Another Portfolio Addition — AMPY
Cheap O&G producer on the brink of cash flow generation inflection
In this newsletter, I share summaries of attractive investment ideas sourced from the Value Investors Club and incorporated into my personal portfolio. These summaries will be complemented by regular updates on key developments impacting investment theses. My aim with Idea Hive is to document my own portfolio management process while also enabling readers to quickly grasp and follow attractive investment opportunities.
In this post, I am excited to share a new portfolio idea, Amplify Energy (AMPY). AMPY was pitched on VIC in March. You can find the full write-up here.
Without further ado, let’s dive into the investment idea.
Amplify Energy (AMPY)
Elevator Pitch: Cheap O&G producer on the brink of a potential surge in cash flow generation, propelled by the development of its key asset.
Current Price: $6.62
Target Price: $35+
Amplify Energy is a $262m market cap company that owns and operates several mature oil and gas assets across the US (see slide below). The company’s assets are low-decline, meaning that the rate at which production drops off over time is lower compared to other mature assets.
AMPY presents an attractive way to invest in the energy space. At current prices, the company is trading at 4.3x TTM EBITDA and 9x FCF. These are not demanding multiples for an O&G producer that operates low-decline, long reserve life assets (proved developed reserves to production life of c. 13 years) and boasts a track record of consistent cash flow generation over recent years (see slide below). AMPY’s assets are expected to continue generating substantial cash flows over the coming decade, with high visibility for the next few years, as a large portion of company’s near-term production is hedged (85-90% of natural gas and 45-50% of oil production is hedged until the end of 2025).
AMPY is also cheap based on the value of company’s proven developed reserves. At the recent NYMEX strip price and a 10% discount rate, the present value of AMPY’s proved developed reserves would stand at $611m. This would imply equity value of $442m or $11.17/share, 69% above the current share price levels. The NYMEX futures strip includes oil prices of $80/bbl, $74/bbl and $70/bbl oil prices and natural gas prices of $2.43/MMBtu, $3.53/MMBtu and $3.97/MMBtu for 2024, 2025 and 2026 respectively. This compares to the current oil and natural gas prices of $84/bbl and $2.33/MMBtu.
But that’s not all as I have not yet mentioned the most important part of the story, the planned development of AMPY’s key world-class oilfield asset Beta. Management expects to significantly ramp up Beta’s production over the coming years driven by new well drilling, including a four-well drilling program initiated in Q1’24. The Beta expansion project is expected to boast impressive unit economics, with first-year free cash flow from each well (c. $7m per well, at $75/bbl oil price) anticipated to exceed total capex ($5m-$6m per well). Assuming the results of the ongoing drilling program are as expected, the company is likely to accelerate the number of wells drilled and this would materially increase AMPY’s cash flow generation. The company also expects significant cost savings ($6m-$8m in 2024 vs $29m in TTM FCF) coming from electrification and one-time upgrades of facilities at Beta.
The present value of Beta’s development (excluding Beta’s currently producing wells) at a 10% discount rate might range between $1bn-$2bn depending on the number of wells drilled annually. This would imply incremental value of $25-$50 per share.
On top of the expected Beta drilling results/production ramp, another catalyst here might be potential divestitures of non-core assets. Management has already launched a sale process for the Bairoil asset (accounts for 25% of AMPY’s proven developed reserves PV-10). An update on the sale process will be provided with Q2’24 results. Another asset, Eagle Ford (5% of PD PV-10), appears to be unofficially for sale as well.
So, that's the gist of the investment thesis. There are several risks/uncertainties worth addressing, namely, 1) potential issues/delays associated with Beta development and 2) AMPY management’s incentives and potential capital allocation. However, I believe these points are unlikely to derail the investment thesis given the large margin of safety.
AMPY management’s comments suggest that the key risk associated with Beta development is not geological but technical, i.e., the presence of the oil has already been confirmed, and the infrastructure is in place. So the key risks here are higher capital expenditures and/or delays. During the recent conference call, AMPY’s management highlighted equipment issues related to the drilling of the first well that has now been delayed until Q4’24. There is a risk that remaining drillings might run into similar issues. However, given how cheap AMPY’s producing assets currently are, the margin of safety here seems to be significant, implying a favorable risk-reward.
As for management’s incentives, it is worth pointing out that AMPY’s management holds a minimal 1.4% stake in the company. While this might potentially signal limited alignment of interests, AMPY’s leadership seems competent and focused on shareholder value. Communications between the author of the VIC write-up and the company indicate that management’s focus is on asset sales and aggressive buybacks. Another positive is the recent launch of a sale process for the Bairoil asset.
The opportunity seems to exist as AMPY is a sub-scale mash-up of mature/declining O&G assets. Another explanation might be AMPY’s recent-year operational issues with its key asset Beta. Back in late 2021, Beta experienced an oil spill which prompted a massive stock sell-off. However, AMPY's share price has since then recovered as the accident turned out to be smaller than expected, and AMPY eventually reached a settlement with the ships that caused the accident and collected insurance proceeds. Beta has come online since then, with production now exceeding pre-spill 2021 levels.
I have had a position since before the resolution with the shipping company. A lot will come down to the Langdon Shareholder Resolution that "hereby recommend that the board of directors of the company take the necessary steps to achieve a sale, merger, or orderly liquidation of the corporation on terms which will maximize shareholder value in three years or less.". That is a potential near term catalyst to consider.
I would look at Meg energy in Canada. MEGEF. If you want long lasting reserves with no exploration risk and no share dilution