I've been looking into a company with about $100M market cap that I think is undervalued in the market. I was hoping I can get some advice about things I might not be thinking about when it comes to evaluating such a small company in this sector. Here's some facts about this company.
Their primary location is in Oklahoma, in Caney shale fields surrounded by big players like Exxon. These fields produce about 75/25 ratio of oil to gas. They have a couple partnerships with Exxon and have also sold some Woodford drilling rights to them in the past. Now the company operates exclusively in the Caney region.
Total proved reserves (about 25,000 MBOE, net) are recently valued at $480 million (10% discount). When you account for tax liability on some of the reserves, it's about $400 million (based on $76 2024 WTI oil price). The auditor is Netherland Sewell. I get the sense that management feels Netherland Sewell is overly conservative. It's probably reasonable to consider some of the additional "probable" reserves totaling 17,000 MBOE, net. Proved + Probable is 42,000 MBOE, net.
They have recently expanded their drilling operation in the last two years. This has increased their output to about 2700-3000 BOEPD from 1700 BOEPD last year. By the end of 2024, they will likely be pumping 3500-4000 BOEPD.
This expansion has disrupted their cashflow. They have borrowed about $25 million of a $40 million credit line (which is interest only, SOFR + 4%, until 2026). Their last quarter's end cash position was $500K.
The lender also requires them to hedge some of their output, which has hurt their profits last quarter. This part get's difficult to summarize, but they have costless collars into 2025 on 270 MBOE with an average upside cap of $83 per BOE and a downside cap of $62.
I'm still waiting on their Q4 numbers, but their est. revenue (based on $71 WTI), is about $51-53 Million for 2023, and I think the 2023 earnings will come in around $17-18 million. For 2024, assuming $70 WTI and successful drilling operations on a few new wells, I estimate their net earnings will be about $20-25 million on about $60-65 million in revenue. They currently do not do buybacks or pay a dividend. Their current netback per BOE (accounting for hedging) is about $42-48.
Considering their proved reserves minus their debt and tax liability, I figure the company is worth easily $250 million as a fire-sale buyout price. I noticed that many of these micro E&P companies trade under their book value, but this one seems particularly cheap.
In addition to the poor cash flow and unfortunate hedging positions, they also have a low insider ownership of 1%. Considering those negatives, I still think this is looking like a net positive story. What else am I missing?
