Southwestern Energy Might Have Difficulty With One Of Its Debt Covenants At The End Of The Year

In my two most recent articles, I described how anyone considering an oil and gas investment right now must answer two questions:

1. Is it cheap?
2. Is it likely to survive the current downturn, especially without diluting investors?

In an earlier article, I answered the first question for Southwestern Energy (SWN). I described how the company looks cheap when you compare its enterprise value to the value of its underground oil and natural gas reserves.

In my last article, I began answering the second question for Southwestern. I looked at how the company’s hedging contracts might affect its estimated 2020 revenues. By estimating the company’s revenues for this year, we can see if the company will earn enough to service its debts.

There are two areas of concern here:

1. Will the company have enough earnings to cover its interest expenses?
2. Will the company have enough earnings to meet its debt covenants?

If Southwestern can answer “yes” to both questions, it is likely to survive the current downturn, at least through the end of 2020. If the answer to either question is “no,” the company’s survival will be in the hands of its creditors. (Read More)

A Look At Southwestern Energy's 2020 Hedges

In my last article, I described how anyone considering an oil and gas investment right now must answer two questions:

1. Is it cheap?
2. Is it likely to survive the current downturn, especially without diluting investors?

In that article, I answered the first question for Southwestern Energy (SWN). I described how the company looks cheap when you compare its enterprise value to the value of its underground oil and gas reserves.

To answer the second question for Southwestern, we need to know if the company will earn enough this year to service its debts. There are two areas of concern here:

1. Will the company have enough earnings to cover its interest expenses?
2. Will the company have enough earnings to meet its debt covenants?

If Southwestern can answer “yes” to both questions, it is likely to survive the current downturn, at least through the end of 2020. If the answer to either question is “no,” the company’s survival will be in the hands of its creditors.

To calculate Southwestern’s 2020 earnings, we need to look at the company’s price hedges. Those hedges are meant to protect the company from oil and gas price declines, and may be key to giving the company enough earnings to service its debts. Only if we know the impact of those hedges on the company’s revenues will we be able to calculate the company’s earnings. (Read More)

A Look At Southwestern Energy's Reserves

With the recent fall in oil and gas prices, many investors are looking for bargains in the industry. One company that has drawn interest is Southwestern Energy (SWN).

For an oil and gas company such as Southwestern to be a good investment right now, I think it must answer two questions:

1. Is it cheap?
2. Is it likely to survive the current downturn, especially without diluting investors?

Answering the first question tells an investor if they might earn above average returns by investing in the company. Answering the second tells an investor how likely it is they will earn those returns, rather than losing most or all of their money.

To answer the first question for Southwestern, we will compare the company’s enterprise value to the value of its underground oil and gas reserves. (Read More)

Occidental Petroleum Is Even More Expensive Relative To Its Reserves Than I First Thought

For my 30th Seeking Alpha article, I revisit Occidental Petroleum by taking another look at the company's valuation relative to its reserves:

In my recent article “Occidental Petroleum is Surprisingly Expensive Relative to Its Reserves,” I compared the company’s enterprise value to the value of its underground oil and natural gas reserves. I then made the same comparison for several other large oil companies. Even though Occidental Petroleum (OXY) is much riskier than those companies due to its high debt levels, its enterprise value to reserve value ratio was not much cheaper.

In calculating Occidental’s enterprise value in that article, I left out Occidental’s roughly 10 billion dollars in preferred stock. Warren Buffett (BRK.A) (BRK.B) bought this stock to help finance Occidental’s August 2019 acquisition of Anadarko Petroleum, and I only noticed my omission while writing my follow-up article “A Valuation of Occidental Petroleum Based On Its Three Sources of Value.”

Fortunately, including that preferred stock in the calculation doesn’t weaken my original thesis. It actually makes it stronger. My original thesis was that the company's enterprise value to reserve value ratio was surprisingly high, and now it's even higher. This article will look at that revised EV/Reserves ratio and compare it to the EV/Reserves ratios of some other integrated oil companies, taking into account the various companies’ share price changes in the past three weeks. In doing so, we will see how expensive Occidental Petroleum is now compared to those other companies. (Read More)

A Valuation Of Occidental Petroleum Based On Its Three Sources Of Value

Of the companies impacted by the recent oil price collapse, Occidental Petroleum’s (OXY) story might be the most dramatic. The company bought Anadarko Petroleum in August 2019 to become America’s fourth largest oil and gas company. Since then, its shares have fallen by over 60%, in part due to concerns over the debt the company took on for that deal. Even the company's bonds have collapsed. Occidental’s bonds due in 2049 have dropped by over 50% in the past year. Such low prices imply many bondholders think the company will go bankrupt.

Of course, not everyone feels so negatively about the company. Six “Bullish” or “Very Bullish” articles were written about Occidental on Seeking Alpha in March alone, and three more in April. After all, much of the fall in the company’s shares has been caused by the recent oil price collapse. If oil prices go back up again, it is plausible that investors who buy now could triple their money. It's also worth noting that both Carl Icahn (IEP) and Warren Buffett (BRK.A) (BRK.B) are invested in the company, which gives even more impetus to whose who think that the company will do well as an investment.  

With so many diverging opinions about Occidental’s future, I think it is important to remember the company’s fundamentals. Occidental has three sources of value...(Read More)

Occidental Petroleum Is Surprisingly Expensive Relative To Its Reserves

In my recent article “Drilling for Oil in the Stock Market,” I compared the enterprise values of the oil “supermajors” to the value of their reserves—the oil and natural gas they own underground.

