Oil has been absolutely decimated over the last several months and trying to time the rebound or find a bottom in oil is a losing cause. Experts and analysts have widely differing opinions and views how much further oil will drop and how long it will take for a rebound. I admit I have no idea where oil will be in 1 week or 6 months, but over the next 6-12 months I believe it will likely stabilize around $70-$80/barrel. Because of the great near-term uncertainty, I believe many E&P and oil service companies are undervalued and present great upside opportunities. As a result, I started looking for E&P companies that had reasonable net debt levels, good production growth and most importantly good hedging programs. This led me to Bill Barrett Corp (BBG). Bill Barrett Corp is one of the best hedged companies with manageable debt levels and has the kicker of heavy insider buying.
100% Hedged Oil
Bill Barrett Corp. has hedged 100% of PDP exit rate for 2014 for all of 2015 at over $90/barrel and roughly 50% of the current PDP rate at $87.50/barrel in 2016. 3Q14 Pro forma production was roughly 70% oil.
3Q14 | Production |
Boe | 15,185 Boe/d |
Oil | 10,230 Bbls/d |
Gas | 20.1 MMcf/d |
NGLs | 1,610 Bbls/d |
Bill Barrett Corp. didn't outsmart the market and predict a massive sell-off in oil, rather the company followed its strategy of heavily hedging its production to provide predictable cash flow for its cap ex. budget. Now looking back, this strategy may have realistically saved the company some extremely painful quarters and guaranteed decent production growth through this weakness. Every E&P company out there, especially small-cap E&P companies, wishes it had hedged as aggressively as Bill Barrett Corp. Essentially 100% of 4Q14 oil production in hedged at $93/barrel and all of 2015 is 100% hedged at expected 2014 exit rate production levels. While there has been speculation that some small cap E&P companies will likely go out of business if the price of oil stays low for any extended period of time, Bill Barrett will not have this issue and can concentrate on its production growth in the DJ Basin and Uinta Basin in Utah. The company has run models in their shale plays that predict 30% IRR at $65/barrel in the DJ XRL properties and 16% IRR at $65/barrel in the Uinta Bluebell property. Considering their oil production is fully hedged at 2014 exit rates, these IRRs should increase to over 40%.
Oil | Natural Gas | |||
Swaps | Volume (Bbls/d) | WTI Price ($/Bbl) | Volume (MMBtu/d) | NWPL Price ($MMBtu) |
4Q14 | 10,600 | $93.88 | 19,158 | $3.55 |
1Q15 | 11,800 | $90.46 | 20,000 | $4.13 |
2Q15 | 11,300 | $90.39 | 20,000 | $4.13 |
3Q15 | 10,800 | $89.81 | 20,000 | $4.13 |
4Q15 | 10,800 | $89.81 | 20,000 | $4.13 |
1Q16 | 5,500 | $87.61 | 5,000 | $4.10 |
2Q16 | 5,500 | $87.61 | 5,000 | $4.10 |
3Q16 | 4,000 | $87.24 | 5,000 | $4.10 |
4Q16 | 4,000 | $87.24 | 5,000 | $4.10 |
Source: Capital One Securities 9th Annual Energy Conference December 2014
Debt Profile
One of the most important characteristics of a successful small-cap E&P company is a manageable debt level. When times of weakness appear, companies with highly leveraged balance sheets suffer far greater than those with moderate debt levels. Bill Barrett has done a good job of lowering its debt levels through divestitures and focusing on 2 core properties in the DJ Basin and Uinta Basin. The company has $829 million in long-term debt and $294 million in cash on hand with a $375 million unused credit revolver. Their debt structure is easily manageable with $400 million in senior notes at 7.625% due in 2019 and $400 in senior notes at 7.0% due in 2022. In addition, the company recently announced a successful settlement on a dispute over leasing terms on its Cottonwood Gulch asset and will receive a $42 million settlement during the first quarter of 2015. $42 million is a drop in the bucket for most E&P companies, but for Bill Barrett Corp., which has a $572 million market cap., it's a huge win and provides further financial flexibility.
Insider Buying
When the company dropped under $10/share in early December, there was a healthy amount of insider buying. From December 4 - December 11, 4 different insiders bought a total of 50,000 shares for a total of $436,327. While industry insiders, in general, have been early when trying to catch their company's stock in free fall, this represents another positive for me. Insider buying alone isn't a buy signal, but when you add up all the supporting evidence, it can act as reassurance to your analysis.
Conclusion
Investors looking for a small-cap E&P company with plenty upside and insulation from rapidly falling oil prices should consider Bill Barrett. It has one of the most aggressive oil and gas hedging programs I've seen among shale companies, a decent balance sheet and healthy production growth. The company hasn't released its official 2015 guidance, but management has stated they expected double digit pro forma production growth in 2015 given contribution from wells already drilled coming on-line. Because their hedging program will protect their cash flow, it's likely the company will take a moderately aggressive spending program compared to competitors with little to no hedging.
Another back-pocket consideration is industry consolidation. I never make investments based on M&A speculation, but Bill Barrett would make an excellent acquisition target for larger E&P companies looking for well-run companies with good balance sheets, decent production growth and good downside protection based of strong hedging programs. Companies with large debt loads would be unlikely take-over candidates, because in this environment the last challenge a company wants to take on is new unfunded debt. Bill Barrett Corp. meets all these requirements, yet also stands as a terrific investment in a chaotic environment.
Trading around $11.50/share, the stock has fallen over 50% YTD. Even though the company is positioned far better than many competitors in the current pricing environment, Bill Barrett Corp. has suffered along with the industry as a whole. I believe once the company reports earnings and investors realize the position that the company is in, the stock will get a bounce. It will likely take oil prices to stabilizes before the stock sees any significant appreciation, but I believe the stock can get back over $20/share by the end of 2015, a 73% increase.
