|Shares Out. (in M):||38||P/E||0||0|
|Market Cap (in $M):||212||P/FCF||0||0|
|Net Debt (in $M):||200||EBIT||0||0|
|TEV (in $M):||412||TEV/EBIT||0||0|
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AMPY was last written up on VIC in October 2020. The stock has been a screamer since then, trading from <$1 then to ~$6/share today. A lot has happened since then, and I think the stock today is both undervalued and heavily catalyst rich. As their key Beta asset comes back online in the middle of this year, I expect shares to trade for >$10/share.
The company was formed through a merger of equals of two smaller companies in 2019; this timing proved ill-fated, as COVID demolished oil and gas prices just a few months after close. With energy prices hitting record lows in 2020, AMPY found itself subscale and overleveraged.
As energy prices started to recover in 2021, it looked like AMPY would finally start to work. Higher prices would let AMPY generate significant free cash flow, which would let them pay down their debt and likely assess options to get the company to a reasonable scale (either through buying a company or, more likely IMO, selling themselves). Then disaster struck: in early October 2021, AMPY’s key Beta asset (off the coast of California) had an oil spill. The stock was hammered as investors sold first and asked questions later, and it’s easy to see why: BETA was viewed as AMPY’s crown jewel and responsible for ~20% of their PV-10. The oil spill meant significant (and, at the time, unknown) clean up costs for AMPY; combine that with the lack of cash flow from Beta and AMPY’s high leverage, and there was considerable chance that the spill would result in AMPY going bankrupt.
AMPY’s stock has largely recovered since the oil spill, as the spill turned out to be much smaller than initially feared and AMPY has done a great job of collecting on insurance proceeds. Plus, with the spill almost certainly caused by two ships whose anchors hit the Beta pipeline, investors have largely gotten comfortable that the ultimate costs of the spill will be limited. I’ve pasted the 6 month stock price of AMPY below; I’m sure you can easily spot the rapid decline due to the spill and the gradual recovery as investors got comfortable with the spill liability (and/or energy prices mooned).
That largely brings us to today. Despite shares recovering all of their oil spill losses (and then some), I think AMPY represents an exceptional and catalyst rich risk/reward today.
In large part, this risk reward is driven by energy prices. Energy prices have screamed higher since the oil spill. Obviously current prices =/= the long term curve, but when the spill happened in early October oil was ~$75/barrel. Today, oil is >$100. If you look through the company’s investor decks, they include PV-10s at the then current strip prices. Pre-Beta, the company’s most recent PV-10 at strip was from July 31, 2021 and suggested AMPY’s PV-10 was $12.31/share.
In March, they published an updated strip PV-10 that had AMPY worth $15.15/share at strip as of February 27, 2022 (see below).
That >$15/share of PV-10 is a huge increase from today’s ~$6/share price, and I’ll note that I think that PV-10 number is low for four reasons:
Strip is materially higher today than it was at the end of February; see screen shots of nat gas and oil prices below. It’s tough to get exact, but assuming they hold these moves should be good for well over $100m in extra PV-10 in the next valuation (>$2/share).
Because of the spill, AMPY took out almost all of their proved undeveloped reserves (PUD) from their forecasts. At current strip, those would add ~$10/share (though how much of that value you want to give AMPY credit for is an open question; the market clearly never gave them any!); I would expect those get added back in a reasonably short time period after Beta comes back online.
AMPY’s debt number is current as of the end of February 2022. They’ve incurred almost $100m of costs related to Beta, almost all of which will be recoverable through insurance. Through the end of Feb, they’d only recovered ~$70m of the cost. The incremental $25-30m of recovery would drive another >$0.65/share in PV-10 value (on the low end); importantly, this value should be realized in the near term and will be in straight cash.
Per the 10-K “Through December 31, 2021, we had collected $48.3 million out of the approximate $97.4 million of costs that we believe are probable of recovery from insurance carriers, net of deductibles. Therefore, as of December 31, 2021, we have recognized a receivable of approximately $49.1 million for the portion of costs that we believe is probable of recovery from insurance, net of deductibles and amounts collected during 2021. Subsequent to December 31, 2021, for the period January 1, 2022 through March 1, 2022, we received insurance cost recoveries of $22.1 million.”
Per their earnings call:
The company has loss of production insurance (LOPI) for Beta. They are already recovering on this; while recoveries through the end of Feb should be in that PV-10 number (it flows through the net debt number), I do not believe future LOPI insurance is in their PV-10 number. Per the earnings call (see below) their LOPI insurance would run through Q1’2023 (if they don’t get Beta online) and kicked in 45 days after the spill. Since the spill happened in early October, the insurance kicked in towards the back half of Q4’21, and the 10-K notes “For the period from October 2, 2021 through December 31, 2021, the Company recognized LOPI insurance payments of $6.7 million from our Beta properties due to the pipeline incident that occurred on October 2, 2021.” That’s almost $7m of insurance recovery for half a quarter at lower strip prices. AMPY is forecasting Beta coming back online in early July 2022; assuming that’s correct (I think it might be slightly aggressive), LOPI would result in >$20m in recoveries that aren’t in that PV-10 number (>$0.50/share in hard cash).
