XTO acquired by XOM
Best of the Best is acquired at a not great valuation. Will anyone ask why?
1. XTO will be acquired for EVx of 6.0x and CFOx 6.9x (2009e). These multiples are roughly the eight-year average trading multiples for XTO. It seems to me a rationale seller would not use an average valuation multiple off depressed cash flow. Especially if you thought gas prices were going higher than today’s $5/mcfe. (Even if you argue that the multiples are appropriate, XTO would get a higher EV valuation as gas prices rose and lifted Ebitda and CFO. So why not wait?)
2. Acquisition multiple of EV/mcfe of $2.90/mcfe (proved reserves only) seems high except that it gives no value to the 14.2Tcfe on “2P” reserves that are part of existing reserve fields. XOM is picking up an additional 14.2 Tcfe of “2p” reserves, which XTO estimates will cost roughly $1.80/mcfe to develop. Even taking into consideration PV issues, this seems very cheap. Note also that 14.2Tcfe of reserves would be a very large company by itself and is greater than the 13.9 Tcfe of proved reserves acquired.
3. Lastly, I monitor a unique metric that calculates a company’s EV/mcfe as a percent of the market price of natural gas. Historically, XTO has average 25% (that is XTO’s EV/mcfe has averaged 25% of the market price of natgas). XOM is acquiring XTO for an EV/mcfe to natgas price of 53%.
XTO, in my estimation and as reflected in its peer beating operating metrics, is the premier North America E+ P Company. (Some XTO peer beating metric include: ROIC, CFO/mcfe, FCF generation, Low F+D costs, Reserve growth per share, low debt/mcfe, etc)
Therefore, I find it curious that smartest, best run E+P company is selling out when gas is at a depressed $5/mcfe range and valuation multiples suggest no upside. This strongly suggests XTO management sees no further upside to gas prices!!
As the market absorbs this fact, the recent run up in E+P stocks from “M+A madness” will recede, and market will re-calibrate valuation benchmarks for E+P valuation. Assuredly downward!
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Tuesday, December 15, 2009
Thursday, December 18, 2008
SLB-SELL/AVOID/SHORT-Estimates way too high
SLB-SELL/AVOID/SHORT-Estimates way too high
Sell side estimates are too high, as they are not taking margins down enough for the coming trough. I believe the coming drop in rig rates from falling demand is coming just as SLB (and other OFS companies) have significantly ramped capacity. The result will be lower utilization and falling prices. The confluence of these factors will weaken margins, as they have done historically, and significantly below current sell side estimates. Negative revisions will drive stock down.
The below chart demonstrates the point. It graphs WW rig count, SLB capex spend and SLB Ebitda Margin from 1994-2008. Some quick take aways:
1st WW rig count is synonymous with increased capex spend by E+P companies
2. This increased capex leads to increased demand for OFS products creating higher utilization rates and margins
3. SLB (and other OFS companies) do not immediately increase their capex spending as Rig count accelerates, creating a tight (or shortage of) capacity. This tight capacity leads to pricing power and even higher margins. (See capex lag 2002-5)
4. As rig count rolls over capacity adds from SLB accelerating capex spends are still coming on. High capacity and falling demand has historically led to weaker margins as the factors in #2 and #3, reverse.
5. SLB (and OFS margins in general) are significantly higher than historical as this cycle was sharper and longer run-up in rig count and oil prices than previous cycles. This served to magnify the benefit of delayed OFS capacity spend ( i.e. capex ) on SLB margins.
6. Now I will recap trough margins from this graph:
Today (2008)EBITDA MARGIN= 36%
Average EBITDA margin 1994-2004=21%
Highest EBITDA margin pre 2005-26%
Average previous trough EBITDA margin= 20%
Major sell side 2009 (the trough) EBITDA Margin=34% (lowest found)
7. WW rig count likely to fall by 600 rigs in 2009, an 18% drop off. This is mostly North American driven, and could be greater if IOC's and NOC's begin cutting capex. This last point likely to happen should we enter a world wide recession.
