|Shares Out. (in M):||25||P/E||0||0|
|Market Cap (in $M):||248||P/FCF||0||0|
|Net Debt (in $M):||340||EBIT||0||0|
Post-bankruptcy equity, formerly Memorial Production Partners LP, now a C-Corp. Cue eye roll. In addition, it’s small and illiquid. One of many upstream MLP victims of the energy meltdown, most of these dogs housed mature, high-cost, largely conventional assets. Amplify has those qualities, but the balance sheet has been cleaned up, and it’s mispriced. Assuming $2.70 natural gas, I estimate that the PV-10 of Amplify’s proven reserves crosses its enterprise value at $43 oil. The company is reasonably leveraged to WTI and carries low operational risk.
Investors gain oil exposure well below market. Based on year-end 2017 Standardized Measure ($51.34 WTI, $2.98 Henry Hub), Amplify trades at 86% of PDP and 55% of 1P reserve value. Several leveraged oil producers (DNR, CRC, etc.) with similar percentages of developed reserves have become popular oil proxies / trading vehicles. While larger, liquid and less gassy, the year-end 2017 Standardized Measure for these companies does not cover their debt stacks. There are good reasons for AMPY to carry a discount valuation to these stocks, but not this much of a discount. Company stats:
1) Total Proved Reserves = 165mm BOE
2) 44% Oil, 15% NGL, 41% Gas
3) 64% Proved Developed Producing, 71% Proved Developed
4) Four areas of operation - one that I would categorize as spend-and-grow, two that work quite well in a $60 WTI environment and are in “maintenance mode,” and one that is of small consequence
The company is owned and controlled by hedge funds (distressed debt holders), with Board representation. All options are on the table, and I have zero insight beyond what’s been publicly announced (all assets are for sale). Absent asset sales, I believe the plan is sensible: spend enough on D&C to keep production flat to slightly up and use the excess free cash to deleverage on the way to a blow-down / liquidation of the assets. The sum of the free cash and potential assets sales should be greatly in excess of the current enterprise value.
Given the relatively low upside but high predictability of the assets here, I won’t go into much detail on the operational forecast beyond this: I expect AMPY to continue to truck along producing around 30k BOE/d, split roughly 50/50 liquids versus gas. Notably, production has increased 4% sequentially each of the last two quarters, after bottoming in second quarter of 2017. At $60 WTI and $2.70 Henry Hub, I expect pre-hedge free cash flow of $42mm in 2018, and another $26mm from hedges, on a $72mm CapEx budget. Recurring FCF yield to the equity is 17%, not including this year’s kicker from the hedges. The company provides detailed guidance and has an outstanding IR function in place, making forecast modeling simple and easy.
That said, I look at this predominantly on a Standardized Measure basis, and AMPY is abnormally discounted to the current spot price. The below table lays out the methodology: calculating the delta in Standardized Measure value change between 2016 and 2017, you can ascertain a benchmark pricing “flow-through” percentage to reserve value, i.e., 33% of the wellhead price increase in 2017 flowed-through to the increase in the PDP value per BOE.
When dealing with multiple operating areas, I find that dynamic PV-10s can be difficult to calculate accurately given the typical lack of detail that is offered. Some may look down on this method, but I have found that simplified, historical torque to changing prices has been a good predictor of reserve PV-10 under new pricing scenarios - usually a better estimator than a detailed model with bad assumptions or too many unknowns. This is obviously not scientific and it is barely arithmetic, but I don’t care for two reasons: 1) AMPY trades so far below fair value that it doesn’t begin to matter until there is quite a move up; and 2) I have thoroughly cross-checked my calculations with past company data (10-Ks and past presentations, most notably the BK emergence deck), and they are close. Finally, I have attempted to isolate the oil-only areas of operation (Rockies, California) with past data, and I am satisfied with my understanding of these assets.
1) East Texas / Louisiana (49% of proven reserves, 75% Gas): the bulk of the CapEx budget resides here, as the company will continue to drill the predictable Cotton Valley formation - this has been the company’s bread and butter for some time now. In time, I would expect some exploratory drilling in their higher upside Haynesville acreage. With over 200 identified locations, this should offer modest, but continued reserve replacement.
2) Rockies (28% of proven reserves, 100% Liquids): EOR operation (CO2), characterized by low decline rates (6-7% tops) and high LOE. This area works very well at current prices, but as pricing moves down to $50 WTI, the economics decay quickly. RLI is 27 years.
3) California (19% of proven reserves, 100% Oil): Offshore production known as the Beta properties, this is a really nice asset (my favorite). LOE are lower than the Rockies, the decline rate is similar, and there is real opportunity to increase production here. A minimal level of workover capital grew production 5% in 2017, and the cash flow is prodigious at $60 WTI. RLI is 19 years.
4) South Texas (4% of reserves, 60% Liquids): consists of a 5% working interest in the Eagle Ford, limited drilling activity planned here for 2018.
At year-end pricing, if you believe the Standardized Measure, AMPY is a 56 cent dollar. At $60 / $2.70, it’s a 140% return proposition - this one appears particularly attractive from a risk/reward standpoint. These assets were originally put into an MLP for their predictability, so the drilling risk is minimal. The absolute development capital requirement is low relative to future production (over 70% Proved Developed). The guys that control 70%+ of this thing all want an exit, and I view $10 per share as being paid to hold that call option.
