Amplify Energy: Potentially Eruptive Share Price Appreciation

Summary

• Amplify Energy shares appear priced for bankruptcy or perpetual depressed commodity prices, but the company doesn't appear headed for bankruptcy and commodity prices may be moving to all time highs.
• Management performed remarkably well during 2020 and has a history of rewarding shareholders.
• Tremendous share price appreciation and/or substantial capital returns may be on the horizon.

Amplify Energy Corporation (AMPY) is a relatively low-float, microcap independent oil, natural gas, and natural gas liquids exploration and production (E&P) corporation that caught my attention when, back in October of 2020, I was scouring the yearly charts of E&P companies for the purpose of finding E&Ps seemingly priced for bankruptcy but that may have a good chance of yielding strong stock price appreciation should oil, NG, and NGL prices increase materially. Out of all the charts and companies I looked at during that search, AMPY presents, in my opinion, the greatest turnaround opportunity. When I found AMPY, back in October, its one-year share price depression was quite substantial at ~ -90%, even more so than other, larger oil and gas companies such as, for example, Exxon (XOM), Royal Dutch Shell (RDS.A), and Hess Corp. (HES). I believe that this discrepancy in share price depression among oil and gas companies is largely due to the perceived better ability of larger companies to weather 2020’s unprecedented decline in oil prices. While this perception may generally be true, it does not necessarily mean that smaller companies—such as APMY, are going to fail whereas larger players are going to be able to weather the storm. However, in my mind, such prevailing market sentiment requires greater analysis and more thought before taking a position. Ergo, before taking a position in AMPY, I wanted to take a historical look at AMPY to see how it has performed in the past to find any red flags and then estimate FY2020Q4 and FY2020 results now that commodity prices appear to be on the upswing and the world community prepares to transition from Covid-19 necessitated restrictions to more active behaviors. A summary of my analysis follows.

Amplify Origins

AMPY is the successor corporation which resulted from the merger, completed August 6, 2019, between Midstates Petroleum Company, Inc. (Midstates), Midstates Holdings, Inc. (a wholly owned subsidiary of Midstates), Alpha Mike Holdings, LLC (a wholly owned subsidiary of Midstates), and Amplify Energy Corporation (Legacy Amplify), whereby Midstates Holdings merged into Legacy Amplify and Legacy Amplify merged into Alpha Mike Holdings thereby resulting in a corporate entity comprising Midstates as the parent and Legacy Amplify as a subsidiary. However, per the merger terms, Midstates was renamed Amplify Energy Corporation and thereby became the current AMPY entity.

Both Legacy Amplify and Midstates had troubled pasts and were both successors of companies restructured through Chapter 11 proceedings. First, Midstates filed for Chapter 11 on April 30, 2016 and emerged restructured—name unchanged—on October 21, 2016. Second, Memorial Production Partners LP (Memorial) filed for Chapter 11 on April 14, 2017 and emerged restructured on May 4, 2017 as Legacy Amplify. Finding that AMPY’s ‘roots’ lie in companies restructured through Chapter 11 was an immediate red flag for me, especially when considering 2020’s depressed prices, and I wanted to take a deeper look at those predecessors to see if their troubles might persist and/or resurface and result in AMPY filing for Chapter 11.

Amplify doesn't appear to be headed for Chapter 11

Comparing oil, NG, and NGL prices for the 2016-2017 period, the time period in which both Midstates and Memorial filed for Chapter 11, to prices during 2020 shows that oil, NG, and NGL prices turned downward markedly during both 2016-2017 and 2020 but that during 2016-2017 average prices—across the board—were all higher than average prices during 2020. This was a second red flag for me. In other words, if the predecessor companies were unable to weather low, but still higher prices, how could AMPY deal with 2020’s depressed prices?