8. Each 1% drop in EBITDA margins equals a $0.17/share eps, using 2008 estimates. For example, if EBITDA margins fell to 30%, 2008PF earnings fall 22%, from $4.66 to $3.65/share. Given history, this would be a very modest margin drop.
9.Recommendations:
Long Only: Sell/Avoid
Hedge Funds: Long Off shore Deepwater drillers/short SLB or Long WFT (currently very cheap to SLB vs historic and rest of OFS))/Short SLB
10. Possible critic of this analysis: I used numbers reported in each year and did not go back and adjust for business subsequently acquired or disposed of. Nonetheless, I believe the disparity between today’s margins and historical margins ( average, trough, peaks) are sufficiently anomalous that a refinement in this analysis would not change the conclusion.
Note: Having trouble publishing the excel graph. Until I figure it out, please post a comment requesting a copy, provide your email and I will be happy to send it along.
Sell side estimates are too high, as they are not taking margins down enough for the coming trough. I believe the coming drop in rig rates from falling demand is coming just as SLB (and other OFS companies) have significantly ramped capacity. The result will be lower utilization and falling prices. The confluence of these factors will weaken margins, as they have done historically, and significantly below current sell side estimates. Negative revisions will drive stock down.
The below chart demonstrates the point. It graphs WW rig count, SLB capex spend and SLB Ebitda Margin from 1994-2008. Some quick take aways:
1st WW rig count is synonymous with increased capex spend by E+P companies
2. This increased capex leads to increased demand for OFS products creating higher utilization rates and margins
3. SLB (and other OFS companies) do not immediately increase their capex spending as Rig count accelerates, creating a tight (or shortage of) capacity. This tight capacity leads to pricing power and even higher margins. (See capex lag 2002-5)
4. As rig count rolls over capacity adds from SLB accelerating capex spends are still coming on. High capacity and falling demand has historically led to weaker margins as the factors in #2 and #3, reverse.
5. SLB (and OFS margins in general) are significantly higher than historical as this cycle was sharper and longer run-up in rig count and oil prices than previous cycles. This served to magnify the benefit of delayed OFS capacity spend ( i.e. capex ) on SLB margins.
6. Now I will recap trough margins from this graph:
Today (2008)EBITDA MARGIN= 36%
Average EBITDA margin 1994-2004=21%
Highest EBITDA margin pre 2005-26%
Average previous trough EBITDA margin= 20%
Major sell side 2009 (the trough) EBITDA Margin=34% (lowest found)
7. WW rig count likely to fall by 600 rigs in 2009, an 18% drop off. This is mostly North American driven, and could be greater if IOC's and NOC's begin cutting capex. This last point likely to happen should we enter a world wide recession.
8. Each 1% drop in EBITDA margins equals a $0.17/share eps, using 2008 estimates. For example, if EBITDA margins fell to 30%, 2008PF earnings fall 22%, from $4.66 to $3.65/share. Given history, this would be a very modest margin drop.
9.Recommendations:
Long Only: Sell/Avoid
Hedge Funds: Long Off shore Deepwater drillers/short SLB or Long WFT (currently very cheap to SLB vs historic and rest of OFS))/Short SLB
10. Possible critic of this analysis: I used numbers reported in each year and did not go back and adjust for business subsequently acquired or disposed of. Nonetheless, I believe the disparity between today’s margins and historical margins ( average, trough, peaks) are sufficiently anomalous that a refinement in this analysis would not change the conclusion.
Note: Having trouble publishing the excel graph. Until I figure it out, please post a comment requesting a copy, provide your email and I will be happy to send it along.
Wednesday, December 3, 2008
Recommended Energy Portfolio Positioning-Overview
Energy Positions
If no current exposure, start with an underweight position, and expect to add dollars over time. This based upon my belief we have not yet seen the slowdown in demand for energy from a weakening economy. Stock valuations are down, but overall not cheap enough yet.
Given current stock prices though, I would not be a net seller of existing positions, but would trade around to arrange them as follows.
Long only funds should be very defensive. Hedge funds can be more aggressive (not much) and should be mostly/fully hedged (market neutral).
