLL appears to be a company that invests a large amount of capital in assets that are hard to scale down on short-notice. As a result, this aspect of WLL indicates a higher beta than a similar size company with a lower portion of fixed assets on their balance sheet. Similarly, WLL’s beta value conveys the same message.
What this means for you:
You may reap the gains of WLL’s returns in times of an economic boom. Though the business does have higher fixed cost than what is considered safe, during times of growth, consumer demand may be high enough to not warrant immediate concerns. However, during a downturn, a more defensive stock can cushion the impact of this risk. What I have not mentioned in my article here are important company-specific fundamentals such as Whiting Petroleum’s financial health and performance track record. I highly recommend you to complete your research by taking a look at the following:
- Future Outlook: What are well-informed industry analysts predicting for WLL’s future growth? Take a look at our free research report of analyst consensus for WLL’s outlook.
- Past Track Record: Has WLL been consistently performing well irrespective of the ups and downs in the market? Go into more detail in the past performance analysis and take a look at the free visual representations of WLL’s historicals for more clarity.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.