Cushing, OK Crude Oil Futures Contract 1 ($/Bbl)
FY2016-17 avg.	$47.10
FY2016-17 low	$26.21
FY2020 avg.	$39.27
FY2020 low	-$37.63
FY2020Q1 avg.	$45.78
FY2020Q1 low	$20.09
FY2020Q2 avg.	$28.00
FY2020Q2 low	-$37.63
FY2020Q3 avg.	$40.92
FY2020Q3 low	$36.76
FY2020Q4 avg.	$42.51
FY2020Q4 low	$35.79
FY2016-17 avg. v. FY2020 avg. % Diff.	-16.62%
FY2016-17 avg. v. FY2020Q4 avg. % Diff.	-10.80%

*Table data from eia.gov

U.S. Natural Gas Liquid Composite Price ($/MMBtu)
FY2016-FY2017 avg.	$5.97
FY2016-FY2017 low	$3.69
FY2020 (1/1/2020-10/30/2020) avg.	$4.25
FY2020 (1/1/2020-10/30/2020) low	$2.85
FY2020Q1 avg.	$4.09
FY2020Q1 low	$3.06
FY2020Q2 avg.	$3.65
FY2020Q2 low	$2.85
FY2020Q3 avg.	$4.77
FY2020Q3 low	$4.54
FY2020Q4 (Oct. 2020) avg.	$4.97
FY2020Q4 (Oct. 2020) low	$4.97
FY2016-17 v. FY2020 % Diff.	-28.75%
FY2016-17 v. FY2020Q4 % Diff.	-16.68%

*Table data from ycharts.com

Natural Gas Futures Contract 1 ($/MMBtu)
FY2016-FY2017 avg.	$2.78
FY2016-FY2017 low	$1.64
FY2020 avg.	$2.12
FY2020 low	$1.48
FY2020Q1 avg.	$1.87
FY2020Q1 low	$1.60
FY2020Q2 avg.	$1.77
FY2020Q2 low	$1.55
FY2020Q3 avg.	$2.12
FY2020Q3 low	$1.64
FY2020Q4 avg.	$2.77
FY2020Q4 low	$2.31
FY2016-17 v. FY2020 % Diff.	-23.65%
FY2016-17 v. FY2020Q4 % Diff.	-0.50%

*Table data from eia.gov

However, as seen from the tables above, oil, NGL, and NG prices rallied substantially during FY2020Q4 off their yearly lows.

While the lower prices AMPY had to face this year are troubling, a comparison of the total assets, current assets, total liabilities, and current liabilities of Midstates and Memorial as they moved toward Chapter 11 filings to AMPY’s values demonstrates that AMPY was not poorly situated to weather 2020’s depressed prices as were Midstates and Memorial in 2016-2017.

AMPY Current Ratios
FY2020Q3	Total Assets	Total Liabilities	Current Assets	Current Liabilities	Current Ratio
	$421,694,000	$417,658,000	$62,502,000	$51,387,000	1.22
FY2020Q2	Total Assets	Total Liabilities	Current Assets	Current Liabilities	Current Ratio
	$453,683,000	$432,428,000	$84,773,000	$66,794,000	1.27
FY2020Q1	Total Assets	Total Liabilities	Current Assets	Current Liabilities	Current Ratio
	$507,125,000	$445,029,000	$116,381,000	$55,658,000	2.09
FY2019	Total Assets	Total Liabilities	Current Assets	Current Liabilities	Current Ratio
	$877,539,000	$443,332,000	$52,587,000	$61,088,000	0.86

*Table data from AMPY's FY2020 10-Qs and FY2019 10-K

Memorial Current Ratios
FY2017Q1	Total Assets	Total Liabilities	Current Assets	Current Liabilities	Current Ratio
	$1,910,988,000	$1,826,808,000	$160,924,000	$502,278,000	0.32
FY2016	Total Assets	Total Liabilities	Current Assets	Current Liabilities	Current Ratio
	$1,973,254,000	$1,873,765,000	$132,584,000	$1,713,777,000	0.08
FY2016Q3	Total Assets	Total Liabilities	Current Assets	Current Liabilities	Current Ratio
	$2,473,740,000	$2,053,215,000	$218,884,000	$96,067,000	2.28
FY2016Q2	Total Assets	Total Liabilities	Current Assets	Current Liabilities	Current Ratio
	$2,540,083,000	$2,085,840,000	$198,619,000	$90,869,000	2.19