There are lots of E&Ps out there that are cheap, and there are others that look cheap but are not. It’s likely they all trade up if the back-end of the curve ever moves up and out of backwardation, or if the front-end stays where it is now for long enough. But with AMPY, the margin of safety with a good shot at upside is too compelling to ignore.
|Entry||04/09/2018 11:35 AM|
how are they compensated? Clearly, Fir Tree controls the process. Wondering how they incentivzed management
|Entry||04/09/2018 01:09 PM|
MIP is for 2.322mm shares. 683k RSUs and 517k options (struck at $21.58) issued so far, 3-year ratable vest.
warrant package from the BK is way out-of-the-money at $42.60
|Subject||Update / Restricted Investments|
|Entry||09/18/2018 06:00 PM|
Any updated thoughts here after Q218? I agree its trading well below PDP PV10 at strip and the leverage gives nice potential upside to the equity. But it seems like East TX drilling results have disappointed and the sales processes from late 2017 have not gone anywhere. What do you think their options are now that they gutted capex?
Also do you have any insight into the Restricted Investments balance sheet item? Is that just a prefunded asset retirement obligation account? If so, it is well in excess of the ARO on their balance sheet. What are the rules there? Can they access that extra cash at some point under any circumstances?
|Subject||Re: Update / Restricted Investments|
|Entry||09/18/2018 08:56 PM|
last one first: yes, the Restricted Investments is prefunded for the Beta Field's P&A liabilities. they cannot access that cash, and it must be maintained at a minimum balance of $152mm.
East TX results have been disappointing and as you point out, all capex has been halted. at year end 2017, East TX PV-10 was $298mm, 69% developed. I believe of that 1P PV-10, at least $250mm is PDP. adjusting for reserves produced, lower gas but higher liquids pricing, I estimate that East TX PDP is about the same value now as it was at year end 2017. i don't see how they will get much credit for PUDs given their recent drilling results, so if they could get $225-250mm for the property I would say punt it. if not, blow it down and harvest cash. while Cotton Valley A&D activity has picked up of late, I am assuming the assets will not be sold.
the story here are the oil reserves in CA, WY and South TX. new CEO has been in place for 4.5 months, and i expect some kind of strategic initiative and/or a new capital plan to be laid out this Fall. probably in November. for obvious reasons they are now focused on the oil properties, where at current WTI pricing there are options that have not been available to them in several years. in the meantime it is gushing cash and paying down debt.
|Subject||Re: Update / Restricted Investments|
|Entry||10/10/2018 06:49 PM|
Plainview, the company just announced that $61.5mm of the restricted cash has been released, leaving $90mm in the decommissioning trust. good news, almost $2.50 per share in cash.
the company now has net debt of $221mm as of today. $37mm of capex will go into expansion of the Bairoil complex's C02 facilities, which will allow them to bring 900 bopd of shut-in production back online by late 2019. they had cut East TX capex by $25mm this year, so this offsets that and then some. in addition, they will drill 4 wells in 2019 in Wyoming, and they revealed a recent seismic shot shows 59 additional locations at Bairoil - for reference, as of year-end 2017 they had 58 producing wells at Bairoil. i don't know how many locations were booked in PUDs before this, or if this changes anything - i don't know how that works, i am assuming they will not book additional PUDs until more drilling is done. but either way the location count is encouraging.
i hope this brings to light the value in the Bairoil property at current WTI pricing, which more than covers the entire market cap. at year-end, they had 1P of 44mm barrels (roughly 85% oil, 15% NGLs) at Bairoil, 32mm of that was PD - being high cost EOR, the move in oil this year (if you believe in it) provides tremendous leverage on these assets. i am sure i will be disappointed by the stock but i am used to that, eventually someone will be forced to care.
this is phase 1 of the new plan since they shut down drilling in East TX. i am hopeful, but not banking on, some drilling in the Beta field offshore CA. this is fantastic inventory, but the hurdles given its location are big. we'll see, either way the PDP of Beta + the Wyoming 1P alone gets you through the debt and deep into the teens in value per share. South TX and East TX come for negative values. despite the recent drilling disappointments in East TX, the PDP value there is significant; and their sliver holdings in the South TX wells are also meaningful, and they are humming along there.
people are going to laugh at me but my target here is a tad north of $30, assuming PDP for East TX and offshore CA, and 1P for WY and South TX at $65 flat.
|Subject||Re: Re: Update / Restricted Investments|
|Entry||10/11/2018 11:31 AM|
Good news, thanks for the update. You probably already know this, but I just looked back and apparently MEMP bought the Bairoil complex properties for $935mm in 2014. They probably overpaid even at the higher price deck but that is just incredible.
Have you gotten any additional color from mgmt on their issues in East TX? It looks like at least some of their position is in Panola county. Covey Park and Rock Hill are drilling big wells in Panola. Are they just outside of the core?
|Subject||Re: Re: Re: Update / Restricted Investments|
|Entry||10/11/2018 11:48 AM|
*Rockcliff not Rock Hill. I always do that.
|Subject||Re: Re: Re: Update / Restricted Investments|
|Entry||10/11/2018 12:12 PM|
Plainview, it gets better. Merit Energy sold the asset to MEMP in 2014, and at the same time Merit sold their Rangely field (also EOR) for $408mm ($159k per flowing boe) to Atlas Resources - so Merit had a hand in fleecing two companies into BK. Merit then bought the Rangely asset back from Atlas in August 2017 for $104mm, or $41k per flowing boe.
Merit also bought a Wyoming waterflood asset for $870mm ($53k per flowing boe) from Marathon in April 2016.
I have no additional information on East TX. i hope they either sell it or blow down the PDP for cash, either way i don't care. obviously their performance in Panola is discouraging, however it comes for a negative value. i am happy for them to use all of the free cash for reinvestment in the oil properties, where they have more than ample inventory. at this point the company's leverage should be considered conservative given the long life and low decline nature of their assets.