aws Posted August 3, 2019 Share Posted August 3, 2019 Midstates Petroleum (MPO) and Amplify Energy (AMPY) have agreed to a merger of equals and will begin trading as a combined company on August 6th. They will trade under AMPY, and each share of MPO will receive 1 share of the combined company, while AMPY shareholders will get 0.933 shares. As AMPY had slightly more shares outstanding, shareholders of each company will own 50% of the combined company and there will be approximately 41mm shares outstanding after the merger. The market capitalization implied by the current share price is $176mm. Combined net debt of the companies is $207mm, for an enterprise value of approximately 383mm. PD PV-10 was $960mm based on 4/30/19 strip pricing. Both companies were previously in bankruptcy and emerged with relatively clean balance sheets. The companies are controlled by shareholders who have shown a determination to return cash to shareholders. In the past nine months, each company has done a tender offer for a large percentage of the shares outstanding. MPO purchased 5 million shares at $10 each, and AMPY purchased 2,916,667 shares at $12 each. In the aggregate that is $85 million, which is nearly 50% of the current market cap. Now while they certainly could have retired a lot more shares if they waited, it’s not like they destroyed their balance sheet to do it. Both companies had substantial net income in 2018. MPO also received proceeds from the sale of some non-core properties, and AMPY received cash that had previously been held in a trust account as a result of their bankruptcy. In June 2019, AMPY received a further $90 million in cash from the beta decommissioning trust account. Now while they still have the associated decommissioning liability (it’s not free money or anything), it does give them plenty of ammunition for another big repurchase. And this time they can do so at probably half the price they previously paid. In addition to the $90 million in new cash, they are also projecting pro-forma free-cash-flow from the combined company to be $65 million for 2019. Now, while the cash flow figures will likely come down as a result of lower energy prices, they should also have substantial G&A expense reductions ($20mm/year according to their presentation) after the merger is completed which will help future cash flows. From the day after the merger announcement the stock of each company has been going in just one direction, with about 2/3rds of the company value evaporating. Obviously the decline in energy prices and general hatred of the E&P sector have not helped matters, but nothing seems to justify this severe of a decline in price. Once the merger has been completed, it is likely they will repurchase additional shares, and this should be incredibly accretive. Using the $960mm PD PV-10 figure in the merger presentation minus the current $207mm of net debt gives an implied equity value of 753mm, which with 41mm shares would be over $18 per share, over 300% above the current share price. Sure the prices are lower now, and the EV would ignore decommissioning liabilities, but that’s still a huge margin of safety. I expect you could either buy now and collect maybe a 40-50% return by the time they announce further repurchases, or you might be able to hang on and collect a multi-bagger, especially if energy prices cooperate in the future. I would love to see them come out with say a 10 - 15 million share tender offer at $6 a share to use up most of that new cash. It’s possible such an announcement could come as early as next week. Here are some documents related to the merger: Announcement: https://www.midstatespetroleum.com/news-media/press-releases/detail/136/amplify-energy-and-midstates-petroleum-announce Merger Presentation: https://d1io3yog0oux5.cloudfront.net/_bb31a59812c24c0c963d54ba0f3aaafc/midstatespetroleum/db/346/2642/pdf/Amplify+Energy+and+Midstates+Petroleum+Merger+Presentation.pdf Link to comment Share on other sites More sharing options...
wisowis Posted August 4, 2019 Share Posted August 4, 2019 ... Now, while the cash flow figures will likely come down as a result of lower energy prices, they should also have substantial G&A expense reductions ($20mm/year according to their presentation) after the merger is completed which will help future cash flows. ... Looks like they have a tonne of natural gas and oil hedges for 2019 (and some in 2020 and 2021 as well). Referencing this: http://investor.amplifyenergy.com/static-files/5759e6c5-ed51-41aa-a949-bfc7002b908a So just eyeballing it...70-80% of cash flows over the next couple years should be predictable...right? Link to comment Share on other sites More sharing options...
aws Posted August 4, 2019 Author Share Posted August 4, 2019 Yes, around 80% hedged. MPO has around the same percentages for Oil and NG, but doesn't appear to have any NGL hedges. AMPY's hedges aren't that great for 2019, with mostly swaps at 53.29, but those have been in place for a while and it is what it is. The 2020 hedges are looking a little better now at current prices. MPO had some better fixed price hedges in the 60s for this year, but not for that many barrels. The rest of their hedges are collars, where the strip pricing is around the bottom end of their collar. MPO had suspended their drilling program last year and had just been building cash to payoff debt and buyback shares. I'm not sure what their future production in the Mississippian Lime (MPO's only play) will bring as they don't offer guidance, but I get the impression that investing capital there is not attractive. I'm happy if they just let that runoff for now and they can diversify into the AMPY assets, while saving SG&A costs in the merger. AMPY's production guidance seems fine, and I'm certainly happy to see that it includes free-cash-flow and not just adjusted EBITDA nonsense. FCF with an eye towards buybacks is what much of the E&P world needs, and these guys do have a history of providing just that. With the current share prices, I cannot imagine any drilling program having a better long-run return than buying back shares. And with their history I certainly expect them to do it. Link to comment Share on other sites More sharing options...
