Oil & Gas 360 Publishers Note: Often I am presented with industry insights, and opinions, that may be helpful to our readers. This particular opinion written by David Ramsden-Wood has some interesting discussion points. So the question isn’t “should you sell” it’s “who should you sell to?”
Dear CDEV,
It’s Technical Tuesday and you had to know it was coming. In the past 8 weeks, I have taken a lot of beatings on your behalf on Twitter for my equity ownership in you because, rightly or wrongly, I made you the poster child for my SMOG investment thesis. It is also relevant to this discussion that I own more shares personally than any of your non executive directors, so you know I care. Like really, really care.
Let’s start with the basis of my investment thesis. Your YE2018 SMOG value significantly exceeds your share price, even including 3 years of G&A/interest adjustment and factoring in your 2019 overspend. You have 2.5 SMOG/debt coverage and no maturities until 2026. Your peers trade at >150% of this value. You trade at 71%. Add your announced water infrastructure monetization plans, and tada, I made my investment.
We all know that there are too many small and mid cap companies and consolidation needs to happen. NEEDS TO. And with 100% certainty, you must be part of this. The cost efficiencies and scale that can be driven by selling to a larger (adjacent) company will unlock far more shareholder value than you can stand alone. Especially with capital markets closed, there is no other path forward.
In the game of consolidation, there are predators and there are prey. As a shareholder looking at your relative valuation, you simply can’t be the predator. Too many quarters of outspending cash flow has led to your trading at a discount to SMOG NAV and so it would be dilutive to shareholders to use equity to buy private E&P companies. So the question isn’t “should you sell” it’s “who should you sell to?”
Good news! Unlike many (many) of your small cap peers, your relative value, along with $80 million of annual savings in “synergies” make you an attractive mate and all-equity mergers are a relative value play.
The two companies that best fit the bill are Noble and Apache, both of whom have portfolio “opportunities” in the U.S. that need to be addressed (Colorado regulatory risk + Alpine High/ no longer operating in Suriname).
With thanks to ShaleProfile Analytics, let’s have a look at the Delaware footprint overlay and SMOG relative value play. On an annualized debt to cash flow basis, your balance sheet is better than both of theirs so you are accretive on a NAV, debt, cash flow, portfolio optimization, G&A basis.
The reason the market loved the WPX-Felix deal was because WPX used it’s equity to grow the footprint, streamline G&A per bbl and get bigger in the only basin that really matters. Their stock traded up 25% over a week because it made sense and investors loved it… and I’m not even asking for a board seat.
David Ramsden-Wood of #hottakeoftheday
