Evgenii Mitroshin
In October 2021, Amplify (NYSE:NYSE:AMPY) had a pipeline leak near the California coast that led to a pipeline shutdown. That pipeline shutdown took roughly 14% of Amplify’s capacity offline as measured on a PV-10 basis. There were fears that the pipeline would never reopen. It is now expected to reopen within months.
The pipeline is not yet back online, but in an important development the company now has the long-awaited permit from the Army Corps of Engineers and can start work. The Pipeline and Hazardous Materials Safety Administration must approve the repair work, once complete, but management estimates the pipeline will be back online in Q1 2023 (though management’s – and my – estimates on this have been too optimistic previously, the initial estimate was July 2022 which has likely slipped by 6+ months).
Amplify Valuation
Amplify does a good, if slightly salesy, job in their presentations outlining PV-10 values. As I write this WTI is at $85/barrel drifting to around $75 in 2023 based on futures. Henry Hub gas is at $6.50 drifting down to $5 on a similar basis.
This puts the company’s PD PV-10 reserves (including the Southern California Beta assets) in a range of $831M-$1,276M – likely more at the higher end of the range currently – the rightmost column below. Note that though the range for oil is perhaps reasonable, the values for gas in the PV-10 below is below the current curve. These are management figures combined with data from SEC filings and recent press releases.
| Scenario | $65 oil/$3.50 gas | $80 oil/$4 gas |
| PD Reserves (PV-10) | $845 | $1276 |
| Capitalized G&A | -187.6 | -187.6 |
| Net debt | -185 | -185 |
| Hedge losses | -46 | -57 |
| Spill associated fines/agreements | -18 | -18 |
| FCF calendar H2 2022 | 35 | 35 |
| Asset retirement obligations | -106 | -106 |
| Resulting equity value (38.4M shares out) | ~$8.8/share | ~$19.7/share |
source: company presentation and SEC filings, author’s analysis
The Value Of Southern California Assets
By the same token in its late July 2022 presentation, the company implied that the Southern California assets (assuming those are ‘PDNP’ on slide 9 of the company’s presentation) are worth in the range of $4.5-$6.3/share on a PV-10 basis. It is therefore noteworthy that since the announcement that the pipeline should reopen in Q1 2023, the share price has only moved up +$1/share at this point (price $7.55/share at the time of writing). Amplify is quite levered to a Southern California restart.
That said, I would note that if you take a conservative view on energy i.e. $60 oil/$3.50 gas and believe the Southern California assets never restart, then you would have downside on the stock per the table above as the liabilities start to eat into asset values. Still, I think support for that view is weaker with the recent permit announcement.
Implications
If the pipeline does resume and given agreements have been made with the State of California ($4.9M) and U.S. Attorney’s Office ($12.9M) and civil litigation (funded by insurance) it appears Amplify is now somewhat de-risked.
Of course the final verdict will come once the pipeline repairs are complete (expected early November) and the pipeline then comes online (expected Q1 2023).
At that point it will be harder for investors to justify discounting Amplify based on spill risks. The numbers above suggest a value in the $9-$20/share range compared to around $7.50 today. Furthermore, the numbers above back in a lower natural gas price than the current futures curve.
Natural gas is approximately one third of the company’s production in rough terms. So this is a cheap energy company, though of course the market is skeptical on energy valuations generally today.
AMPY – A M&A Target?
Also, conceivably, with the pipeline up and running hopefully in Q1 and the oil spill behind it, Amplify could be considered an M&A target, given its relatively small scale and potentially discounted valuation. It is unlikely a buyer would have wanted to jump in with legal cases ongoing and permits unresolved, despite a potentially inexpensive valuation.
Additional Upside
Aside from benefiting from higher oil prices. Management has maintained that the pipeline leakage was due to a ship’s anchor dragging the pipeline causing the leak. There may be upside from legal proceedings against the relevant shipping company.
The company has also benefited from insurance payments throughout the pipeline shutdown, these may not be fully captured in the assessment above.
Risks
Nonetheless, risks remain:
- The pipeline reopening will be an important event, but we’re not there yet, though we are getting close. The process has taken longer than expected (largely due to permits)
- The company last updated its hedging as of June. It remains to be seen what hedges are put in place for 2023, but full participation in spot energy prices is likely limited until 2024.
- The agreements with the U.S. Attorney General and the State of California, do put the company on probation. Amplify cannot risk any further environment incidents or it will be viewed as a very negative pattern of behavior.
- The company had planned to sell down certain assets to help pay down debt during the spill. It hasn’t done this so far, and it’s unclear why, especially when the market valuation appeared inexpensive, so perhaps PV-10 values for this company do not mesh with private market valuations.
- Management’s share ownership is not too material, executive offers and the board hold 1% of the equity as of the most recent proxy. Hence there may be lack of alignment for capital allocation decisions.
Conclusion
Amplify appears a relatively compelling opportunity with a catalyst from the anticipated pipeline restart and putting the spill behind it. Hopefully in Q1 2023.
The risks are of course that energy prices slide more than the futures curves suggest, the pipeline restart sees further delays or that management make inappropriate capital allocation decisions. However, there still appears to be a margin of safety in the price, especially if the pipeline is expected to restart.
Be the first to comment