The numbersHello all,
Full disclosure I've decided to support Blue. However before I locked in before next weeks deadline, I wanted to do one last quantitative analysis of the two options. I'm sharing those results below. Those of you who read my last post will be someone familiar but I'll summarize my assumptions below:
Yellow: 3900bbl/day production based on mid range of guidance. My thoughts are Eagle has been reasonably good about production guidance in the past. All other numbers (royalies, opex, admin) stay the same as last quarter. Capex assumed at 5M/q. They talked about some magic scenario where we double production, but that means even more debt.
Blue: I evaluated 3 cases: Selling about 2000bbl/day of production at various metrics: $25k/bbl/day, $35k/bbl/day and $45k/bbl/day (in this last case only sell 1800bbl/day production to wipe out debt). For comparison, Eagle payed $32kbbld/day for Maple leaf in Nov 2015 when oil was in the low 40s. All numbers except admin get reduced linearly with production, debt calculated based on a 5% interest (assume we will be lower with lower debt ratio), and admin expenses reduced by 66%. CAPEX assumed at 2.5M/q.
Assumed no hedging and other none core buisness charges (unit based compension = 0, no more write-downs etc).
In all cases royalties are assumed to scale with oil price and production linearly.
Implied share value is 10x P/E ratio.
Dividend payout is assumed to be at 50% of free cash flow (which I think is conservative).
My numbers below are a bit different than my previous post (I cleaned up a few errors, and tightened up the scaling). I think the gist is the same though.
2019
| | Quarterly Net Income
(000's) | | | Implied Share Price (10x PE) | | | Free Cash Flow (000's) | | | Annual Dividend /share @ 50% payout ratio | | |
| WTI Price | 50 | 60 | 70 | 50 | 60 | 70 | | | | | | |
| Yellow | 400 | 3700 | 7000 | $ 0.38 | $ 3.52 | $ 6.67 | $ 1,200.00 | 4600 | 8000 | $ 0.06 | $ 0.22 | $ 0.38 |
| Blue @25k (sell 2000bbl/day) | 1100 | 2700 | 4400 | $ 1.05 | $ 2.57 | $ 4.19 | 1500 | 3200 | 4800 | $ 0.07 | $ 0.15 | $ 0.23 |
| Blue @35k (sell 2000 bbl/day) | 1400 | 3100 | 4700 | $ 1.33 | $ 2.95 | $ 4.48 | 1800 | 3500 | 5100 | $ 0.09 | $ 0.17 | $ 0.24 |
| Blue @45k (sell 1700bbl/day) | 1800 | 3700 | 5600 | $ 1.71 | $ 3.52 | $ 5.33 | 2400 | 4300 | 6200 | $ 0.11 | $ 0.20 | $ 0.30 |
So this more or less supports my earlier assertion: If you think Oil is going to be in the $65+ or more in a year or two, we should go Yellow. Whatever we lose on interest and exec pay over the next 12-18 months will be more than outweighted by the gain we make on rising commodity price.
If you think we are due to languish in the $45-55 range for the next two years, we'd be much better off with taking a less risky path, clean up the balance sheet and wait for oil to recover. Even if we go blue we see a significant premium at $70/bbl, albiet less than we would sticking with current management's plan.
It doesn't matter what the oil price is in 2020, if the company doesn't survive to see it.
If we sell 2000bbl/day production (which I grant is a number I pulled from my rear), we are basically 100% hedged for 2017 and are completely safe for the rest of the year.
Regardless of how you intend to vote I suggest you do your own due diligence, and base your decision on the numbers. It's irritating that our CEO has pocketed huge money while our share price has gone into the toilet, but making a decision about your wallet due to anger is probably not a good idea. If he makes me rich, I'm fine paying Clark and co more than they deserve.
GLTA