|Shares Out. (in M):||33||P/E||0||5.4|
|Market Cap (in $M):||192||P/FCF||0||1.9|
|Net Debt (in $M):||-84||EBIT||0||0|
This is in our opinion a very opportunistic situation.
EGC (formerly EXXI) is a post-bankruptcy reorganization which has been posted in the past here. The reasons why the company actually filed for bankruptcy are quite clear: a former management which favoured acquisitions using leverage and the perils caused by a fixed cost base and declining oil prices. I will not delve too much into the bankruptcy as there is aboundant public information and will instead focus on the opportunity we find.
First and foremost the assets-
EGC has arguably one of the best collection of producing assets in shallow waters in the GOM. If valued as peers (WTI as an example), EGC would be worth 5x it's current price on proved reserves and 10x on proved and probable.
This company has a clean balance sheet but is hindered by ARO (abandonement obligations) for a variety of fields purchased from Exxon time ago which were uneconomical at sub $50 oil.
Because of it's ARO obligations and fixed cost basis, it is our belief that if oil prices (Brent) dip below $50 again, the equity is most likely to be worth zero. That is the bear case. However, we do believe there is a credible medium to long term thesis for oil stabilizing betweem $70 and $80. Just a matter of growing demand (China, India and other developing countries) with constrained supply.
At current strip pricing, with no hedges going into 2019, EGC should generate around $280 million EBITDA next year, or around $100 million free cash flow. Which should by itself equate to a $30 dollar price per share vs it's current price of below $6 per share.
Post-bankruptcy the board of directors (guided by the majority owners, previous bondholders) had a mandate to sell the company. Given the then prevailing oil prices, that proved to be difficult and the company under invested and production declines followed. Production declined from nearly 40k boepd to 27k currently. This has changed. The board has changed and top level management has been replaced. The strategy in place today is to continue as a stand-alone entity, while remain receptive to potential offers. EGC was re-listed at around $30 per share last year, declining close to 90% to a recent low of $3.5 per share. We think this is a classic scenario where there were no natural holders left (Templeton and other bondholders indiscriminatley sold their holdings with no natural buyers) while the market was flooded by bad news. Which we believe is mostly priced in.
Also the company didn't help itself by guiding to the need for a capital raise (which we believe is necessary) in order to fund it's 2019 budget and thus have production growth. The flaw was in the guidance. Our belief is that the market "assumed" an equity dilution which in our opinion is all but necessary. Most likely (especially with current oil pricing) a debt/convertible raise will be the outcome.
The undervaluation is so evident that I'll let you run your numbers, we're talking about a 3x on a conservative scenario and 10x on a sustained brent price of $75 for the next couple of years. Using relative valuations without giving much credit to the reserve base of the company. Needless to say this was a $4-4.5 bn EV company two years ago and today trades for $100m EV, $600m if you count the ARO's which is aggressive enough in our opinion. With the exact same base of assets/reserves.
I'd rather delve on the next steps (underway) which should correct the valuation disparity (all with a 3-6 month timeframe):
1. EGC is looking to divest some of the properties which are not in their "core" geographic base. Because of the latter they're now uneconomical to them but are of great value to other players who have fields closer. By doing that they'd loose marginal cash flow but importantly would reduce their ARO's in a signifficant manner. Our meetings with management indicate between $300-$350 million in reduced plug and abondonement obligations vs the total of close to $500 currently. This is something we believe could happen within a month or so. Discussions are underway and in our opinion, current oil prices support such an outcome. This by itself should cause the stock to double immediately.
2. After that we expect a financing deal to be announced (on a non-dilutive manner) for $150-170 million which should cover 2019 enhanced budget and drive production back to a 33-35k boepd rate. Most likely debt/convert. That would be a second catalyst for the stock price.
3. As cash flow is generated we believe the company will pursue deals to buy on-shore properties which should help diversify the production base and hopefully aid in a multiple re-rating.
In summary, our opinion is that EGC is a busted bankruptcy play with little downside (as long as Brent remains above $50) and multiples of upside potential.
For full disclosure we own around 8% of the company (at a cost basis very similar to today's prices).
Forced sellers basically done. New shareholder base being established.
Brent oil between $65-75.
Divestment of "non-core properties" with associated reduction of ARO liabilities.
Financing deal to cover 2019 budget.