So put all those points together, and you get this: AMPY trades for a material discount to the value of their PV-10, and when they next report a PV-10 I think the market is going to be surprised how much higher it is just based on the current curve and all the “hidden assets” from their insurance recoveries.
Now, a reasonable push back would be “Ok, AMPY trades at an enormous discount to PV-10; don’t tons of companies trade for a discount?” The answer is yes (though AMPY trades for a larger discount than just about any I’m aware of), but what I like about AMPY is that the current curve means they should absolutely mint money. AMPY is reasonably hedged for 2022, but they wisely took their hedges off for Beta reasonably quickly after the spill. At the current strip, AMPY should generate ~$250m in free cash flow between now and the end of FY24 (if we assume Beta comes back online in July). That would pay off all of AMPY’s debt and leave the company with roughly a quarter of their current market cap in cash. Again, the market can do anything in the short term, but that level of cash generation combined with the huge discount to asset value AMPY currently trades at can’t exist for long.
So, over the next year, I’d expect AMPY’s discount to PV-10 / NAV to close simply driven by Beta coming back online and the massive cash flow coming in at the current strip. But I believe there’s an opportunity to accelerate that process: M&A.
In the short term, AMPY announced alongside their Q4 earnings, “We are currently marketing our non-operated Eagle Ford asset and are considering additional transactions that could accelerate the deleveraging of our balance sheet.” Eagle Ford is a small non-operating asset; there should be a variety of strategic and financial buyers willing to pay close to PV-10 for it given what a simple financial asset it is. Eagle Ford was worth $40m in PV-10 at Feb. strip, so a sale would go a long way to quickly deleveraging AMPY. Additional asset sales might go for a bit more of a discount, but would do something similar.
In the longer term, it’s clear AMPY is subscale. If you look at their PV-10 slide, $75m of value is getting hit from capitalizing G&A at 3x. For a company with ~$1B in PV-10, that’s a simply unsustainable level of G&A costs (and I think the cap rate is too low). I’ve talked to AMPY’s management and they clearly know that the current status quo cannot hold; AMPY needs to bulk up either by acquiring someone or getting acquired. Given AMPY is currently looking to sell Eagle Ford and other assets, I think the writing is on the wall that management will be sellers in the medium to long term (i.e. once Beta is fully operational) / I think management is overwhelming likely to be sellers than buyers. Why? Well, I think they and the board were dealt a bad hand (both from COVID and the spill), and they’ve managed that “bad hand” extremely well and in a generally shareholder way (I give them particularly high marks for how they’ve handled the Beta spill so far). So I think they’ll do what makes most sense.
Now, what makes the most sense could be AMPY looking to bulk up instead of selling. Oil and gas assets across the board are trading for a large discount to their cash flow implied by the curve (as detailed here), and AMPY has a decent bit of infrastructure assets that could be leveraged for synergies if they went on a shopping spree. So, while I think AMPY is more likely to be a seller than a buyer, I could see them looking to buy. That said, I think both management and the board know the shareholder base is going to have a very high bar for M&A. Avenue Capital is the largest shareholder (owning ~7% of the stock) and has a board seat; between that and the shareholder base / recent turmoil, I think if AMPY did decide to become a buyer it would be because they had some very accretive deals lined up.
AMPY’s past with Beta would likely serve as a check on M&A: I doubt banks are eager to let AMPY really leverage up after Beta, so any large scale M&A would probably have some equity component. That means shareholders will likely get a vote on any deal, and if AMPY tried to get “bad” M&A through it would likely lead to a proxy fight of some form. Again, I think that’s unlikely; the largest shareholder is a board member, and my talks with the company indicate they clearly know the bar for M&A is high given how cheap the stock is.
Hopefully at this point I’ve convinced you that AMPY is undervalued and catalyst rich. To recap:
AMPY trades for a fraction of their PV-10
Their PV-10 is most likely dramatically understated given the recent move in the energy curve
PV-10 is likely understated given well in excess of $1/share in near term insurance recoveries that are not included (something I have not seen anyone else comment on)
AMPY should generate significant cash flow in the near term, which will derisk the story, particularly once Beta turns back on
In both the near, medium, and longer term, AMPY is likely a seller, which will alleviate the G&A burden on asset value and should deliver shareholders a premium.
Put all of those together, and provided we don’t see a material decrease in energy prices, I think AMPY will continue to grind higher as the market gets clarity on Beta restarting and gains confidence in AMPY’s PV-10. By the end of the year, I expect Beta will be back online, the company will be printing money thanks to the current curve, and that cash flow (plus maybe an asset sale) will help AMPY easily refinance their debt. In the medium term, I expect the company to sell itself as the oil spill gets further and further in the rear view mirror.
There are three big risks worth discussing before wrapping this up.
