ABMD - Amped Up For 2023 With Amplify

Summary

• 2022 was my most concentrated book ever.
• ABMD, TWTR, RENN, and AMPY.
• And then, after today, there was one.

Biggest Positions & Best Idea for 2022

ABMD , TWTR , RENN , and AMPY were each bigger than practically any previous investments that I've ever made. 2022 simply offered big opportunities worthy of big (my biggest) swings. But after today, three are largely done - TWTR closed on original terms, ABMD's tender offer expired, and RENN distributed cash to shareholders of more than twice the share price at the beginning of the year. RENN was my best long with a $33 upside and 90% probability of success.

It cost under $10 when my position was first disclosed to StW:

It more than doubled since it was subsequently disclosed to StW as my best idea for 2022.

But that was 2022. My best idea for 2023 is better.

Biggest Position & Best Idea for 2023:

Amplify Energy ( AMPY )

The best way to get up to speed on AMPY is to listen to my colleague Andrew Walker's Amplify Is Still Undervalued Despite The Oil Spill . This one was well timed, shortly after an oil spill cut the share price in half:

It was a terrific tax loss selling opportunity at the end of last year. In late 2021, I wrote that,

That's a whole lot of losses for investors to take for tax reasons. And they also may want to take the L for political reasons - in this era of ESG mania, owning an oil and gas company leaking oil onto California beaches could be a bad look for anyone who wants to burnish their green credentials…

… It was a cheap stock before the oil spill and cheaper after. And Amplify wasn't the perpetrator - it was the victim of a vessel that ripped open their pipeline with an anchor. The major liability is the ship's. The ship will be identified and the owner will pay.

2022

AMPY has made a lot of progress since then. The Coast Guard completed the cleanup in December 2021. Their response phase was complete in February of this year. In August, they settled a civil class action suit over the spill and shortly after settled with the US Attorney's office. In September, they resolved all criminal matters with the state of California. The following month they got the permit from the US Army Corps of Engineers to repair the pipeline. We have been able to monitor repair barges on site since then. This month, AMPY extended their revolving credit facility, securing enough time to deal with bringing the pipeline back online.

AMPY is fixing the pipeline issues:

Deleveraging their balance sheet:

And even doing our work for us on what their shares are worth:

And by 2024, they can reuse this slide for marketing to strategic buyers:

2023

Timeline for pipeline: Work is being done on the pipeline at this moment. Things appear to be on track for the repairs to be completed early in 2023. Once repairs are done, the feds will likely take about a week to rubberstamp some paperwork and AMPY should be back in action.

• Best case: pipeline is up and running by early February.
• Base case: pipeline is up and running by mid-March.
• Bear case: Loss of production insurance (LOPI) runs out in early April; pipeline isn't back on until early May and about a month of missed revenue that will then get thrown into our lawsuit against the ship owners. (Worse bear cases could slip production even more but based on the work needed to be done it would take a shockingly bad turn to push the timeline further out.).

Then what? Once the damaged Beta pipeline comes back online, AMPY should have a much stronger hand. Their underwater energy hedges will have rolled off, and the company should be gushing cash flow with an almost completely delevered balance sheet. The company should quickly pursue strategic alternatives and sell themselves. Any downtime between Beta coming back online and the company selling themselves ought to see the aggressive return capital to shareholders.

Capital returns: Once Beta is back on, AMPY could be net debt free within a year. Given the nature of AMPY's low-decline assets and management's history, we would not be surprised to see the company pursue a share buyback or implement a dividend program. As management said on their Q2'21 call which was their last call before the Beta spill,

we were a return of capital story… before it was in vogue with everybody back in 2018 and 2019.

Selling the company: We have spoken extensively with management and other shareholders. Everyone agrees this company has attractive assets but is too small to justify the G&A expense of being a standalone public company. After Beta comes back online, management and the board ought to be motivated to sell the company. A sale could be slightly tricky; AMPY has disparate assets that will be attractive to different buyers. For example, AMPY's Oklahoma and East Texas assets are more natural gas weighted, so they'd likely be attractive to a variety of natural gas focused players, while AMPY's Eagle Ford assets are non-operated and oil focused. The likely buyer there is Murphy, who operates the majority of the Eagle Ford assets, but there are several other possible buyers including a financial buyer who wants exposure to Eagle Ford.

What's it worth? We haven't seen wild amounts of energy M&A, and given AMPY's mismatch of assets, it is a difficult comp. We have generally assumed these assets will sell for 70-80% of PV-10. At current strip as of 12/22/2022, that would get you to anywhere from $13 to $16 per share. However, there's reason to think we're being too conservative. Though the energy M&A market has been quiet, we expect it will pick up over the next year if energy prices and interest rates start to stabilize.

Long time AMPY followers may also remember Beta as a trophy asset. AMPY had begun investing money in the pipeline to expand production when the accident happened.

The pipeline spill caused AMPY to dramatically reduce the value of Beta in their PV-10. As the asset comes back online, we expect PV-10 for Beta to go higher, perhaps significantly so if the expansion work shows good results.

Bonus asset: lawsuit . AMPY and their insurers have spent hundreds of millions of dollars cleaning up a pipeline spill that was not their fault. They are currently suing the shipowners to recover this cost. While the majority of the money will go to the insurance company, AMPY should ultimately get tens of millions of dollars in damages. If the case goes to trial, we'd expect resolution of the lawsuit sometime in 2024. However, we expect all parties to be commercially inclined, so a settlement that avoids a court battle's cost and headache would make sense. A settlement could be reached sometime in the middle of 2023. We would expect AMPY to get roughly $50 million in a settlement or more if Beta is not online before LOPI insurance runs out. That would instantly delever AMPY and position them to accelerate a potential return of capital.

Conclusion

Today, AMPY costs less than $8 per share. Check back around this time next year to see what happened (or stay tuned for updates along the way).

If all goes well, it could double or triple from here, easily surpassing RENN's 2022 performance. AMPY's chairman Chris Hamm just bought another $130,110 of AMPY shares; you might think about doing the same. He values these shares at somewhere between about $14 and $24 based on their reserves. I agree.

TL; DR

AMPY is our best idea for 2023.

P.S.

This is the literal answer to my best idea. It is my biggest position now that TWTR, ABMD, and RENN cashed out. However, please stay tuned for more... I also have a best new idea coming soon to StW.

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