Comparing Whiting Petroleum's Post-Bankruptcy Enterprise Value To Its Reserves

On April 1^st, Whiting Petroleum Corporation (WLL) announced it was going bankrupt. In late April, it announced how the company will be split between current lenders and shareholders after bankruptcy.

Based on the company’s bond prices, we can estimate the post-bankruptcy Whiting Petroleum’s enterprise value. We can then compare that enterprise value to the value of the company’s oil and gas reserves.

In doing so, we can see how the market is valuing those reserves. Using that valuation, we can guess what other distressed oil and gas companies’ reserves might be worth in bankruptcy. (Read More)

Alternative Financial Services Are A Major Source Of Earnings For Republic Bancorp

At first glance, Republic Bancorp, Inc. (RBCAA) looks like an ordinary regional bank. With $5,601 million in assets, Republic was Kentucky’s biggest bank at the end of 2019. Republic was also America’s 172^nd largest bank.

Unlike most regional banks, though, Republic Bancorp earns around 30% of its net income from alternative financial services. The term “alternative financial services” covers products such as high interest loans and tax refund advances. Customers often use these services when they can’t access traditional bank services. Such customers are often poorer and pay higher costs.

Republic Bancorp’s Republic Processing Group (RPG) business is a big provider of these services. RPG has two segments. Tax Refund Solutions (TRS) offers tax refund advances. TRS also offers “refund transfers” that let tax filers pay for tax preparation using their refunds. Republic Credit Solutions (RCS) offers loans, mainly high interest lines of credit.

These two segments earned $28.246 million of the company’s $91.699 million in 2019 net income. It is very unusual for much of a bank’s earnings to come from alternative financial services. Since these segments are so important, we will analyze them to better understand their impact on the company. (Read More)

How Much Value Has Ladder Capital Created For Shareholders Since Its IPO?

One of my favorite investment bloggers, Clark Street Value, recently wrote about mortgage real estate investment trust (mREIT) Ladder Capital (LADR). Ladder mainly invests in commercial mortgage backed securities (CMBS), or pools of mortgage loans to businesses.

The post described how Ladder is well positioned to survive the current downturn due to its high quality assets and use of unsecured debt to fund those assets. It provided much information about both topics; I encourage interested readers to read it.

As an investor, though, I am not just interested in how well a company might survive the current downturn. I am also interested in the long term value the company can generate for me if I invest.

This is especially important since downturns offer two common types of opportunities for investors:

1.  High quality companies trading at a modest discount from normal prices.
2.  More average companies trading at a much larger discount to their intrinsic value.

In the long run, high quality companies compound an investor’s capital far more than average ones. This is true even if those average companies are purchased at much cheaper valuations.

In that context, after reading Clark Street Value’s post, I was curious which type of company Ladder Capital is. Is it a high quality company I can “buy and hold” forever while it compounds my investment? (Read More)

Equinor, One Of The Greenest Oil Majors, Could Be Undervalued

Norwegian company Equinor (EQNR) (STOHF), once named Statoil, is one of the greenest big oil companies. Morningstar’s January 2020 report “Understanding the Emissions Challenge” evaluated each of the oil majors based on several metrics for carbon emissions reduction. Equinor was the only company to score in the top third in each metric.

In that context, I wanted to look at the company’s investment value. Equinor has three sources of value. The first is its Exploration and Production (E&P) operations, which explore for and produce oil and natural gas. The second is its Marketing, Midstream, and Processing (MMP) segment, which transports, processes, and sells oil, gas, and electricity. Finally, the company’s Other segment develops renewable energy projects and new oil and gas technologies, and also handles other corporate functions.

By adding up the value of these three parts, we can calculate the Equinor’s valuation. That valuation turns out to be around the same as the company’s enterprise value, which means Equinor could be undervalued. (Read More)

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)