In re: both questions re: call options, I don't trade options for various reasons, the biggest one being I don't love being boxed in from a timing perspective. On AMPY, separately, implied vol is so high that you have to see massive upside in the stock before you start to make money, and I'm not sure that there is a ton of liquidity in anything long-dated.
Great write-up and podcast. Are you surprised that the stock didn't react positively to the Q3 earnings?
Three questions going forward for you:
- How much in EBITDA do you think Beta would have done in FY21 that would be eligible for lost income insurance?
- What happens with the Beta ARO liability if CA somehow never allows the asset to operate again? Does it accelerate the balance sheet liability if they are forced to plug the holes today (or when the lawsuits finally end) instead of a decade or two in the future?
- Do you think mgmt. will sell assets? If so, which do you think are mostly likely and at what price?
For the 3rd question, I think it will depend on how fast the liabilities for the Beta oil spill come. I think if they don't have too pay too much too quick they should be fine? Even without the Beta field they are still producing 20k+ bopd, and even with their hedges they have pretty good cash flows. In 2023 when most of their hedges come off - if oil prices hold up or if they can hedge at current prices - their cash flow should even improve further. So in a normal scenario I think they wouldnt need to sell assets, if they think they'll be forced to pay a lot quickly they might do it.
Great post Tim by the way, I would love to hear your thoughts on their results, I think they were okay but the stock has dropped a lot these past days.
Re 1, I think Beta would have done around 30M of EBITDA with no successful drilling. I was padding capex by 20M per year, however, to account for their exploratory drilling at the asset. Hence, free cash flow impact far smaller than EBITDA.
Re 2, it’s not really California’s call here. But in a draconian regulatory outcome, yes you would have to assume the ARO is made current. I just don’t see a pathway to get here, honestly.
Re 3, not in the short term. I don’t think you want to have even the perception of being a forced seller.
Starting in March 2020 trading volume in AMPY rose abruptly and was sustained through March of 2021 but then just as abruptly fell (though still above pre-March 2020 level). Very clearly sustaining significantly lower volume. This is best seen on weekly chart. Do you have any ideas what this was about and if there is anything to read into it?
Very nice write-up btw, and also on ARCH. I'm a tourist in energy -- something to avoid I thought b/c of secular decline and ESG headwinds but you make compelling case.
Thank you Brent. Unfortunately, I don't have any great explanations for the change in trading volume - would be nice to see a sustained uptick so that a small fund could build a position. At 400K shares traded a day, you would have to be many days at 10-20% of volume to build even a couple $million position.
hi twebs - great article! I just registered on substack just so I can comment/ask questions on this :-)
Key questions I have is on valuation:
- you often cite their PV10, however (as far as I know - and please correct me if I'm missing sth): PV10's vs fair market value can show *significant* discounts, e.g. because of how much production actually comes from proved reserves on a year-by-year basis can vary greatly, because of tax rates, etc. (I think AMPY itself was trading at about ~60% discount to their then PV10 before the spill?)
-> do you have any insights on this, or other reasoning for how you're using their PV10? In the podcast you mention, that at current level (which back then was far below current prices) it really doesn't matter because it's so cheap - but the stock being approaching 10 / share I think this question has become more pressing. (strip reported by AMPY as of 4/18/22 was 18.45 PD / share, if we simply take off 60% here we arrive at ~11.. I know: "Hold on!" you say, "Prices have increased even more since then!!" - true, but this question still has to be faced in some way at some time)
- ...and therefore more generally: What do you see as ballpark-estimate for when you would sell again/when fair value has been realized?
Hi Tim, many thanks for the post. It's really well written. I would also be interested in the call options (although I am not an expert I have to admit). Do you have a view on that if any? Best regards Philip
No view on the options. I think the stock is already an option in a sense and hence I am happy expressing a view through equity. Implied vol is insanely high so you have to nail the timing perfectly to win
Tim, great interview w/ Andrew. It was my exposure to AMPY. It seems like the options might be a great way to play this (instead of the stock). It seems like if things play out in the "middle range" of what you mentioned on AMPY (in terms of liabilities, the company is able to keep its revolving LOC), then the options could be worth a lot. There are April '22 calls, giving you 6-7 months to see what happens. Plenty of time to have this spill issue resolved.