*Table data from Memorial's FY2016 and FY2017 10-Qs and FY2016 10-K

Midstates Current Ratios
FY2016Q1	Total Assets	Total Liabilities	Current Assets	Current Liabilities	Current Ratio
	$782,845,000	$2,287,355,000	$344,702,000	$2,265,100,000	0.15
FY2015	Total Assets	Total Liabilities	Current Assets	Current Liabilities	Current Ratio
	$679,167,000	$2,005,233,000	$145,802,000	$1,984,560,000	0.07
FY2015Q3	Total Assets	Total Liabilities	Current Assets	Current Liabilities	Current Ratio
	$1,298,061,000	$2,114,072,000	$271,158,000	$174,953,000	1.55
FY2015Q2	Total Assets	Total Liabilities	Current Assets	Current Liabilities	Current Ratio
	$1,796,238,000	$2,119,035,000	$292,863,000	$175,485,000	1.67

*Table data from Midstate's FY2015 and FY2016 10-Qs and FY2015 10-K

A current ratio of 1 or above indicates that a company has a generally good chance of being able to pay its debts that are due within 1 year or less and a current ratio less than 1, while not dispositive, is a red flag indicating that a company is in danger of being unable to cover current liabilities. As seen in the tables above, the current ratios for AMPY remained above 1 throughout the difficult 2020 year whereas the current ratios of Memorial and Midstates quickly fell off to dangerously low values two reporting periods prior to their Chapter 11 filings. These ratios indicate that AMPY has withstood the depressed prices of 2020 well and is not likely to file Chapter 11 imminently. Moreover, a comparison of the total liabilities to the estimated proved reserves (EPRs) of each company during the same period is instructive.

Total Liabilities/Estimated Proved Reserves
AMPY
EPR (Boe) as of 12/31/2019	Tot. Liab. As of 3/31/2020	Tot. Liab./EPR
163,000,000	$417,658,000	$2.56
Memorial
EPR (Boe) as of 12/31/2016	Tot. Liab. As of 3/31/2017	Tot. Liab./EPR
152,761,000	$1,826,808,000	$11.96
Midstates
EPR (Boe) as of 12/31/2015	Tot. Liab. As of 3/31/2016	Tot. Liab./EPR
73,540,000	$2,287,355,000	$31.10

Because EPRs indicate future earnings potential, it makes sense that the larger the EPRs of an E&P company, the larger the total liabilities it can carry without undue difficulty. In the above table, we see that AMPY has the largest EPRs (as of 12/31/2019) while it also has the lowest total liabilities. Indeed, the Tot. Liab./EPR ratio of AMPY is nowhere near the higher Tot. Liab,/EPR values seen for Memorial and Midstates immediately before those companies filed for Chapter 11, those ratios being 4.7x and 12.1x higher than AMPY’s, respectively. These current ratio and Tot. Liab./EPR results are doubly indicative that AMPY is not in any imminent danger of filing for Chapter 11 despite the depressed oil, NG, and NGL prices of 2020 it has had to contend with.

Rising Oil, NG, and NGL Prices and the Oil Supercycle

As evidenced in the tables below, we saw oil, NG, and NGL prices rally substantially during FY2020Q4 as compared to their prices during FY2020Q3. While it’s difficult—if not impossible—to consistently and correctly predict oil, NG, and NGL prices into the future, I’m of the opinion that we will see prices continue to move generally upward as we move through 2021 going forward. In early 2020, chronic underinvestment in upstream projects, only exacerbated by 2020’s activities—or lack thereof, led J.P. Morgan’s European Equity Research Team to predict “Brent oil prices rising steadily from 2022 onwards, averaging around $80/bbl in 2023, $100/bbl in 2024 and $190/bbl in 2025.”  Indeed, the 36 oil and gas producer bankruptcies this year (as of 10/1/2020) has likely only exacerbated upstream underinvestment. 

