PRO Top Ideas
Top Ideas are high-conviction long or short ideas focused on market mispricings with asymmetric risk/reward profiles.
SandRidge Energy: What Happens Once The Cash Pile Runs Out?
- By the end of Q1 2015, SandRidge will have essentially exhausted its entire enormous cash pile. The company's drilling carries have also run out.
- With its 2015 capital spending curtailed, SandRidge's oil production is expected to decline steeply. Cash flow will contract. Additional funding will be needed as working capital shrinks.
- The ratio of Total Debt-to-trailing EBITDA may climb to ~6:1 by year-end 2015.
- Oil production decline will likely extend into 2016, even if the oil price recovers to the $100 per barrel range.
- Despite the significant decline since last summer, at $1.82 per share, the stock's risk/reward appears skewed strongly to the downside.
Linn Energy: In Need Of A $100 Oil And $4.50 Natural Gas
- Linn's capital spending and distributions will be effectively funded by derivative settlements in 2015, assuming the current strip pricing.
- In the longer term, I estimate that a maintenance capital spending of $1.3-1.4 billion per year would be required to sustain production.
- The reported year-end PV-10 value disappoints, raising renewed valuation concerns.
- A long-term commodity price assumption of ~$100+ per barrel for WTI and ~$4.50+ per MMBtu Henry Hub appear to be required to justify the current price.
- The units' risk/reward profile appears skewed to the downside.
Chesapeake Granite Wash Trust: Oil Volumes Disappoint; Recent Rally Creates Downside Risk
- Q4 2014 oil volumes came in substantially below my estimate, indicating continued weakness in well performance. There is a risk of a downward reserve revision in the year-end 2014 report.
- Oil over-hedging enhances distributions through Q3 2015. The subordination mechanism may remain in place through Q2 2017. Once protections expire, distributions will contract sharply.
- I estimate the distribution to decline 60-70% within 2 years (depending on commodity prices).
- The Trust's current $8.19 per unit price reflects ~$110 per barrel WTI and $4.50/MMBtu Henry Hub (based on the illustrative scenarios outlined in this note).
- At the current price, the risk-reward profile is skewed to the downside, in my opinion.
Exxon Mobil: Slow But Steady, Value Erosion Is Underway
- Despite $100 oil and much higher capital spending, Exxon's oil production has continued to decline at a high rate.
- When measured on a free cash flow basis, after adjusting for production declines, financial returns over the past five years were poor and the outlook remains bleak.
- Even assuming the company will stabilize its liquids volumes, the stock appears dependent on $100+ oil to yield minimally acceptable free cash flow returns.
- In a weaker price environment, Exxon may have to borrow to sustain dividends and share buybacks at the current level.
- Exxon needs a radical Upstream strategy re-evaluation and deep cost reductions to restore competitiveness.
SandRidge Mississippian Trust I: Valuation Compelling After The Correction
- The risk/reward offered by the Trust’s units has shifted from unfavorable just several months ago to quite favorable currently.
- Under Pessimistic Scenario discussed in the article, the units offer a ~9%-10% IRR to maturity, which, arguably, is a good return for this type of risk.
- More optimistic scenarios suggest a substantially higher upside.
- “Flatter than feared” production volumes in the next two quarters should not be ruled out and could become a powerful catalyst for the units.
- I estimate the next quarterly distribution to be ~$0.23 per unit.
Synergy Resources: Exceptional Drilling Returns In The Niobrara
- Synergy impresses with its rapid operational ramp up and very strong well results in the Niobrara/Codell play.
- The stock is trading at a moderate multiple of EBITDA and a strong discount to the potential full drill-out value of its inventory.
- The company is in a strong position to keep its growth momentum for another several quarters and may continue to surprise with strong production increases.
- The company will evaluate Greenhorn Limestone potential on its acreage based on the “encouraging” core analysis results.
- Declining oil price and local overproduction are potential risks.
EQT Corporation: The Midstream Advantage
- Based on a sum-of-the-parts analysis, EQT’s upstream business is one of the best values in the Marcellus/Utica E&P peer group.
- The company is developing takeaway solutions in the Marcellus that may support production growth to over 3 Bcf/d by 2018.
- The stock has a catalyst in the form of a potential monetization of the General Partner interest in the MLP.
- The recently acquired Midland acreage has the potential to evolve into a second core operating area.
- Despite the natural gas pricing headwinds in the Marcellus/Utica area, the stock's risk/reward profile appears skewed very favorably to the upside.
Antero Resources: Rich Valuation Represents A Risk
- Antero’s strong stock performance has resulted in trading multiples that are among the highest among large-capitalization E&P stocks and among its Marcellus and Utica peers.
- While the company's production growth guidance is impressive, it is to some degree a result of significant outspending of internal cash flow and does not represent an organic growth rate.
- The risk to natural gas price realizations is elevated and may contribute to the stock's price correction.
Halcón Resources: Success In The TMS Redefines Upside Potential
- Recent drilling results in the Tuscaloosa Marine Shale, both by Halcón and other operators, indicate that the play’s ultimate success is increasingly probable.
- A week ago, Halcón received an important endorsement of its TMS asset from Apollo Global Management in the form of the first tranche of a $400 million mezzanine financing.
- Given the scale and quality of Halcón’s position in the TMS, the asset may prove defining for the stock’s valuation.
- Factoring in the potential impact from the TMS, the stock’s risk/reward profile appears favorable.
Sanchez Energy: From 'Asset-Poor' To 'Asset-Rich'
- Sanchez emerged as the winning bidder on Shell's Eagle Ford assets. The purchase price is highly favorable to Sanchez.
- In an optimistic scenario, the transaction could add over $1 billion to the stock’s intrinsic value.
- From a strategic perspective, the acquisition fully resolves the company’s drilling inventory challenge.
- Only a small portion of the potential upside is reflected in the post-announcement price move.
Kodiak Oil & Gas: A New Paradigm - A Moderate-Risk Development 'Story'
- The article provides illustrative valuation analysis of Kodiak’s drilling inventory, including risks and upsides.
- The stock is priced very reasonably relative to its value potential.
- The transition into full development mode and substantially reduced operating risk should help to close the gap between the stock price and the underlying NAV.
- SandRidge Energy: Disappointing Asset Sale Reinforces Valuation Concerns
- Bill Barrett: The Niobrara And Uinta Upside
- Cabot Oil And Gas: 50% Growth And Free Cash Flow Shows The Stock's High Multiple Is Warranted
- Comstock Resources: In Search Of New Growth
- Penn Virginia: Outlook Remains Strong Despite Recent Outperformance
- EXCO Resources: Fundamentals Remain Weak, Despite Leadership Change
- Carrizo Oil & Gas: Oil-Focused Portfolio With Assets In All The Right Places
- SM Energy: Just Getting Started
- Goodrich Petroleum: Transformation Underway
- Clayton Williams: Leveraged To Momentum In 2 Top Oil Plays
- Forest Oil: Disappointing Asset Sale Raises Valuation Concerns
- SandRidge Mississippian Trust I: Risk Of Downward Re-Pricing
- Penn Virginia: Strong Value Upside Driven By Quality Of Eagle Ford Assets
- QEP Resources: Bakken 'Monster' Wells Validate Strong Upside Potential