In re: both questions re: call options, I don't trade options for various reasons, the biggest one being I don't love being boxed in from a timing perspective. On AMPY, separately, implied vol is so high that you have to see massive upside in the stock before you start to make money, and I'm not sure that there is a ton of liquidity in anything long-dated.
Great write-up and podcast. Are you surprised that the stock didn't react positively to the Q3 earnings?
Three questions going forward for you:
- How much in EBITDA do you think Beta would have done in FY21 that would be eligible for lost income insurance?
- What happens with the Beta ARO liability if CA somehow never allows the asset to operate again? Does it accelerate the balance sheet liability if they are forced to plug the holes today (or when the lawsuits finally end) instead of a decade or two in the future?
- Do you think mgmt. will sell assets? If so, which do you think are mostly likely and at what price?
Working on a writeup and I will attempt to answer all these questions
For the 3rd question, I think it will depend on how fast the liabilities for the Beta oil spill come. I think if they don't have too pay too much too quick they should be fine? Even without the Beta field they are still producing 20k+ bopd, and even with their hedges they have pretty good cash flows. In 2023 when most of their hedges come off - if oil prices hold up or if they can hedge at current prices - their cash flow should even improve further. So in a normal scenario I think they wouldnt need to sell assets, if they think they'll be forced to pay a lot quickly they might do it.
Great post Tim by the way, I would love to hear your thoughts on their results, I think they were okay but the stock has dropped a lot these past days.
Re 1, I think Beta would have done around 30M of EBITDA with no successful drilling. I was padding capex by 20M per year, however, to account for their exploratory drilling at the asset. Hence, free cash flow impact far smaller than EBITDA.
Re 2, it’s not really California’s call here. But in a draconian regulatory outcome, yes you would have to assume the ARO is made current. I just don’t see a pathway to get here, honestly.
Re 3, not in the short term. I don’t think you want to have even the perception of being a forced seller.
𝑻𝒉𝒂𝒏𝒌 𝒚𝒐𝒖 𝒇𝒐𝒓 𝒚𝒐𝒖𝒓 𝒇𝒆𝒆𝒅𝒃𝒂𝒄𝒌, 𝒇𝒐𝒓 𝒎𝒐𝒓𝒆 𝒊𝒏𝒇𝒐𝒓𝒎𝒂𝒕𝒊𝒐𝒏 𝒐𝒏 𝒉𝒐𝒘 𝒕𝒐 𝒃𝒆 𝒔𝒖𝒄𝒄𝒆𝒔𝒔𝒇𝒖𝒍 ,𝑾𝑯'𝑨𝑻'𝑺'𝑨𝑷'𝑷 𝑴𝑬 十
+•1•27=2•2=8•=1=••0=••77=••5=•√•✔️✔️✔️✔***
You nailed it
𝑻𝒉𝒂𝒏𝒌 𝒚𝒐𝒖 𝒇𝒐𝒓 𝒚𝒐𝒖𝒓 𝒇𝒆𝒆𝒅𝒃𝒂𝒄𝒌, 𝒇𝒐𝒓 𝒎𝒐𝒓𝒆 𝒊𝒏𝒇𝒐𝒓𝒎𝒂𝒕𝒊𝒐𝒏 𝒐𝒏 𝒉𝒐𝒘 𝒕𝒐 𝒃𝒆 𝒔𝒖𝒄𝒄𝒆𝒔𝒔𝒇𝒖𝒍 ,𝑾𝑯'𝑨𝑻'𝑺'𝑨𝑷'𝑷 𝑴𝑬 十
+•1•27=2•2=8•=1=••0=••77=••5=•√•✔️✔️✔️✔***
Starting in March 2020 trading volume in AMPY rose abruptly and was sustained through March of 2021 but then just as abruptly fell (though still above pre-March 2020 level). Very clearly sustaining significantly lower volume. This is best seen on weekly chart. Do you have any ideas what this was about and if there is anything to read into it?