aws Posted August 5, 2019 Author Share Posted August 5, 2019 Quarterly results are out. Nothing too surprising. Confirms the substantially lower net debt as a result of the decommissioning release. The updated guidance and conference call are tomorrow. I am hoping for good news on buybacks. http://investor.amplifyenergy.com/news-releases/news-release-details/amplify-energy-announces-second-quarter-2019-results-and Link to comment Share on other sites More sharing options...
aws Posted August 6, 2019 Author Share Posted August 6, 2019 Merger closed today, although I still see it as MPO in my account but maybe will change to AMPY after market close. They expect $21 million of free cash flow for the next six months, and annualized savings of $21 million from the merger. They announced a $25 million open market buyback (about 14% at current prices. Plus a dividend of 0.20/quarter which is an incredible 18% yield at the current price. https://www.globenewswire.com/news-release/2019/08/06/1897610/0/en/Amplify-Energy-Announces-Closing-of-Merger-with-Midstates-Guidance-for-Second-Half-2019-Recurring-Dividend-with-Current-Yield-of-18-and-Share-Buyback-Plan.html Link to comment Share on other sites More sharing options...
awindenberger Posted August 6, 2019 Share Posted August 6, 2019 Thanks for highlighting this one AWS. I was able to buy some before the close yesterday. The dividend is nice, but they would have been better served to buy back shares at these prices and announce a dividend later. Although I guess their goal is to get dividend investors interested. Trying to decide if I want to buy more now or not. Link to comment Share on other sites More sharing options...
valuedontlie Posted August 6, 2019 Share Posted August 6, 2019 what does this situation look like 2-3-4 years out? it sounds like they are forgoing capex in favor of generating / returning cash... i feel like the decline curve is always steeper than people realize... this isn't the type of business where they can steady-state cash generation for many, many years... i feel like the PV-10 doesn't do justice to true liquidation value either so i'm not sure you can treat that as the undiscounted net cash this thing will generate til the wells run dry... do you see it as more of a return to normal quick trade? or is there a longer term play here? Link to comment Share on other sites More sharing options...
aws Posted August 6, 2019 Author Share Posted August 6, 2019 I'm not really qualified to analyze the quality of the assets or the decline rates. My reason for getting in was the huge disconnect in value and the fact that I liked how management handles their capital. I would hope they are only forgoing the growth capital that so many other E&Ps spend wildly, destroying their balance sheets and oversupply the markets. At these prices I think the buybacks are the most important, and the longer term value will be affected not insignificantly by how many shares they are able to get for their $25 million. At $5 current price that's a 16% annual dividend savings from every share repurchased, leaving significant extra value for the rest of the shareholders. If the share price doubled tomorrow I'd take my gains and be on the way, but it still might offer reasonable returns from that level. Link to comment Share on other sites More sharing options...
valuedontlie Posted August 6, 2019 Share Posted August 6, 2019 makes sense... i actually hate the idea of buybacks for any declining business... i'd rather see a large, variable dividend payout tied to cash generation... simply too difficult to know if the buybacks are good value when looking several years down the road... Link to comment Share on other sites More sharing options...
aws Posted August 6, 2019 Author Share Posted August 6, 2019 I know what you mean, but a dividend cannot create value like buybacks can when done under fair value. And at prices of not much more than 1x cashflow, it's hard to imagine them overpaying anytime soon in this round of buybacks. Link to comment Share on other sites More sharing options...
valuedontlie Posted August 6, 2019 Share Posted August 6, 2019 right, but if production declines accelerate and oil/gas prices fall and cash flow drops to $0 in 2 years time then i'd bet you'd be happier with some big divvies along the way... Link to comment Share on other sites More sharing options...
wisowis Posted August 9, 2019 Share Posted August 9, 2019 Thanks for this idea aws. It was a great call, played out exactly as you suspected. I picked up a bit on Monday morning. Link to comment Share on other sites More sharing options...
aws Posted August 9, 2019 Author Share Posted August 9, 2019 Yes, it was quite fortuitous that the market was crashing on Monday and this could be picked up for $4 while no one was paying attention. It was trading at an all time low after the merger had been approved, the quarterly results were out, and they had announced a capital return plan was about to drop. Definitely shows the market is not always efficient. The confusion of trading under MPO instead of AMPY on Monday certainly didn't hurt either. I added a lot on Monday too and it's worked out great. Link to comment Share on other sites More sharing options...
aws Posted August 13, 2019 Author Share Posted August 13, 2019 Here's their presentation today from Enercom for some additional color if anyone is interested. It's also pulled back lately so it seems like a good time to get in again. Still a 15% yield, 50% discount to PD PV-10, 17%+ FCF yield, repurchasing >10% of outstanding shares, etc. https://www.theoilandgasconference.com/amplify-energy-corp/ Link to comment Share on other sites More sharing options...
