February 08, 2020 - 1:33pm EST by
2020 2021
Price: 2.97 EPS 0 0
Shares Out. (in M): 266 P/E 0 0
Market Cap (in $M): 791 P/FCF 0 0
Net Debt (in $M): 1,001 EBIT 0 0
TEV (in $M): 1,792 TEV/EBIT 0 0

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***This is a very speculative energy idea that we are treating like an option (either there is a rather large payoff or the shares are worth zero), so size accordingly***

Centennial Resource Development is (probably) a (subscale) Permian oil & gas company run by Mark Papa (of EOG fame).  Riverstone was the original investor, and remains a large owner of the company.  The strategy was to acquire Permian acreage using relatively low leverage, build production, and not hedge... which was/is possible given the low balance sheet leverage.  During the third quarter of 2019, the company produced 76,300 boepd.

There is a big problem -- at $50 oil, the stock is overvalued at today's price (using the assumptions we'll outline below), and at $40 oil, the stock is worth zero.

Here are the relevant assumptions --

CDEV has acreage with ~2,400 drilling locations for which they have an average 85% working interest; they are spending around $13M to drill a well; EUR per well is probably around 1.25 billion BOE of which we assume that roughly 35% is gas (so we just cut rev/boe by 35%).  In September, they dropped a rig and so are running a 5 rig program which should drill ~70 gross wells in the next 12 months.  They are outspending cash flows at current oil prices.

Per Well EUR (after 25% royalty)  = 937,500 barrels

Oil Price @$50 WTI = $32.50 after discount for nat gas

Costs = ~$11.25/BOE ($9 for opex, $2.25 for taxes)

Cash flow per BOE = $21.25

Cash flow per well = ~$19.9M

Given the capex per well, discounted at a 10% discount rate, using the above assumptions, we calculated that the company produces ~$370K NPV per well after tax, just barely worth doing at $50 oil.

If we assume that CDEV drills all of their available wells over the next 20 years, and discount the cash flows at 10% using $50 oil, we arrive at a paltry $325M of NPV from the acreage position.  We can then add the intrinsic value of existing production which we calculate at $1.2 billion given current oil prices (~$15,700 per flowing BOE on 3Q production numbers).

That brings us to the following valuation table --

Existing production $1.2B

Value of acreage      0.3B

Total Value    = $1.5B

Less Debt          (1.0B)

Intrinsic value per share = $500M/280M shares = ~$1.88/share    (a side note here... we're increasing the share count for options grants over the years, this is not the current share count)

So, why even bother?  We think CDEV provides very interesting upside should oil prices rise over time.  Using the same assumptions as above, but changing the oil price (and the variable taxes paid that are tied to commodity price), we arrive at the following IVs for the corresponding oil price.

Oil Price            IV            Multiple of today's price

$45                  $0

$50                  $1.8               0.6x

$55                  $7.0               2.3x

$60                  $12.1             4.1x

$65                  $17.3             5.8x

$70                  $22.4             7.5x

As I said to start this idea -- this is very speculative.  There is a good probability of total loss given the sensitivity to oil prices, and the current oil strip.  However, for those investors that would like to have significant upside to any spike in oil prices without the near-term balance sheet risk, we think CDEV offers an interesting speculation.

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.


None (or oil prices)

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