RE:Relative values OBE vs YGRThanks for sharing.
YGR as a pair trade with OBE.
The idea behind pair trading in both companies will have similar exposure to a change in oil or gas prices. So by moving between companies, your oil/gas exposure doesn't change.
I looked YGR over a while ago, and again after your post, as a potential pair trade option with OBE.
My first impression is No.
1. First the numbers need to be standardized - ie, YGR has about 17% more shares (fully diluted). On a fully diluted basis that Q4 38c FFO is about 34c. On a standard basis YGR is still better than OBE
2. Oil/Gas. YGR is about 44% liquids, whereas OBE is around 70%. This is a big difference. It means cash flow for each is affected quite differently per $1 increase in the price of oil or decrease in the price of gas.
3. Next - debt. Here I'm looking at Debt per barrel of oil per day (or to make it easier, per barrel of liquids). YGR is about $44,500. OBE is about $23,000. This is the main reason I decided against YGR as an OBE pair trade.
The conclusion I draw from 3 above is that sometime (mid ot second half) 2022, OBE is going to be able to pay a dividend (I'm assuming here they will do so). During 2022, YGR won't have that ability.
YGR is forecasting 2022 free cash flow of $25 million. They are forecasting using all of that to pay down debt, with an exit 2022 debt of $171 million. (which they are forecasting to be around 1.1X debt to cash flow in Q4 2022). ie nothing left for a dividend.
If YGR does decide to pay a dividend in 2022, it will be too small to make a difference to their share price.
Once a dividend exceeds 5% of the share price, it will become a share price driver.
OBE has the ability to pay a 5+% dividend over the second half of this year. YGR does not.
That simple difference is why I'm not going to sell OBE to by YGR at these prices or at this time.
It doesn't mean I'm right - but that simple sentance is why.
IF OBE's share price rises to the point that I think their dividend would be less than 5% (ie unable to propell the share price higher), thats when I may reevaluate YGR as a pair trade).
A few years ago, share price in this sector was driven by cash flow per share. Then with all the debt that was added by horizontal drilling/fracking it became enterprize value to cash flow.
In both cases, the idea was that the bigger slice of cake that belonged to you, the more value that slice was.
BUT - if you never get to touch the cake, it doesn't matter how big your slice is, or how small my slice is - neither one of us gets to eat any cake!!!
Investors paid up for the big piece of cake they were told was theirs, on the assumption that soon they would get to eat some of it. But prices dropped, their slice got smaller, and they went home hungry, thinking they won't pay that game again.
Today, people pay for the cake they get to eat. That cake is called a dividend.
In the second half of this year OBE and YGR are going to holding a party.
OBE is going to be handing out cake at their party. YGR isn't. Which party are you going to?
I've got my tickets to the OBE party. When the cake comes out I'm going to stuff myself. When the room is full of others who came for the cake, I'll be the one leaving. Thats when I'll by my tickets for the YGR party (in 2023), when they will be giving out cake! And then I'll get stuffed again.