RE:Just wait 'til Next YearKontrary wrote
I've owned this stock for 6 years. When I look at my portfolio, Surge is by far my biggest loser. It's one thing to say that "things look bad because the banks made management layer on these hedges" but the reason they did that was because management made some debt-financed acquisitions that have yet to pan out. Recently, they've compounded that problem by making more acquisition by diluting equity and adding debt. This year, CJ shares have increased 10X, SGY has gone nowhere.
Now it's all about 2022. "Just trust us and it's all going to be great next year" is the PR messaging. The numbers look good, right until management makes another bad acquisition.
At this point, I'm still willing to hold, but I need to see two things from management:
1. A commitment that there will be no more acquisitions until the debt and share count are both reduced.
2. A commitment to drill and develop the current inventory and be in the business of being an O&G company instead of an M&A company.
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The major asset purchases of a few years ago were funded with a lot of debt and in hindsight had bad timing as oil prices were in the $50 range and stayed in that range for several more years. The recent two purchases by SGY add nearly 6000 barrels per day production and only adds aprox. $17 million in debt. So SGY increased production by nearly 40% much of it light oil while only taking on a small amount of debt. Yes there was share dillution but lets not forget that there are now more shares outstanding but their is alot more production and profits to spread among the increased number of shares. The latest $58 million alone is expected to generate aprox. $26 million in cashflow next year at $70 oil. That is nearly a 50% return.
What SGY is doing is increasing the production of the company going into a period of much higher oil prices while at the same time not increasing overall debt by very much. With much larger production and cashflow the same amount of debt is actually relatively a lot smaller.
With the $50 range oil prices of the last 6 or 7 years SGY and most other oil companies have been basically spinning their wheels. SGY is a high decline higher cost producer and at the oil prices of the last several years has not been making any money and thats why debt remained high as there have been no profits to pay it down. At $80 plus oil where we are not things have changed and will start showing up in the financial statements next year as the hedges come off.
At $80 oil SGY states they will make aprox. $160 million in Free cashflow next year. Fot a company with a market cap or aprox. $425 million that is an aprox. 37% annual return at todays shareprices.
SGY has not done well for many years mainly because of low oil prices. That has changed and if it holds for next year this company and its shareholders should end up doing very well.
As they say a high tide lifts all boats and high oil prices will lift SGY in time.