General composition would be long oily E+P and short gassy E+P; long offshore drillers and short OFS companies and JU’s.
Rationale for Long Oily E+P/Short gassy E+Ps
Rationale is my belief in a natural gas surplus that may last 12-24 months. The oversupply period depends upon the extent of drilling curtailments, weather and LNG imports overcoming the high US shale gas production growth. Natgas production, through September 2008 is up 6.7% vs year ago, while 2007 production increased 3.6% over 2006. This on a demand of around 1-2%. These past two years represent the first time this decade and longer that US nags production increased y/y driven by the highly productive Shale wells. It will take some time to reverse this growth, which means that natgas will be dead money until that occurs, absent M+A activity.
Investors not paying enough attention to LNG risk
I believe investors are overlooking the potential for harm to natgas prices from LNG, given recent benign impact. In 2008, LNG imports decreased a full 2/3 less than 2007 imports, to 0.9bdfe/d for the first 9 months of 2008 vs. 2.9bcfe/d imported in the same period in 2007. Volumes fell due to an increased shortage in UK (leading to higher prices there) and unique events in Spain and Asia, which created higher than normal demand. With a moderation in these one-time demand surges and significant new LNG capacity coming on stream in 2009-10, the risk and uncertainty over natgas prices increases. This higher risk/uncertainty requires greater valuation discounts in the stocks to compensate.
Conversely, while Oil’s price has been clipped pretty hard (as has natgas), It has a supplies regulator in OPEC. While further OPEC cuts will not necessarily cause oil to rally (demand will be weak for a time), cuts will help to place a floor on prices. There is no comparable mechanism for natgas, which increases relative confidence levels for oil prices vs. natgas.
If no current exposure, start with an underweight position, and expect to add dollars over time. This based upon my belief we have not yet seen the slowdown in demand for energy from a weakening economy. Stock valuations are down, but overall not cheap enough yet.
Given current stock prices though, I would not be a net seller of existing positions, but would trade around to arrange them as follows.
Long only funds should be very defensive. Hedge funds can be more aggressive (not much) and should be mostly/fully hedged (market neutral).
General composition would be long oily E+P and short gassy E+P; long offshore drillers and short OFS companies and JU’s.
Rationale for Long Oily E+P/Short gassy E+Ps
Rationale is my belief in a natural gas surplus that may last 12-24 months. The oversupply period depends upon the extent of drilling curtailments, weather and LNG imports overcoming the high US shale gas production growth. Natgas production, through September 2008 is up 6.7% vs year ago, while 2007 production increased 3.6% over 2006. This on a demand of around 1-2%. These past two years represent the first time this decade and longer that US nags production increased y/y driven by the highly productive Shale wells. It will take some time to reverse this growth, which means that natgas will be dead money until that occurs, absent M+A activity.
Investors not paying enough attention to LNG risk
I believe investors are overlooking the potential for harm to natgas prices from LNG, given recent benign impact. In 2008, LNG imports decreased a full 2/3 less than 2007 imports, to 0.9bdfe/d for the first 9 months of 2008 vs. 2.9bcfe/d imported in the same period in 2007. Volumes fell due to an increased shortage in UK (leading to higher prices there) and unique events in Spain and Asia, which created higher than normal demand. With a moderation in these one-time demand surges and significant new LNG capacity coming on stream in 2009-10, the risk and uncertainty over natgas prices increases. This higher risk/uncertainty requires greater valuation discounts in the stocks to compensate.
Conversely, while Oil’s price has been clipped pretty hard (as has natgas), It has a supplies regulator in OPEC. While further OPEC cuts will not necessarily cause oil to rally (demand will be weak for a time), cuts will help to place a floor on prices. There is no comparable mechanism for natgas, which increases relative confidence levels for oil prices vs. natgas.
Sunday, November 30, 2008
CHK. Sell/Avoid:Stock issuances has troubling implications
On Wednesday, CHK filings with the SEC noted their intent to raise up to $1.8B via stock issuance for "general corporate purposes, funding capex...etc " and "payment for land leases". This filing comes after repeated (and recent) comments by the company that liquidity was not an issue and if pushed .." could always reduce 2009 capex further..". (Recall they are still looking to grow 2009 production by about 18% y/y. Further troubling was the timing of the filing, just before the Thanksgiving weekend, when most investors will be away from their desks.