The first is refinancing. AMPY is heavily levered (~$200m in net debt at the end of February). All of this debt is on their revolver, which comes due in November 2023. There is a risk AMPY can’t roll their revolver…. but I view this risk as remote. Why? Between now and the revolver going current at the end of this year, AMPY should generate a significant amount of cash flow. If Beta is online by then, this won’t even be a concern, but even without Beta, AMPY will be generating a material amount of cash flow thanks to the insurance proceeds and current energy pricing. Given where the strip is, AMPY should easily be able to refinance their debt by locking in some hedges and showing the banks how much cash flow they’ll generate. And all of that assumes Beta is offline and that AMPY doesn’t sell any assets (like Eagle Ford) to pay down debt in the near term.
The second big risk is a rapid drop in energy prices. This is certainly possible (even if it feels like the path for energy prices is higher in the near / medium term given how tight supplies are and the geopolitical risks). I’d just note that AMPY’s PV-10 is materially higher than the current share price even with a curve much, much lower than today’s, and AMPY does have a nice amount of hedging on for 2022 and 2023 so even a big drop in prices doesn’t destroy the story / cash flow.
The last big risk here is that Beta never restarts for some reason. I think that’s extremely unlikely; lots of people worry that Beta won’t restart because California is hostile to oil drilling in general and Beta in particular (thanks to the spill), but I don’t think California has much say. Beta is in federal waters, so federal regulators will get final say, and everything from both the company and regulators suggests they are on a clear guide path to getting this back online (I’d encourage you to read their Q4 earnings call to see how confident they sound on Beta coming back online). The company has modeled a July 1 restart date; I think that’ll prove a little aggressive as it takes several months to get back online after receiving approval, but I do expect we should have federal approval by late May / early June, which will give AMPY (and investors) clarity into a restart sometime in Q3 (or early Q4 at the latest).
What if I’m wrong and California tries to block Beta for some reason? Well, first, given current energy prices, I think the politics for blocking an easy near term supply of oil/gas are not great; you can find all sorts of articles on California politicians looking to give taxpayers back money to deal with high gas prices. Turning down an easy extra few barrels (and the tax revenue) while paying out gas stimmies seems like a bad look politically. But, second, if California did try to stop Beta, I believe AMPY would have an easy lawsuit on their hands. I’m not a lawyer, but I’ve spoken to several and a state trying to take an asset from a company without very good reason* is about as easy of a lawsuit as you’d get, and AMPY would be entitled to the NPV of Beta plus, in all likelihood, significant damages. Given the current strip, I would love to get the NPV of Beta from California (with likely damages on top).
*Naysayers might say “of course California has a reason; the pipeline spilled.” But Beta could (rightly) point out the spill wasn’t their fault, and in fact turn the tables politically on California by saying “Hey, the spill only happened because a ship dragged anchor on our pipeline, and that happened because of the epic mismanagement of the port system.” I doubt anyone in California wants to go down that line of attack and risk discovery.
There are a few other goodies with AMPY (for example, I think there’s a small chance they get awarded some penalties from the shipping companies that caused the spill), but all in this is a reasonably simple thesis. AMPY trades for a huge discount to asset value, and a variety of catalyst should see AMPY realize a ton of cash flow and close that gap in the near future.
Odds and ends
Again, I think it’s extremely likely Beta comes back online sometime this year. But what if I’m wrong and Beta never does? It wouldn’t be ideal…. but I actually think the stock would still be undervalued at anything close to current energy prices. Without Beta, the company is forecasting they’d have ~$125m in net debt at the end of FY21 (versus over $200m currently), so they’d still be generating significant cash flow (and growing as they’d be largely unedged after that). Beta was responsible for ~$150m of AMPY’s just under $1B of PV-10 at the end of Feb., so you could knock PV-10/share down from ~$15/share to just over $11/share…. and, again, that’s at strip from the end of February. Strip’s much higher now. And none of that factors in the money AMPY would likely win from the government and/or the ship owners who caused the spill if Beta didn’t come back for some reason.
To sum: I think it’s overwhelmingly likely Beta comes back on this year, and when it does I think it’s a huge catalyst for the stock. But at anything near current strip, I think AMPY is undervalued with or without Beta.
Also, if Beta did not come online or comes on late, AMPY would continue to get LOPI insurance through early next year.
I am not picking AMPY as a macro call; AMPY’s current stock price does not reflect current energy curves with or without Beta. That said, higher energy prices are certainly better for AMPY, and it’s hard to look at how tight the market is right now and things like the LNG export boom without thinking that prices will remain elevated for the near to medium term, which will be great for AMPY both in terms of their PV-10 mark and, more importantly, that they’ll be printing free cash flow.
Generalists generally get murdered buying into energy spaces, but I think they generally do so paying peak cycle prices for rapidly declining assets that don’t really produce cash flow. I think the apposite is the case for AMPY; as stressed above, you’re not paying anywhere close to the current curve for AMPY, and these are mature assets that produce a ton of cash flow but have a reasonably low decline curve.
Beta Coming back online
Enormous FCF leading to delevarging
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