Amplify: Q3 Earnings Support Bull Case

Summary

• Amplify is set to benefit as hedges roll off and Beta returns to operation.
• A reasonable fair value is $16/share, for over 60% upside.
• The company does have high torque to energy prices (both positive and negative).

imaginima

Amplify Energy (NYSE:AMPY) reported Q3 numbers largely as expected. It's reasonable to expect the shares to trade closer to $16/share as the Beta field comes back online in early Q2 2023.

Pipeline Repair

The pipeline repair is proceeding as planned after the spill in October 2021. This should enable the Beta field to resume in early Q2 2023 per management's plan. However, the field may take some time to come back to full capacity and then company's insurance covers 18 months from the spill, so if the Beta assets aren't fully operational by the end of March 2023, then there may be slight 'gap' in earnings in Q2 2023 as insurance is no longer paying out, but Beta isn't fully productive. This is not a major concern, but is something to keep an eye on.

Hedge Book

Amplify has reduced hedging for 2023 and has no current hedging for 2024. This should help the stock capture its upside potential if energy pricing remains strong as the futures curve suggests will occur in 2023 ($80-$90/barrel) and 2024 ($75-$80/barrel). Currently, the company appears to have ~$50M of hedging losses on its balance sheet, which should be a fairly consistent drag on earnings over the coming quarters, but lower than the hedging costs paid in 2022 enabling the company to meaningfully reduce debt.

Valuation

Valuation here remains attractive and perhaps less risky now we have line of sight to Beta coming back online. Note that I capitalize G&A at a higher rate than management. The relevant valuation is $16.02/share as a reflection of recent strip pricing (end of October). $65 oil and $3.50 gas is a downside case, but below what the futures curve suggests. Illustratively if NMYEX moved 10% higher, the valuation would move up to around $21/share.

Scenario	$65 oil/$3.50 gas	NYMEX
PD Reserves (PV-10)	$831	$1035
Capitalized G&A	-188	-188
Net debt	-185	-185
Hedge losses	-15	-57
Resulting equity value (38.4M shares out)	$11.80/share	~$16.02/share

Click to enlarge

Source: Company Presentation, SEC filings and Author's analysis

Return Of Cash

If the pipeline is restored as expected, hedges are paid down and no major future loss-making hedges are put in place, then Amplify should be able to rapidly pay down debt. Management believe debt could be essentially paid down by early 2025, I estimate it could happen mid 2024. At that point Amplify could have a ~25% free cash flow yield on my estimates, though of course that's volatile with respect to energy pricing. It remains to be seen how management choose to allocate any excess capital.

Risks

• Beta is not back online yet, there's still some work to do although no major risks remain
• Clearly changes in energy pricing could move the stock materially, this is not a low-cost producer and has high torque to energy price declines
• It remains to be seen how management will allocate capital assuming debt is paid down

Conclusion

Amplify should re-rate further once Beta is back online and hedges roll off demonstrating the cashflow potential of the business. Both events should occur in early/mid 2023. A reasonable fair value for the shares is around $16/share at current energy pricing, suggesting 68% upside. The company may be able to become debt-free in 2024 if energy pricing holds or improves.

Author's note - I initially double-counted asset retirement obligations in my fair value calculation (since these costs are typically included in PV-10). I've updated the valuations to reflect this increasing the fair value at current strip from approximately $13/share to $16/share. - 11/7/2022

Disclosure: I/we have a beneficial long position in the shares of AMPY either through stock ownership, options, or other derivatives. 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.