|Shares Out. (in M):||17||P/E||9.5||0|
|Market Cap (in $M):||315||P/FCF||0||0|
|Net Debt (in $M):||78||EBIT||70||0|
Buy Panhandle / PHX
I have no idea if we have reached the bottom in oil and natural gas prices. If pressed, I would say we are still in a bearish supply enviornment, so I think prices likely remain weak for a while. My "loose" recommendation is to buy Panhandle (PHX) Oil & Gas...Loose meaning that I think you very easily might have an opportunity to buy this in the mid-teens again, but I / we do personally own the stock at this juncture at prices right around this level. We believe energy will have a gradual recovery later in the year, and this is a super well run enterprise, and a solid way to express that belief.
PHX has a unique business model in an industry which is highly competitive, and where everyone sells the same product. True, management competency and technological innovation have given an edge to some in oil and gas production, but operating with a structural advantage is not the norm in this industry. What differentiates PHX is the fact that it owns the minerals which produce a royalty stream, and has the option to participate as a non-operated working interest participant in wells being drilled on their mineral interests. PHX never has to deal with drilling a well to hold a lease, or letting a lease expire because of a bad pricing environment (like now), only to potentially re-lease it at higher prices down the road. They are simply not on the lease-bank treadmill. They can elect to stand pat and collect their royalty, or participate (usually 5%) with industry leaders such as Southwestern, Continental, Devon, Chesapeake, EOG, and Cimarex. The ability to make money on both sides, as royalty owner, and participant lowers their cost and increases their returns. PHX also has a much lower cost of capital on its core asset base, 255,000 perpetual mineral acres owned at an average cost of $90 per acre, of which only 68,000 are producing or leased. We have seen and will be seeing other companies in the present environment walk away from leases that they paid $1,000's of dollars per acre for.
Let me also point out a fact that I find remarkable : Since PHX came public in 1979 (Panhandle was founded in 1926), it has not issued any further shares into the public market. You would be hard pressed to find in any extractive industry a company that hasn't been a regular issuer of shares. PHX share count is essentially static, save for splits. PHX is conservatively run and financed, with $78mm drawn (originally drew $83mm last summer but have paid it down) from a $200mm facility which matures November 2018 at a rate of just over 2%. Managment and directors own approximately 15% of the company, and since 2010, the BOD has set managment bonuses based most heavily upon finding cost targets.
Global Hunter ranks PHX in the top 10 of public E&P companies for finding and development costs. This cost advantage gives PHX an edge. That cost advantage is gained because of the dual nature of their business, owning the perpetual mineral rights and participating in the projects. PHX's slice off the top gives them a greater interest with less economic exposure. PHX's finding cost averages .90 per mcf, and their pre-tax rate of return averages 34%, compared to industry averages of $1.10 and 22% respectively. This means Panhandle enjoys a nearly 20% lower finding cost, and a nearly 60% higher rate of return. In fact, PHX was primarly a royalty company until fairly recently, when in 2006, they begain participating as working interest participants. This has worked out well, as 70% of their income is now derived from working interest participation, to the 30% from royalties. Since 2008, through royalties and participation, Panhandle has increased reserves at a compounded rate of 20%.
Panhandle's core focus areas are the Eagle Ford (Panhandle paid $80mm for a 16% W.I. in 11,100 acres in the window), Anadarko Basin (Panhandle owns through royalty and W.I. over 10% of all the wells in the basin, with nice postions in SCOOP and STACK), Fayetteville Shale, Woodford Shale (Panhandle owns working interest and royalty in 17% of producing wells in this area), and Cana-Woodford Shale (liquids rich and partnered with Cimarex where high ROR's have been achieved through Upsized frac'ing; also partnered with Devon). Panhandle has identified over 4200 future development locations, and they have proven reserves of 206 Bcfe proved (an increase of 36% compared to the year prior), approximately 69% of which is natural gas, and 22% oil and 9% NGL's.
Earlier last month, Panhandle reported record net income primarily from a pre-tax hedging gain of $11mm, and operating cash flow of just over $15mm. Last year, PHX hedged approximately 50% of their oil production for just over $90 per barrel, and this will continue through December of 2015. While it is obvious that $90 oil is preferable for the industry and PHX, clearly their will be cost savings wrung from service providers by the industry leaders that PHX participates with. You are also investing with a management team that appears to be prudent, if still suceptible to swings in commodity prices (I'm sure they would take a do-over on the Eagle Ford acquisition from this past summer, but over time I think this will work out. The economics of Eagle Ford are such that $65 WTI produces a 10% ROR. which to my longer term thinking seems achieveable in the next 12 months). During the financial crisis when energy along with everything else crashed, Panhandle remained cash flow positive, and continued to pay its dividend.A clean company with a structural advantage, PHX is not screaming cheap at just around 5.6 x EV/EBITDA, but I think reasonable, and of a very high quality when taking into account its superior finding costs and returns on capital compared to its peers. In a stable but low price environment I view this as a single digits compounder, while improved pricing would move that into the teens. They spend less and earn more than the vast majority of their industry, and they do so with just 20 full time employees. I would also encourage you to visit their website where they have a wealth of information, including their record of decreasing finding costs, and their hedge book. We are optimistic that this is the right managment team and the right corporate strucutre to have exposure to energy.I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.
No typical corporate catalyst, just a unique vehicle if you are inclined to bet on a recovery.