A company’s enterprise value is the value of all the money invested in the company by both shareholders and lenders. It equals the company’s market capitalization, which is what all its stock is worth, plus the face value of its debt minus the company’s cash (also known as its “net debt”).

Enterprise value is a good metric to compare to an oil company’s reserves because ultimately, both lenders and shareholders have a claim on the company’s assets, including those reserves. This is particularly important if the company is at risk of bankruptcy. In comparing the supermajors’ enterprise values to their reserve values, I wasn’t implying they might go bankrupt. Rather, I wanted to see how an acquirer might appraise them. However, there is a major oil company which is in financial difficulty—Occidental Petroleum (OXY). (Read More)

A Valuation Of BP Based On Its 4 Sources Of Value

In my last article, “Drilling for Oil in the Stock Market,” I wrote that some of the world’s largest oil companies are trading for little more than the value of their oil and gas reserves. My analysis looked at each company’s enterprise value—the value of all of the money invested in the company by both shareholders and lenders, minus the company’s cash. When an oil company’s enterprise value is the same as the value of its reserves, you essentially get the rest of the company’s assets for free when you buy the company’s stock.

Of the five oil supermajors—Royal Dutch Shell (RDS.A) (RDS.B), Exxon Mobil (XOM), BP (BP), Total (TOT), and Chevron (CVX)—analyzed in that article, BP was the cheapest on an enterprise value to reserve basis. BP is divided into four segments—its Upstream segment, its Downstream segment, its Other Businesses and Corporate segment, and its Rosneft holdings. By looking at each of these segments, we can get a better idea of what the company might be worth. (Read More)

Drilling For Oil In The Stock Market

Oil analyst Daniel Yergin’s book The Prize has been described as “the canonical history of the oil industry.” As a value investor, the part I found most interesting was the section on the 1980s oil price slump, when many oil companies traded for less than the value of the untapped oil and gas they owned underground.

In Yergin’s words, both oil companies and outside investors eventually realized it was ‘cheaper to “explore for oil on the floor of the New York Stock Exchange”—that is, buy undervalued companies—than to explore under the topsoil of West Texas or in the seabed of the Gulf of Mexico.’ Once investors realized this, they bought up oil company shares, causing them to rise to a price that better reflected the value of the companies’ underlying assets. Since value investing is all about buying a company’s stock for less than its underlying value, this story was unsurprisingly appealing to me.

Despite their recent decline, oil companies’ shares have not fallen by as much as they did in the 1980s. However, they have fallen by enough that it’s worth comparing companies’ share prices to the value of their reserves...(Read More) 

Revisiting My Articles On The Alternative Finance Industry - 5 Years Later

Five years ago, I wrote a series of Seeking Alpha articles about the alternative finance industry, which provides financial services to customers who have trouble accessing them from traditional sources. This series was inspired by Gary Rivlin's book about the industry, Broke, USA. In those articles, I considered topics relevant to an investor in the industry, such as competition, regulation, and future growth.

Much has changed in the industry since then. Some products, such as payday lending, have become less popular, while others have grown. The regulatory climate has changed. Thus, I wanted to revisit my original articles to see if their conclusions were born out by subsequent events. (Read More)

Whatever Happened to RecMed?

Back in May 2016, various news outlets ran stories about 14-year old entrepreneur Taylor Rosenthal. Rosenthal turned down a $30 million offer from “a major healthcare company” to buy his startup RecMed, a company that planned to make vending machines for first-aid equipment. Various news outlets, including CNBC, CNN Money, and Fox Business, wrote about this buyout offer and how Rosenthal also already had an order from Six Flags for 100 of the machines.

I ran into one of these articles earlier today, and I wondered how the story turned out. Googling “RecMed” provided surprisingly little information, including not even a company website. This made me suspect that things had not gone quite as expected.

As it turned out, Taylor Rosenthal was just one of many people to be taken in by Kyle Sandler, a scam artist who targeted Rosenthal’s hometown of Opelika, Alabama, a suburb of Auburn. According to an Associated Press investigation, Sandler started a business incubator called the Round House and encouraged various locals to invest, before spending much of the $1.9 million in investment funds on himself. It helped that while Sandler was in Opelika, he made friends with John McAfee, the founder of the namesake security firm, who had also moved to Opelika at the same time. This friendship made Sandler seem more credible. (If you’re wondering about the seemingly implausible coincidence of Sandler and McAfee just happening to run into each other in a small town in Alabama, apparently Opelika was Alabama’s “first ‘gig city’ with a high-speed fiber-optic network” and “provided an incentive of free internet service worth about $50,000.”)

In any case, Sandler convinced Taylor Rosenthal and Rosenthal’s family to let him be their advisor on the RecMed idea. He then invented the offer from Six Flags and created a fake letter from Johnson and Johnson with the supposed $30 million buyout. He sent out fake press releases with this information, which inspired those articles above.

I found this story interesting because it’s common for news outlets to run unusual stories to draw attention, and I’ve always wondered how those stories turn out. (I’m apparently not the only one, given that I recently ran into a Cracked article titled “5 Viral Stories That Had Insane Twists After We All Moved On.”) I think the story of Taylor Rosenthal and RecMed is a particularly dramatic example of how there’s often more to these stories than you get to see in the news, and thus your first impressions of them might not always be correct.