The illogic of issuing stock to fund an aggressive drilling and land acquistion program in a period of depressed commodity prices and with a depressed common stock price, is at odds with the company assertions concerning liquidity. The company is at the end of their "liquidity generation" rope.
My take is the company is more stressed for cash than they have let on and for reasons not yet apparent to us. We know there are no buyers of assets, no credit to be had. Not yet spoken about, but will soon become a topic, is the year end SECPV10 calculations. These will be performed at significantly lower prices than last year. The result is much lower SEC PV10 valuation and the possibility (and to the surprise of investors) of lower reserves as out year reserves (long tail reserves of Shale plays) fall out of the calculation as uneconomic at current low prices.
It is interesting that CHK is using its common stock as if it were its cheapest capital, not its most expensive. While I noted earlier they may have no other option, it doesnt hurt that the CHM/CEO no longer has any stock holdings. Having had to sell his entire holdings to meet margin call earlier this year, he has no skin in the game and it may set up a cheaper entry point to reacquire shares.
My calculation of the stocks value is $26/bbl, using only 1P reserves, Midstream assets valued at a EVx of 6x and a $7/mcfe realized price.
This creates the following valuation metrics on TTM:
EVx EV-mcfe/PD (1P) EV-mcfe/PDP
Today 5.4x $1.99/mcfe $3.22/mcfe
Historical (8yrs)
Average 5.6x $1.91/mcfe $2.72/mcfe
High 6.9x $2.83/mcfe $3.80/mcfe
Low 3.5x (2001) $1.19/mcfe (1999) $1.66/mcfe (1999)
Current NAV share price calcuation of $26/share suggest a buy, while these other metrics suggest more downside than upside. Especially so given CHK's seemingly deperation driven use of equity and resulting implied liquidity issue. Avoid/Sell this stock
Note that in times of stress, investors and lenders have tended to value companies on Proved Developed reserves only. This is the valuation to focus on now.
The illogic of issuing stock to fund an aggressive drilling and land acquistion program in a period of depressed commodity prices and with a depressed common stock price, is at odds with the company assertions concerning liquidity. The company is at the end of their "liquidity generation" rope.
My take is the company is more stressed for cash than they have let on and for reasons not yet apparent to us. We know there are no buyers of assets, no credit to be had. Not yet spoken about, but will soon become a topic, is the year end SECPV10 calculations. These will be performed at significantly lower prices than last year. The result is much lower SEC PV10 valuation and the possibility (and to the surprise of investors) of lower reserves as out year reserves (long tail reserves of Shale plays) fall out of the calculation as uneconomic at current low prices.
It is interesting that CHK is using its common stock as if it were its cheapest capital, not its most expensive. While I noted earlier they may have no other option, it doesnt hurt that the CHM/CEO no longer has any stock holdings. Having had to sell his entire holdings to meet margin call earlier this year, he has no skin in the game and it may set up a cheaper entry point to reacquire shares.
My calculation of the stocks value is $26/bbl, using only 1P reserves, Midstream assets valued at a EVx of 6x and a $7/mcfe realized price.
This creates the following valuation metrics on TTM:
EVx EV-mcfe/PD (1P) EV-mcfe/PDP
Today 5.4x $1.99/mcfe $3.22/mcfe
Historical (8yrs)
Average 5.6x $1.91/mcfe $2.72/mcfe
High 6.9x $2.83/mcfe $3.80/mcfe
Low 3.5x (2001) $1.19/mcfe (1999) $1.66/mcfe (1999)
Current NAV share price calcuation of $26/share suggest a buy, while these other metrics suggest more downside than upside. Especially so given CHK's seemingly deperation driven use of equity and resulting implied liquidity issue. Avoid/Sell this stock
Note that in times of stress, investors and lenders have tended to value companies on Proved Developed reserves only. This is the valuation to focus on now.
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