Cushing, OK Crude Oil Futures Contract 1 ($/Bbl)
FY2020Q3 avg. v. FY2020Q4 avg. % Change	3.73%
Natural Gas Futures Contract 1 ($/MMBtu)
FY2020Q3 avg. v. FY2020Q4 avg. % Change	30.36%
U.S. Natural Gas Liquid Composite Price ($/MMBtu)
FY2020Q3 avg. v. FY2020Q4 (Oct. 2020) avg. % Change	4.27%

*Table data from eia.gov

While the U.S. Natural Gas Liquid Composite Price has not been publicly updated to reflect Nov. and Dec. prices, the Composite price is based on the daily Bloomberg spot price for NGLs, which include ethane, propane, butane, isobutane, pentane, and heavier hydrocarbons. The U.S. Residential Propane Price has risen from an average price of $1.82/gal on Nov. 2, 2020 to $1.97/gal on December 28, 2020—a 8.24% increase. If the price rise of propane is indicative of the price change of the overall Composite from FY20202Q3 to FY2020Q4 we can expect the Composite to have risen 12.86% overall.

U.S. Natural Gas Liquid Composite Price ($/gal)
U.S. Residential Propane Price Nov. 2. 2020	$1.82
U.S. Residential Propane Price Dec. 28, 2020	$1.97
U.S. Residential Propane Price Nov. 2, 2020 v. Dec 28, 2020 % Change	8.24%
FY2020Q4 (Oct. 2020) avg. + 0.0824(FY2020Q4 (Oct. 2020) avg.)	$5.38
FY2020Q3 avg. v. FY2020Q4 (Oct. 2020) avg. + 0.0824(FY2020Q4 (Oct. 2020)) avg. % Change	12.86%

*Table data from ycharts.com

Estimated FY2020Q4 and FY2020 Revenue, Net Income, and EBITDA

AMPY’s quarterly production has remained fairly constant throughout this year, so to obtain estimated FY2020Q4 and FY2020 total revenues, I: i) assumed that production would remain flat in FY2020Q4; ii) adjusted revenues up in accordance with the higher FY2020Q4 average oil, NG, and NGL prices mentioned previously, and; iii) averaged other revenue from FY2020Q1 through FY2020Q3 to obtain other revenue for FY2020Q4. Management successfully reduced costs this year, as evidenced by the lease operating expense (LOE) plot below and—per the FY2020Q3 earnings call—appeared to have hit a sweet spot, so—in the spirit of these cost saving initiatives—to obtain estimated net income for FY2020Q4 and FY2020, I approximated FY2020Q3 costs and expenses and income tax remaining constant into FY2020Q4. In much the same way, I estimated FY2020Q4 and FY2020 adjusted EBITDA by assuming that FY2020Q3 adjusted EBITDA reconciliations would remain constant for FY2020Q4. These approximation result in net income of -$7MM and an adjusted EBITDA of $35MM for FY2020Q4. I believe these estimates are reasonable and correlate with the generally improved quarter-over-quarter performance of AMPY as evidenced by comparing the FY2020Q1, FY2020Q2, and FY2020Q3 results.

*Plot from AMPY's December 2020 Investor's Presentation

AMPY Revenues, Production, Net Income & Adj. EBITDA
	FY2020E	FY2020Q4E	FY2020Q3	FY2020Q2	FY2020Q1
Revenues
Oil	$143,538,240	$38,243,176	$36,868,000	$22,963,000	$41,851,000
NGLs	$20,251,058	$6,249,058	$5,537,000	$3,343,000	$5,122,000
NG	$42,623,199	$13,144,199	$10,083,000	$8,582,000	$10,814,000
Tot. Oil & NG Sales	$206,412,497	$61,249,497	$52,488,000	$34,888,000	$57,787,000
Other	$1,185,333	$296,333	$257,000	$283,000	$349,000
Tot. Revenue	$414,010,328	$115,569,200	$105,233,000	$70,059,000	$115,923,000
Production volumes
Oil (Bbl= Boe)	3,921,000	997,000	997,000	945,000	982,000
NGLs (Bbl= Boe)	1,749,000	430,000	430,000	435,000	454,000
NG (Boe)	4,642,500	1,117,667	1,117,667	1,142,833	1,264,333
Tot. Production (Boe)	10,312,500	2,544,667	2,544,667	2,522,833	2,700,333
Production %
Oil	38.02%	39.18%	39.18%	37.46%	36.37%
NGLs	16.96%	16.90%	16.90%	17.24%	16.81%
NG	45.02%	43.92%	43.92%	45.30%	46.82%
Net income	-$433,382,800	-$7,348,800	-$17,685,000	-$41,336,000	-$367,013,000
adj. EBITDA	$98,407,200	$35,096,200	$24,760,000	$21,315,000	$17,236,000

