RE:good company but no plan to create shareholder valueAgreed Jack D check out the National bank note from a few days ago.
NBF report yesterday
RMP (RMP; OP; $2.75T): We recently sat down with management at their offices for an update. Admittedly, we can understand this is a tough environment for junior, deep value opportunities like RMP. While we recognize and acknowledge investor push back on this name, we (having long been fans of this management team) think from an asset and execution standpoint RMP has been overly punished by the market. And our analyst has noted that he has seen a growing number of inbounds from investors on this name in and around current levels. Specifically, investors are looking at RMP from a risk/reward perspective. Below, we have run an analysis of various go-forward scenarios, which gives us a sense of the potential risks and rewards of such a trade.
Why the prior sell-off? Why is the Street still Skittish?
1) Ante Creek getting gassier. The Street has expressed obvious concern that Ante Creek is getting gassier. Despite continued strength in well results, investors remain concerned that something is wrong with the reservoir from a technical perspective.
2) Perception of limited inventory at Ante Creek/lack of projects with comparable development potential. The majority of development at Ante Creek is focused on a 6 section block, leading investors to believe that the pool is very localized in nature and does not provide a substantial amount of running room to sustain a competitive, longer-term growth profile. Moreover, given that Ante Creek economics are so robust, the view is that incremental drilling of other plays would only provide diminishing returns to shareholders.
Why might investors be doing the work on the name?
The Risk/Reward Trade
Guys are beginning to look at the highly discounted valuation (which now stands as the cheapest in our universe) as a floor for the name (2016e EV/DACF of 2.9x vs peers at 3.9x). On the flip-side, guys are banking on management finding creative ways to capture incremental value. Below is a simple summary of our findings from our risk/reward analysis. Specific details of each event can be referenced further down in the email.
Breaking Down The Risk/Reward Trade
The Risk Side of the Trade
1) Managing the downside - production getting gassier. If we took a more bearish view on the production mix to a 2016 natural gas weighting of 60% (NBF estimate of 55%), cash flow falls by 6%, bringing DAPPS growth to 8%, the payout ratio to 126% and the balance sheet migrates to a D/CF of 1.6x – still more favorable than the peer average (see below). If we wanted to hold the multiple static on a lower cash flow profile, we see 9% downside to a share price of $1.35.
Source: NBF
2) Managing the downside – assume Ante Creek doesn’t get drilled. Given the negative sentiment around Ante Creek, what if we assumed that RMP never drilled another Ante Creek well and only focused on Waskahigan? What would the pro-forma entity look like? Under this scenario, we assume that the 2016e capital efficiency is adjusted to $30,000/boe/d (from our NBF estimate of $20,000/boe/d), reflecting the less robust efficiencies of Waskahigan. Under this scenario, by no means do we see doomsday figures, underscored by DAPPS growth of 0%, cash flow payout of 128% and the balance sheet migrates to a D/CF of 1.6x. Again, if we wanted to hold the multiple static on a lower cash flow profile, we see 13% downside to a share price of $1.25.
Source: NBF
Potential Value Driving Catalysts – The Reward Side of the Trade
1) Value driving events – getting bought: Even if we assume that the company gets bought at an underwhelming metric of 3.5x, this would imply ~30% upside to a share price of $1.95. At 4x cash flow, we would see a premium of almost 60% at $2.35/share
2) Value driving events – only developing Waskahigan (mentioned above). This scenario should mute the nay-saying about Ante Creek inventory and the company should have some justified visibility to a re-rate closer in line with the peer average based on better than average growth and sustainability metrics (as mentioned previously, DAPPS growth of 0%, cash flow payout of 128% and the balance sheet migrates to a D/CF of 1.6x vs peers at -2%, 165% and 2.0x, respectively). On a re-rate to the peers at a 2016e EV/DACF of 3.9x, we see ~35% upside to $2/share.
Comparables – Current NBF Forecasts
At face value, RMP offers top decile growth and sustainability metrics. RMP is expected to post top decile DAPPS growth of 10% in 2016 (peers at -1% and RRX and SPE both at 2%) on a payout ratio of only 118% of cash flow, with an associated D/CF of 1.4x (peers at 165% and 2.0x, respectively).