Very nice write-up btw, and also on ARCH. I'm a tourist in energy -- something to avoid I thought b/c of secular decline and ESG headwinds but you make compelling case.
Thank you Brent. Unfortunately, I don't have any great explanations for the change in trading volume - would be nice to see a sustained uptick so that a small fund could build a position. At 400K shares traded a day, you would have to be many days at 10-20% of volume to build even a couple $million position.
𝑻𝒉𝒂𝒏𝒌 𝒚𝒐𝒖 𝒇𝒐𝒓 𝒚𝒐𝒖𝒓 𝒇𝒆𝒆𝒅𝒃𝒂𝒄𝒌, 𝒇𝒐𝒓 𝒎𝒐𝒓𝒆 𝒊𝒏𝒇𝒐𝒓𝒎𝒂𝒕𝒊𝒐𝒏 𝒐𝒏 𝒉𝒐𝒘 𝒕𝒐 𝒃𝒆 𝒔𝒖𝒄𝒄𝒆𝒔𝒔𝒇𝒖𝒍 ,𝑾𝑯'𝑨𝑻'𝑺'𝑨𝑷'𝑷 𝑴𝑬 十
+•1•27=2•2=8•=1=••0=••77=••5=•√•✔️✔️✔️✔***
Such a great write-up of such a great idea.
hi twebs - great article! I just registered on substack just so I can comment/ask questions on this :-)
Key questions I have is on valuation:
- you often cite their PV10, however (as far as I know - and please correct me if I'm missing sth): PV10's vs fair market value can show *significant* discounts, e.g. because of how much production actually comes from proved reserves on a year-by-year basis can vary greatly, because of tax rates, etc. (I think AMPY itself was trading at about ~60% discount to their then PV10 before the spill?)
-> do you have any insights on this, or other reasoning for how you're using their PV10? In the podcast you mention, that at current level (which back then was far below current prices) it really doesn't matter because it's so cheap - but the stock being approaching 10 / share I think this question has become more pressing. (strip reported by AMPY as of 4/18/22 was 18.45 PD / share, if we simply take off 60% here we arrive at ~11.. I know: "Hold on!" you say, "Prices have increased even more since then!!" - true, but this question still has to be faced in some way at some time)
- ...and therefore more generally: What do you see as ballpark-estimate for when you would sell again/when fair value has been realized?
Cheers!
...note/add: I know you speak of various scenarios in your article already, but this in my view leaves the point on discounting pv10 open
𝑻𝒉𝒂𝒏𝒌 𝒚𝒐𝒖 𝒇𝒐𝒓 𝒚𝒐𝒖𝒓 𝒇𝒆𝒆𝒅𝒃𝒂𝒄𝒌, 𝒇𝒐𝒓 𝒎𝒐𝒓𝒆 𝒊𝒏𝒇𝒐𝒓𝒎𝒂𝒕𝒊𝒐𝒏 𝒐𝒏 𝒉𝒐𝒘 𝒕𝒐 𝒃𝒆 𝒔𝒖𝒄𝒄𝒆𝒔𝒔𝒇𝒖𝒍 ,𝑾𝑯'𝑨𝑻'𝑺'𝑨𝑷'𝑷 𝑴𝑬 十
+•1•27=2•2=8•=1=••0=••77=••5=•√•✔️✔️✔️✔***
At $110 WTI, what valuation do you get for $AMPY and looks like little to no liability
𝑻𝒉𝒂𝒏𝒌 𝒚𝒐𝒖 𝒇𝒐𝒓 𝒚𝒐𝒖𝒓 𝒇𝒆𝒆𝒅𝒃𝒂𝒄𝒌, 𝒇𝒐𝒓 𝒎𝒐𝒓𝒆 𝒊𝒏𝒇𝒐𝒓𝒎𝒂𝒕𝒊𝒐𝒏 𝒐𝒏 𝒉𝒐𝒘 𝒕𝒐 𝒃𝒆 𝒔𝒖𝒄𝒄𝒆𝒔𝒔𝒇𝒖𝒍 ,𝑾𝑯'𝑨𝑻'𝑺'𝑨𝑷'𝑷 𝑴𝑬 十
+•1•27=2•2=8•=1=••0=••77=••5=•√•✔️✔️✔️✔***
Any updated thoughts on this thesis. Appreciate any feedback.
