Goodrich Petroleum Remains An Overly Discounted Gassy Player
Summary
- Goodrich reported a solid first quarter of 2020.
- Goodrich is getting more done for less spending.
- The balance sheet remains strong.
- The name is one that will benefit from better natural gas prices as it is fairly low cost and tight differential and lightly hedged in 2021.
This is a Z4 quick update. For a recent longer basic piece please click here.
Since our last update for Seeking Alpha Goodrich reported solid 1Q20 results.
Key Points from the Quarter:
- Their natural gas differential pre hedge was only 6 cents below Henry Hub again highlighting their geographic positioning to what amounts to an oversupply of midstream infrastructure.
- Cash costs were in line with expectations. LOE (excluding workovers) of $0.23 per Mcfe was in the middle of the annual guidance range of $0.20 to $0.25. Transportation of $0.39 per Mcfe was within guidance though at the upper end of the annual guidance range of $0.30 to $0.40. G&A per Mcfe of $0.30 which is at the upper end of the annual guidance.
- Capex in the quarter was $18.4 mm with work on 4.0 net wells (Completed 1.8 net wells in the quarter (1 in January, 0.8 in March). This is almost half the planned spending for 2020 at the lower end of the guidance range (see below).
Guidance: Capex and Production Unchanged
- 2020 Spending: Goodrich is maintaining their prior guidance range of $40 to $50 mm. They are however seeing further declines in service costs with an expectation of a 15 to 20% savings on upcoming wells vs recent wells and this is allowing them to up the net well count by almost a full net well (5.0 net wells vs prior plan of 4.2 net) without increasing spending. In fact, they suggested coming in at the low end of the range, even with the extra well.
- 2020 Production: No change vs prior guidance range of 137 to 142 MMcfepd. One might wonder at the lack of increase given the nearly 1 net well bump. We chalk that up to conservatism and timing of the additional well.
- 2020 Pricing: Goodrich edged their differential guidance lower to a range of $0.15 to $0.25 below Henry Hub vs prior guidance of $0.20 to $0.25 below but at the same time transportation was edged up from a prior range of $0.25 to $0.40 per Mcfe to a new range of $0.30 to $0.40 resulting essentially in a wash for analyst estimates.
Balance Sheet:
- Net debt to quarterly annualized EBITDA was 1.6x, compared to 1.3x at year end and is at a modest 1.3x on a TTM basis. For reference, their long-term target is to remain below 1.5x on the TTM basis. This is lower within the gassy upstream segment. As of 1Q20, of the 10 names we actively track in the gassy segment, net debt to annualized 1Q20 EBITDA was 2.8x. Only industry stalwart COG was lower.
- Their borrowing base was reduced by $5 mm to $120 mm. We actually take this with a sigh of relief. This is a price deck based reduction and not a commentary on the quality of reserves. Some of their peers saw 50% lower revolver redeterminations this spring. They have adequate liquidity for their needs for the foreseeable future.
Other Items of Note:
- Goodrich reported a Return on Capital Employed (ROCE) of 12.5%. This is a somewhat rare level for smaller upstream names at this time. Some in the space are negative and while it's not a metric we normally speak to when addressing upstream minnows, it's another sign of a solid story.
- Goodrich reported 0% gas being flared, something that should not be lost on the increasingly ESG focused investment community as they scan for the group for actors who are ahead of the curve.
- Goodrich continues to be about half hedged for 2020 and they are somewhat more lightly hedged for 2021. See the cheat sheet below for details.
A Brief Set of Natural Gas Macro Comments. This is a very brief set of comments on the current natural gas macro in the U.S.
- Storage is elevated but not at record levels. This is well known.
- Elevated storage has driven natural gas prices well into the future to multi-year lows.
- This, in turn, has driven drilling and completion operations to multi-year lows.
- Meanwhile, dry gas production peaked in November 2019 and has been contracting since. This decline in production has accelerated in recent weeks due to a combination of the lower activity and curtailed oil volumes which bring them significant associated natural gas volumes.
- Present pricing is not high enough to prompt most large gas players to attempt to grow production and we've seen a couple of rounds of capital program reductions after what was a lower 2019 vs 2018. Drill to fill firm transport and drill to hold acreage have largely taken a back seat to fear of being further punished for outspending cash flow.
- On the demand side, COVID-19 has worked to reduce LNG demand and we have seen a sizable contraction in exported volumes. LNG was very recently setting new highs and has been cut almost in half in the last week from that peak level.
- We are not however seeing significant COVID-19 related hits to Industrial demand or Commercial demand. This time of year, Commercial contracts naturally anyway with reduced need for space heating. The lack of real hit to Industrial is interesting given the reduction in refinery throughput.
- In the electricity arena, we are seeing strong gas-fired generation demand and we expect a record year for gas-fired demand due to the cheapness of gas, coal-fired generator closures, and an inability of other baseload sources, like nuclear, to generate more than they already do. Quite simply, natural gas continues to take generation share. We expect the arrival of summer heat to quickly prompt new weekly record levels.
- Our view is that natural gas prices will improve as the year progresses, despite the LNG speedbump, as traders' focus shifts from a primary storage-based concern to the greatly improved directionality of supply and demand.
Nutshell: As we have noted before we view Goodrich as a modestly levered, natural gas-centric micro cap that is undervalued. In part, it is no doubt overlooked due to lack of interest in the gas space and also its low float. The name is set to benefit from the ongoing improvement in the fundamentals of the natural gas market. We see the name as modestly under spending this year and maintaining a strong balance sheet as they await natural gas price improvement resulting from the improving macro improvement. GDP is by far not our largest holding in the gassy space but it is currently our least expensive. On a forward EBITDA basis, we would expect, with a modest improvement in natural gas sentiment, a move from a mid 3x multiple on current year Street to 4.0x which would translate into an $11 upside price. While to some a 35% move from current levels may seem too little to bother with, we see more upside than near term downside and see holding the name as part of a gas-centric portion of a portfolio as warranted at this time.
This article was written by
Analyst’s Disclosure: I am/we are long GDP, COG. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.
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Comments (6)
Prudent to have a standard shelf on hand.
Provides options.
Doesn't mean any of it will be utilized.
Could be planning to term out the revolver.
Streamlines process if you want to buy something as well. There are limits placed upon value of sales they can do under the S3 based upon the current cap.
