AMPY - Amplify Remains Cheap And A Potential Steal If An Acquisition Comes In

2023-05-25 16:45:19 ET

Summary

• Amplify Energy has put the oil spill behind it with assets restarting and compensation received.
• The company is cheap on a conservative valuation (I very comfortably get $9/share at strip) and could fetch a lot more with asset sales or full acquisition ($14/share quite possible).
• The risks are softening energy prices, or if management started looking to buy rather than sell.
• Q2 may be a little soft due to insurance payments ending and Beta not at capacity for the full quarter, but this shouldn't impact long-term valuation if the Beta restart goes as expected.

Amplify Energy ( AMPY ) has operationally had a strong start to 2023. They have brought their Beta field off the coast of California back online after an oil spill in October 2021 and associated pipeline replacement.

In addition, AMPY has received material compensation from the shipping companies that caused the spill helping to reduce debt. However, the shares have lagged due, of course, to weakening energy prices and, in part, perhaps management having sometimes hinted at wanting to make acquisitions rather than sell the company.

However, the company remains an inexpensive energy play. What I believe is a very conservative valuation shows 25% upside to $9/share, but in an acquisition scenario or with firming energy prices, the shares could easily trade to around $14/share.

Valuation

This is the valuation structure that the company likes to use. I've adjusted their G&A valuation, they like to use 3x costs, but I think 6.5x makes more sense if you're valuing energy assets on a PV-10 basis (which essentially works out to be 6.5x static multiple, ex-growth, so 'values' G&A in the same way). They also like to augment their reserves with PDNP (Proved Developed, Non-Producing), which I strip out - though that could easily add another $3-$4/share of value.

source: AMPY Q1 presentation and author's analysis

This relatively conservative valuation still shows upside of 26% on the strip analysis from late April (and prices haven't moved much from there currently) and 53% if we do see energy prices, and specifically natural gas prices, pick up moderately from here. Illustratively, if an acquirer can take out 50% of G&A costs, then the value is over $11/share, not $9/share, then closer to $14/share if you're willing to include PDNP values. So there is a lot of room for an acquisition premium here.

M&A Risk and Opportunity

What happens from here depends largely on M&A activity. Is AMPY a buyer or a seller? There was an expectation that once AMPY cleared the pipeline incident, in terms of receiving compensation and bringing Beta back online it would be ripe for a sale. That still could happen, in fact around now is when AMPY may be starting that process.

This is what the CEO said on the Q4 call on this topic:

Obviously, we are always considering what to do with the portfolio, whether there is strategic decisions like divesting a certain asset or multiple assets. And just to be clear, we are not part of any acquisition processes at this time either. So, this is really where we pivot from where we have been reacting to what happened at Beta to getting Beta back online, refinancing the credit facility and really deciding how we move forward from there, especially on returning capital and basically assessing the portfolio and what best to do with that.

A sale of the company or its assets could be a great way for AMPY to unlock value. As illustrated above a conservative market valuation today is $9/share, but that could rise to closer to $14/share with the right acquirer paying a fair value for the assets and cost synergies.

Q2 Risks From Beta Restart

Although, I see upside in AMPY there is a risk to note in the Q2 numbers. Beta did restart in late April, but obviously not at full production levels. As of the Q1 call around 70% of wells were back online and results were encouraging, but early. Of course, if this goes well, the company may have scope to raise guidance. But there is risk of some softness temporarily in Q2 earnings, that's because the insurance payments relating to covering the loss of production (LOPI) ended in March. Therefore there were a few weeks of Q2 with no insurance payments and no Beta production and even later in Q2 Beta production may actually be lower than Q1 ironically, to the extent that Beta production is below the level of insurance payments. That said, this isn't a massive long-term issue, but could weigh on sentiment for Q2 results.

Conclusion - Cheap with a Potential Catalyst

AMPY appears cheap today if energy prices remain broadly stable. However, acquisition either in terms of piecemeal bids or a full sale of the company could be a real catalyst for the shares to trade higher. The $9/share value above is pretty robust and conservative and in an acquisition scenario, especially with multiple interested parties, $14/share is potentially fair game.

Potential Catalysts

• Q2 results - early August 2023 - look for data on Beta production and hints on M&A
• Asset disposals or a full sale of the company (hopefully) at some point in 2023-24

Risks

• The company has relatively high torque to energy prices as we've seen so far in 2023, if you're not constructive on energy prices, then you may want to avoid AMPY.
• As much as the company has hinted at disposals, if they went the other way given current low leverage, and started making acquisitions themselves, the stock would very likely trade lower. Some pessimism on acquisition risk appears reflected in the stock price today but there would likely be more weakness if management did some sort of purchase or ill-considered merger.
• Although the Beta spill was not their fault, they do operate Beta off the coast of California, albeit in international waters, and so further ESG issues at the company could cause California politicians to go after the company, regardless of whether warranted or not.

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