$AMPY Update: Risk/Reward Far Better than October 1st
Fresh Look at AMPY as the Fog of War Clears
[Editor’s Note: Please refer to my initial post to frame the AMPY investment case before the Beta Incident1 ]
I have tried to let the dust settle on the Beta Pipeline discharge to allow for a sober evaluation of the evolving situation. To see my initial reaction during the fog of war, you can watch my interview with Andrew below2. The more we learn. “it’s not the end of the world” was a pretty decent take.
Am I surprised that the stock has traded poorly since the incident? Not at all. This is a microcap and investors will likely wait until they are spoon-fed precise information which perfectly frames insurance coverage, restart of operations and avoidance of regulatory punishment. Only time and company communication will satisfy this desire; what I can do, however, is begin to frame the situation in a way that is mindful of these blind-spots and opine on the stretched risk/reward (as opposed to the timing with which we achieve this necessary clarity).
My conclusion? I believe that AMPY risk/reward is now incredibly favorable, far more so than at $5.75 on October 1st. AMPY has now declined 54% since that day, the incident increasingly looks like it could have little to no net liability outside of standard deductibles and legal costs, and the Oil & Gas strip is higher. This is an explosive combination.
Below are several considerations which I believe frame the investment decision going forward. Let’s analyze what has transpired since the initial incident before getting into the opportunity in the stock.
What is the size of this incident and hence the size of potential cleanup and remediation liability?
Does AMPY maintain adequate Insurance coverage to cover the liabilities from #1. Separately, do they carry adequate business interruption insurance?
Is there potentially shared liability or was the incident solely AMPY’s fault?
Will Beta resume operations? Will the company drill again?
How will lenders respond?
What does this all mean for the stock at $2.67 per share?
Which catalysts will unlock the disparity vs fair value?
1. Size
From day one, almost every new data-point has indicated that the spill and resultant impact was far smaller than feared. The most important measure is the estimated number of barrels released. While inaccurate early press reports largely focused on the maximum potential release of 3,134 BBLs, more refined estimates from the company and reiterated by the Coast Guard have centered on a 588 BBL release, 81% smaller than the potential release. This is a critical statistic, as everything from fines, actual ecological impact and cleanup, and even public and regulatory perception are anchored off this number.
While all beaches were reopened by October 14th, 12 days post incident, the majority reopened even earlier3 This is important as claims are based on economic losses of claimants, and there is only so much damage that can be claimed if your business was only closed for a few days (In fact, as I understand there is a not-inconsequential burden of proof on the part of the claimant that may make the calculus of filing for a few days of damage quite tricky).
Another decent indicator of relative size is Wildlife impact. From the early days of the incident, the Oiled Wildlife Care Network was ‘cautiously optimistic’:
As the numbers continued to roll in, the wildlife impact did not reach anything close to the 2015 Refugio incident. Fewer birds, and especially mammals were impacted. For referenced, 71 sea lions and dolphins4 died during the Refugio incident, while only 4 have perished in this incident to date.
Finally, this is a bit more speculative as I might be comparing apples and oranges, but Plains All American estimated that cleanup costs for their Refugio spill were $3M per day in the first 21 days of their incident. Amplify has just disclosed that their costs “related to remediation efforts regarding the incident” stand at $17.3M 38 days after the incident, i.e. $455K per day or 15% the size of the Refugio incident.
2. Insurance
It is hard to stress how important this topic is. In fact, one could argue that the size of incident is somewhat irrelevant and more of an issue for AMPY’s Insurance carriers and the suspected vessels in some respect.
While we speculated based on past precedent that Insurance would cover a substantial portion of the Incident costs AND the business interruption, the company went out of its way to spell this out in its November 15th disclosures.
I was happy to read this tidbit in the release, but ecstatic to see the following in the 10-Q.
That’s right. The company stated that of the $17.3 million in remediation costs identified to date, the ENTIRE AMOUNT has been either reimbursed of approved for reimbursement, less deductibles.
In the next paragraph, the company once again goes out of its way to spell out the fact that they ALSO expect a MATERIAL portion of lost revenue to be covered. Anybody who has seen the rigor that goes into filing a 10-Q, particularly in a high-stakes filing like this one, would appreciate both the fact that this information is disclosed, and the use of the word material.
3. Shared Liability
Not only has the Coast Guard stated that they believe an anchor dragged the Pipeline, they have gone further and identified the MSC Danit as a ‘vessel of interest’. I don’t want to spend too much time here because this is likely of most interest to AMPY’s Insurance carriers, but I would point out two potential tailwinds this may present.
First, the likelihood for poor regulatory outcomes declines substantially if a wayward anchor thesis is proven. Inverting, a positive regulatory outcome would sounds something like “this wasn’t your fault, straightforward fix, you are operating Beta again in 1H ‘22.
Second, if a specific ship is identified, I believe AMPY could well have a net exposure of zero for the entire incident, as they could likely pursue damages for their cash expenditures like legal fees, insurance deductibles crisis management, etc.
4.Beta Resumption
While this incident has been surrounded in a substantial amount of media drama, the Corrective Action Order issued by the DOT’s Pipeline and Hazardous Materials Safety Administration (PHMSA) has defined pathways to identify root causes, make repairs, and resume operations. The details could be worthy of an entire post, but the bottom line is that this is a process which is not unique to AMPY, and there are very rigid pathways by which a pipeline operator addresses issues and returns to service.
5. Lenders
AMPY included the results of their Fall redetermination in the Nov 15th 8-K. The lenders held the borrowing base flat, but noted that it will decline $5M per month beginning in February of 2022 and through the April ‘22 redetermination. Interesting. Two observations. First, simply getting through this redetermination with nary a mention of anything scary is a nice positive. Second, the $10M - $15M reduction that will take place between February and April of 2022 - well that is VERY interesting. Could this be a signal that management and the lenders feel quite confident in the liquidity outlook through the 1st half of 2022? They are clearly working with far better legal, insurance and incident-specific knowledge than I am.
My gut? The company at Sep 30th (2 days before the incident) had $230M drawn and was holding cash of $17M. I suspect that the company and lenders agreed that the cash on hand plus cash flow from operations (and insurance reimbursements) is sufficient to manage through this incident. If this is the case, it is probably the most important tell we have received since the incident.
6. Risk/Reward
The stock jocks on my feed are probably exasperated at this point. “Ok, ok, get to the STOCK, @twebs!”
Well here we go. At $2.67 as of Friday’s close, AMPY has a market cap right around $100M. My 2022 and 2023 free cash flow estimates before this incident were approaching $140M and that included an extra $50M of cumulative capex to account for Beta drilling (I will assume that’s a goner). Let’s be conservative and just say FCF is $75-$80M per year, baseline, with full operations.
Every bone in my body after evaluating all the evidence of this incident makes me think AMPY will be operating Beta after performing pipeline repairs, and there is a) a decent chance these repairs are funded by an Insurance or shipping company and b)a highly probable scenario in which “loss of production income” insurance has far more duration than is necessary to resume full ops.
What does this mean? You are being given the opportunity to pay $100M for a company that will generate $80M of free cash flow per year, with PV-10 value inclusive of Beta well into the mid-to-high teens. Simply getting back to the October 1st closing price of $5.75 represents 115% upside versus $2.67 Friday close…. and I don’t even need to do the math on what a $2.67 stock going to $10-$15 would mean. Just a thought exercise/sanity check, $10/share (374% upside) would represent $390M market cap and we are still talking about $21% free cash flow yield for low-decline assets.
7. Catalysts
Since we are now into special situation territory, the catalyst path is totally different than my prior writeup. The catalyst path is now all about ‘will this incident cripple the company’? I don’t deny that a micro-cap needs to absolutely knock the market in the forehead with a 2x4 to clear up an incident like this - but here is what I am looking for:
Follow up Report from PHMSA with incremental information re: root causes and potential fixes
Secondarily, if PHMSA gives a clear path to resumption of ops, I5 then want to make sure there is no California-specific litigation.
Incremental information from the Coast Guard regarding its findings, specifically in identifying which ship was liable for the incident.
4Q Earnings and 10-K. By this point, AMPY should have enough information to ‘size the prize’ of the entire incident - a number I believe will be more than manageable at worst, and ultimately could be zero on a net basis
Asset Sale - While I am not expecting any asset sales near-term (I do not think management would want even the perception of being a ‘forced seller’ given that they have ample liquidity to handle this situation), I also would love to be proven wrong as any asset sale would almost certainly close the gap to PV-10.
Majority Of Orange County Beaches Under ‘Soft Closure’ Orders – CBS Los Angeles (cbslocal.com)
Seabird fatalities from oil spill expected to grow ‘considerably’ – Orange County Register (ocregister.com)
This was initially ‘we’ until I checked the Jeremy Raper Style Guide and edited
Hello Sir. I did subscribe recently and this is my first comment after reading the first article.
Nice write-up. One item of note. The oil hedge position is approximately 210,000bbl/month in 2022. With Beta down, production is a little less than 200,000. Amplify therefore effectively has a short position of 10,000 barrels per month. Not a huge number in the grand scheme of things but not something you see every day.