given2invest Posted August 13, 2019 Share Posted August 13, 2019 I bought this last week (in mid 5's unfortunately!) and think exactly as you do. The 50% return from here will be rather easy; the question will be if I hold on for the 200-300% return that's likely. The presentation at Enercom was fantastic. Link to comment Share on other sites More sharing options...
wisowis Posted August 14, 2019 Share Posted August 14, 2019 Here's their presentation today from Enercom for some additional color if anyone is interested. It's also pulled back lately so it seems like a good time to get in again. Still a 15% yield, 50% discount to PD PV-10, 17%+ FCF yield, repurchasing >10% of outstanding shares, etc. https://www.theoilandgasconference.com/amplify-energy-corp/ Thanks for sharing the presentation. I am curious what company (Peer G) trades at a 49.2% FCF yield on slide 12. Link to comment Share on other sites More sharing options...
given2invest Posted August 14, 2019 Share Posted August 14, 2019 Here's their presentation today from Enercom for some additional color if anyone is interested. It's also pulled back lately so it seems like a good time to get in again. Still a 15% yield, 50% discount to PD PV-10, 17%+ FCF yield, repurchasing >10% of outstanding shares, etc. https://www.theoilandgasconference.com/amplify-energy-corp/ Thanks for sharing the presentation. I am curious what company (Peer G) trades at a 49.2% FCF yield on slide 12. I'm told some small australian company but not sure. Link to comment Share on other sites More sharing options...
valuebet Posted September 25, 2019 Share Posted September 25, 2019 New AMPY presentation for investors. http://investor.amplifyenergy.com/static-files/3c0252b1-fc4e-4e51-bc4c-818c5e7204d2 Link to comment Share on other sites More sharing options...
writser Posted November 4, 2019 Share Posted November 4, 2019 I bought this last week (in mid 5's unfortunately!) and think exactly as you do. The 50% return from here will be rather easy; the question will be if I hold on for the 200-300% return that's likely. The presentation at Enercom was fantastic. Nearly there. Well done. I never pulled the trigger. Link to comment Share on other sites More sharing options...
given2invest Posted November 4, 2019 Share Posted November 4, 2019 Yah this worked really well. Haven't sold any. And it re-priced with Oil being flat... Link to comment Share on other sites More sharing options...
wisowis Posted November 4, 2019 Share Posted November 4, 2019 Yah this worked really well. Haven't sold any. And it re-priced with Oil being flat... Good job -- I nearly bottom ticked it, but sold out at ~$6.50 + $0.20 dividend. I could have used a bit more patience, but can't complain about the result... Link to comment Share on other sites More sharing options...
wisowis Posted November 21, 2019 Share Posted November 21, 2019 Might re-open a position in this. Shares are down ~25% from the highs of the past month. And now trading below their average repurchase price (see below). They reported Q3 last week and the numbers basically matched their guidance: http://investor.amplifyenergy.com/news-releases/news-release-details/amplify-energy-announces-third-quarter-2019-results-fourth On repurchases: "Since the inception of the open market share repurchase program, the Company has repurchased approximately 2.4 million shares of common stock at an average price of $6.06 for a total cost of approximately $14.5 million (inclusive of fees). As a result, Amplify has $10.5 million of repurchase capacity under the program." Additionally: Guided to $16-21 million FCF in Q4 Added to their hedge positions Link to comment Share on other sites More sharing options...
given2invest Posted November 21, 2019 Share Posted November 21, 2019 Yes, I haven't sold any. There is no real reason for the pullback. The story is intact though we won't see it move higher till they do another deal and raise the dividend and/or oil goes higher. Link to comment Share on other sites More sharing options...
wisowis Posted February 27, 2020 Share Posted February 27, 2020 Close to back to where we started in this thread. Been crushed with the decline in oil prices. They report next week, some really interesting questions: - Do they have any capacity left in the repurchase program (shares now trading ~30% below their last reported average repurchase price). - Did they add materially to their hedges in early Jan when e.g. WTI was trading briefly >$60. As of December, they were 40-45% hedged for gas, 55% for oil for 2020. Link to comment Share on other sites More sharing options...
valuedontlie Posted March 5, 2020 Share Posted March 5, 2020 Q4 results out -- https://www.amplifyenergy.com/investor-relations/press-releases/press-release-details/2020/Amplify-Energy-Announces-Fourth-Quarter-2019-Results-Dividend-Program-Update-Year-End-2019-Proved-Reserves-and-First-Quarter-and-Full-Year-2020-Guidance/default.aspx Couple of notable items: Not surprised to see the dividend cut -- $0.10/qtr Added to hedges -- 60% of total production / 77% of oil Book value ~$11/share If production continues to hover around 10-11m bbls yr then they have something like 16yrs of capacity? I get something like $15-18m in 2020 FCF -- $0.40-0.45/sh -- doesn't leave much for buybacks after the dividend... Shares perhaps selling off from the dividend specifically? No word on additional buybacks... Link to comment Share on other sites More sharing options...
Recommended Posts
Create an account or sign in to comment
You need to be a member in order to leave a comment
Create an account
Sign up for a new account in our community. It's easy!
Register a new accountSign in
Already have an account? Sign in here.
Sign In Now