*Table data from AMPY's FY2020 10-Qs or estimated by author

AMPY Valuation

Now, valuation. AMPY has traded at a much higher enterprise value (EV) and share price in the recent past. On Dec. 6, 2019, AMPY had an EV of $479MM and a share price of $5.38. At the time of writing, AMPY had an EV of $275MM and a share price of $1.31, as seen in the table below.

AMPY Current Values
Outstanding Shares of Common Stock (as of 10/30/2020)	37,656,451
Price/Share (as of 1/1/2020)	$1.31
Market Capitalization	$49,329,951
Total Debt (as of 10/30/2020)	$243,000,000
Cash & Cash Equivalents (as of 10/30/2020)	$17,000,000
Enterprise Value	$275,329,951

*Table data from AMPY's December 2020 Investor's Presentation or calculated by the author

As illustrated in the below plot, oil and gas companies can trade at substantially divergent EV/EBITDA multiples. I believe that: i) based on the good odds that AMPY will avoid Chapter 11; ii) the likelihood that oil, NG, and NGL prices will rise going forward; iii) AMPY’s size, and; iv) peer group leading proved developed reserves (also seen below), a fair EV/EBITDA for AMPY is 5x.

*Plot from AMPY's December 2019 Investor's Presentation

*Plot from AMPY's December 2020 Investor's Presentation

As seen in the table below, an EV/Adj. EBITDA (FY2020E) of 5x presents incredible upside for AMPY shareholders. Moreover, I don’t believe that the 10x EV/Adj. EBITDA Price/Share of $20.13 is completely out of the question should AMPY continue to perform well and oil prices rally to the levels forecasted by the J.P. Morgan European Equity Research Team.

Valuation & Potential Shareholder Upside	EV/adj. EBITDA (FY2020E)	Enterprise Value	Market Capitalization	Price/Share	% Upside
Current Valuation	2.8	$275,329,951	$49,329,951	$1.31	0.00%
Multiple of Adj. EBITDA & Potential Upside	3	$295,221,600	$69,221,600	$1.84	40.32%
	4	$393,628,800	$167,628,800	$4.45	239.81%
	5	$492,036,000	$266,036,000	$7.06	439.30%
	6	$590,443,200	$364,443,200	$9.68	638.79%
	7	$688,850,400	$462,850,400	$12.29	838.27%
	8	$787,257,600	$561,257,600	$14.90	1037.76%
	9	$885,664,800	$659,664,800	$17.52	1237.25%
	10	$984,072,000	$758,072,000	$20.13	1436.74%

AMPY Management has historically sought to reward Shareholders

Lastly, I believe that AMPY shareholders can breathe easy in light of management’s past efforts to increase shareholder value. While not mentioned in the current December 2020 Investor Presentation, AMPY’s management has rewarded shareholders with numerous tender offers, share buybacks, and cash dividend payouts in the recent past, as seen below.

*Plot from AMPY's December 2019 Investor's Presentation

Conclusion

In conclusion, while AMPY shares have rallied off their lows earlier last year, AMPY still appears to be priced for Chapter 11 and/or substantially depressed oil, NG, and NGL prices. However, i) management performed well during 2020; ii) a Chapter 11 filing does not appear to be in the cards—at least not imminently; iii) we saw oil, NG, and NGL prices rally substantially during FY2020Q4, and; iv) in light of the lack of investment in upstream oil and gas production in recent years, it’s not unreasonable to believe that oil, NG, and NGL prices will rally substantially in the near future. If that rally manifests, AMPY provides a superior instrument for incredible share price appreciation and/or various forms of capital returns. I recommend that investors bullish on oil and gas prices consider taking a position in AMPY.