𝑻𝒉𝒂𝒏𝒌 𝒚𝒐𝒖 𝒇𝒐𝒓 𝒚𝒐𝒖𝒓 𝒇𝒆𝒆𝒅𝒃𝒂𝒄𝒌, 𝒇𝒐𝒓 𝒎𝒐𝒓𝒆 𝒊𝒏𝒇𝒐𝒓𝒎𝒂𝒕𝒊𝒐𝒏 𝒐𝒏 𝒉𝒐𝒘 𝒕𝒐 𝒃𝒆 𝒔𝒖𝒄𝒄𝒆𝒔𝒔𝒇𝒖𝒍 ,𝑾𝑯'𝑨𝑻'𝑺'𝑨𝑷'𝑷 𝑴𝑬 十
+•1•27=2•2=8•=1=••0=••77=••5=•√•✔️✔️✔️✔***
Hi Tim, many thanks for the post. It's really well written. I would also be interested in the call options (although I am not an expert I have to admit). Do you have a view on that if any? Best regards Philip
No view on the options. I think the stock is already an option in a sense and hence I am happy expressing a view through equity. Implied vol is insanely high so you have to nail the timing perfectly to win
𝑻𝒉𝒂𝒏𝒌 𝒚𝒐𝒖 𝒇𝒐𝒓 𝒚𝒐𝒖𝒓 𝒇𝒆𝒆𝒅𝒃𝒂𝒄𝒌, 𝒇𝒐𝒓 𝒎𝒐𝒓𝒆 𝒊𝒏𝒇𝒐𝒓𝒎𝒂𝒕𝒊𝒐𝒏 𝒐𝒏 𝒉𝒐𝒘 𝒕𝒐 𝒃𝒆 𝒔𝒖𝒄𝒄𝒆𝒔𝒔𝒇𝒖𝒍 ,𝑾𝑯'𝑨𝑻'𝑺'𝑨𝑷'𝑷 𝑴𝑬 十
+•1•27=2•2=8•=1=••0=••77=••5=•√•✔️✔️✔️✔***
Tim, great interview w/ Andrew. It was my exposure to AMPY. It seems like the options might be a great way to play this (instead of the stock). It seems like if things play out in the "middle range" of what you mentioned on AMPY (in terms of liabilities, the company is able to keep its revolving LOC), then the options could be worth a lot. There are April '22 calls, giving you 6-7 months to see what happens. Plenty of time to have this spill issue resolved.
Am I missing something in how I view it?
𝑻𝒉𝒂𝒏𝒌 𝒚𝒐𝒖 𝒇𝒐𝒓 𝒚𝒐𝒖𝒓 𝒇𝒆𝒆𝒅𝒃𝒂𝒄𝒌, 𝒇𝒐𝒓 𝒎𝒐𝒓𝒆 𝒊𝒏𝒇𝒐𝒓𝒎𝒂𝒕𝒊𝒐𝒏 𝒐𝒏 𝒉𝒐𝒘 𝒕𝒐 𝒃𝒆 𝒔𝒖𝒄𝒄𝒆𝒔𝒔𝒇𝒖𝒍 ,𝑾𝑯'𝑨𝑻'𝑺'𝑨𝑷'𝑷 𝑴𝑬 十
+•1•27=2•2=8•=1=••0=••77=••5=•√•✔️✔️✔️✔***