AMPY - Amplify Energy: Still Room To Run After $85M Payment

Summary

• Amplify Energy received a payment that is material at around $2.21/share and relatively unexpected.
• The stock was arguably cheap before, and likely still has 40% upside after adjusting for today's announced payment.
• 2023 could be a good year for Amplify, the main risk now is their capital allocation policy since free cash flow could become material in 2023 against low leverage.
• The company will report Q4 numbers in the coming weeks, which should refine this analysis.

Today, Amplify Energy ( AMPY ) announced a net payment of $85M relating to ships damaging their pipeline in 2021 and ultimately causing a leak. This payment was something management had hinted as a possibility, but not a certainty, and is positive news for the stock that was already somewhat cheap. The company's stock was hit hard by the pipeline incidence and arguably has not recovered to levels that reflect resolution and broadly strong energy pricing.

Valuation

Below is a broad valuation reflecting today's news. The company will provide updated numbers with Q4 reporting in a few weeks (in 2022 they reported on March 9, no 2023 date announced yet) including an update on hedging, the company was 50%-60% hedged on oil and 70% to 80% hedged on gas for 2023. Energy pricing has fallen back since October, with WTI at $77 and Henry Hub gas at $2.70 at the time of writing, though the company's gas hedges should be a positive and oil hedges more neutral. This all suggests a valuation of closer to $14/share.

I include the October data on the right as an illustration of torque to energy prices, but that's now optimistic given the steep fall in gas pricing since October, gas is around 47% of AMPY's production. AMPY tends to leave NGL exposure unhedged at around 20% of production.

Return Of Capital?

AMPY stock is now in a position where return of capital could be considered, see below for how management discussed this in Q3 2022. Once received, the pipeline payment could materially reduce net debt and the pipeline leak is now behind it, hence resulting in free cash flow could go to shareholders without bad optics.

Though there's always some risk of inappropriate M&A. Free cash flow could be in the $50M-$100M range annually over the coming years (2022 should be around $50M), representing $1.30-$2.60/share for a 13%-26% FCF yield, though note AMPY's production is declining around 8% per year, so static multiples are a little generous to the company.

Risks

• Everything appears on track for Beta to come back online after the leak. This is expected in Q2 2023, issues here would impact the valuation materially. Beta is about 10% of reserves, but entirely oil.
• The company operates off the California coast, in part, and has already had one leak. It's unlikely California would tolerate other safety issues here were they to occur.
• Capital allocation now becomes a risk. The company should see material cash flow in 2023 in addition to today's expected $85M payment. There's a risk "accretive transactions" or "asset reinvestment" destroy value for shareholders.
• As an energy producer, AMPY is of course subject to swings in commodity pricing, though some hedging is used.

Conclusion

Amplify should continue to perform well in 2023, with today's insurance payment a clear bonus. 40% upside could be realistic if energy prices remain broadly favorable, Beta returns to operations in Q2 as expected, and the company announces meaningful returns of capital to shareholders over the coming months.

For further details see: