SEA - Sundance Energy Australia

[Sdajii]

A month later an not much has changed. The fundamentals are still looking great, oil price is still holding above guidance, production is coming along nicely, analysts and brokers still value it around $1.20 and the price is still in the low 20s!

Especially in light of the risk-minimising hedging SEA has and the clear reference given by the Dimmit sale, the book value of well over a dollar seems completely reasonable. For those that don't know, the Dimmit sale saw SEA sell some of its non core assets, and based on the price of the land and assets sold, their remaining assets minus debt gives a book value of over five times the current share price! The market just doesn't seem able to see past the unconditional hatred of shalers and debt, and the shorters are working heavily to keep the price down for now.

Given the fact that we did just find a buyer for some of our operation, and our remaining assets are better than what we sold, and a takeover at approximately 3 times the current share price would give the mob taking it over a deal 50% cheaper than what we just sold, SEA seems like a very obvious potential takeover target.

It's quite remarkable that the market just isn't reacting to everything going on. I'd say surely the market will be unable to ignore the quarterly, but I suppose if it has ignored everything up until now, it can probably also ignore a brilliant quarterly clearly showing the company is quite tangibly worth literally around 5x the current share price.

Seems like a great undervalued stock to buy for anyone who has a bit of patience. The only real risk is the oil price, but OPEC have indicated they are committed to protecting the price from sustained crashes for some time, and SEA is heavily hedged, so brief drops won't fundamentally hurt. It does seem that the market does hate SEA, but with the cashflow about to turn to positive and with that set to continue increasing, the market can't ignore it forever, at least you'd think. If the cashflow gets too good and the share price remains too low, hopefully we'll see a company buyback. I'd love to see that.

 

[peter2]

Read their recent investor presentation and it seems mgt is going to try to run a leaner operation and to keep costs below revenue. Oil production is 80% hedged at $60/bbl in 2019. They plan for SEA to be self funding and cash flow neutral or positive by EOY 2019.

Sounds great, but then I've never read a poor investor presentation. I'll wait for the instos to start buying in order for me to get interested. SEA has got to be near the bottom. Worth putting in my reversal watch list.

 

[Sdajii]

Read their recent investor presentation and it seems mgt is going to try to run a leaner operation and to keep costs below revenue. Oil production is 80% hedged at $60/bbl in 2019. They plan for SEA to be self funding and cash flow neutral or positive by EOY 2019.

Sounds great, but then I've never read a poor investor presentation. I'll wait for the instos to start buying in order for me to get interested. SEA has got to be near the bottom. Worth putting in my reversal watch list.

It does sound great, and assuming there aren't any extremely surprising nasties within the company, which seems something we can be reasonably sure of, the only real risk is the oil price... which of course is not an entirely trivial risk, but failure is already priced in and all we need for a multibagger on this one is oil sitting around current levels (or big bonus for any higher) and admittedly, a bit of patience.

The market is just terrified of 'shale and debt! Argh!' which is bringing this down.

Of course, a takeover wouldn't be at all surprising, especially given our recent sale indicating that if the directors wanted to (which they won't because they'd be out of a job) they could sell our assets, pay off the debt, give shareholders 5 x the current share price and call it a day.

Another possibility which wouldn't be terribly surprising is a partial asset sale. A few years ago SEA actually did sell a portion of its assets for more than the total market cap at the time, giving the company a net cash position of more than the market cap (the market cap obviously jumped very quickly afterwards) plus significant remaining assets. It would be possible to do the same thing again now.

 

[Sdajii]

Well, here we are again, I choose SEA for the August tipping contest.

Two months ago I was expecting the quarterly to put us on the radar and for SEA to rerate. A month ago I figured that the quarterly was probably not going to have any surprises, it would show a fundamental value worthy of a rerate, but the market wasn't going to care. Two weeks later that's what happened.

Same old story, fundamentally fantastic, operations are coming along steadily, quite a few brokers with targets, all over 4x the current price, average around 6x the current price, the recent Dimmit sale indicates we're worth even more than that, but the market just currently hates shale and debt, even given our hedging in place.

It seems likely that we're going to sit heavily undervalued like this until there's a takeover, a massive spike in oil prices for whatever reason, or in a year or two oil prices will either have increased in which case we'll all have made a fortune, oil prices will have averaged about what they are now and slow, tedious patience will begin to pay off, or the price of oil will have had a very long time significantly below the current figure and the fear will prove to have been justified. Given that failure is already priced in, this seems worth a punt (or if you're a poor soul who bought in at more than double the current price, it seems worth hanging on to. Actually, I know someone who paid over 5x the current price, poor guy).

 

[Miner]

SEA quarterly report was very reasonably but where is the snag that market fails to recognise and keep on reducing the stock value ?

 

[Sdajii]

SEA quarterly report was very reasonably but where is the snag that market fails to recognise and keep on reducing the stock value ?

I think the issue is just caution due to debt. Even at an average $50 WTI the business is viable and worth far more than the current price, but the market is just so risk averse that they think the risk of a sustained low oil price making it impossible to repay debt is too high. If we do get a prolonged period of WTI greater than about $65, SEA should fly. It's conceivable that we could see $70-80+, in which case debt will be repayed very quickly and big profits will come in. That's obviously not the most likely future, but it if it did happen we could easily see a 10, maybe 20+ bagger as long as we weren't taken over.

If not for the debt, WTI would have to fall far below $50 to be a problem, but as the market clearly sees, the debt does exist, and a long term average of $40 or below would eventually be very destructive. I can't really see WTI averaging less than $50 over the next 12 months, although stranger things have certainly happened.

If the recent quarterly did nothing, even positive cashflow/active debt reduction, which we should see this quarter or if not next, may not be enough to do much to the stock price.

 

[ducati916]

1. Same old story, fundamentally fantastic, operations are coming along steadily,

2. It seems likely that we're going to sit heavily undervalued like this until there's a takeover,

1. What is so positive re. the fundamentals? I had a look, didn't like what I saw. What might I be missing?

2. That is a possibility, what sort of price would you envisage?

jog on
duc

 

[Miner]

1. What is so positive re. the fundamentals? I had a look, didn't like what I saw. What might I be missing?

2. That is a possibility, what sort of price would you envisage?

jog on
duc

Hi
@ducati916
It will be great to learn some key points on the report you did not like.
Cheers

 

[Sdajii]

1. What is so positive re. the fundamentals? I had a look, didn't like what I saw. What might I be missing?

2. That is a possibility, what sort of price would you envisage?

jog on
duc

1) Assuming average oil prices of anything other than a dramatic and sustained drop, the company will generate profits justifying a much higher share price. Net revenue is increasing and will soon be sufficient to reduce debt and eventually generate either a lovely cash position or potentially dividends to shareholders. Alternatively, just looking at the potential sale price of their assets, they could sell up, pay all debts, and have a cash position of multiples of the current market cap.

What don't you like?

2) If someone wanted to take over right now they'd easily snap us up for less than I paid, although to be honest I'd probably not be arguing since I'd rather not patiently wait for what could be a year or two, maybe more, before the market is convinced. I can only guess, but it's probably fair to say that a takeover bid would be a huge vote of confidence and cause a rerate, but even so an attempt would probably be successful somewhere in the 30s. High 20s or low to mid 40s wouldn't entirely astonish me.

If a takeover was successful, it would easily be possible for the buyer to then flip the assets for a significant profit above what they paid, assuming they paid anything under 50CPS. Compare the price of the recent sale SEA made to what their superior and much larger remaining assets are clearly worth.

A takeover at this point wouldn't be in any way surprising. Many times I've seen oilers have their prices smashed down irrationally despite good news, shorters working hard, and after a strange, unexplained, sustained price much below the fundamental value, a takeover bid pops up.

I'm not too proud to admit I've mismanaged my money this year and so a takeover wouldn't upset me about now, but if I wasn't in my current position I'd be very worried about it. Either way, it seems like a great time to buy now either for the short term chance of a takeover or long term appreciation. Average broker targets for SEA are around $1, and while that may be a lofty goal, the realistic figure at the current WTI price can be a long way below $1 to make the current price of 16c look very attractive, and in the event that oil does jump for whatever reason, we could easily go far above $1 (you can decide for yourself about the odds of a significant rise in oil prices, it's not something I'm expecting in the near future, but there's the possibility).

 

[barney]

Many times I've seen oilers have their prices smashed down irrationally despite good news, shorters working hard, and after a strange, unexplained, sustained price much below the fundamental value, a takeover bid pops up.

Indeed …… The start of my long road to trading recovery many years back was when Adlephi Energy (ADI) after what seemed an age was taken over around 42 cps from memory … I think it was trading at 6 cents at the time.

Oilers can be really frustrating and you have to be very patient/long suffering at times

I hope this plays out as you hope in the end Sdajii … You've done your research on it so I'd say back your judgement

 

[Sdajii]

Indeed …… The start of my long road to trading recovery many years back was when Adlephi Energy (ADI) after what seemed an age was taken over around 42 cps from memory … I think it was trading at 6 cents at the time.

Oilers can be really frustrating and you have to be very patient/long suffering at times

I hope this plays out as you hope in the end Sdajii … You've done your research on it so I'd say back your judgement

I certainly remember that one being announced. It was at the time my biggest ever profit, and it was the first time I had a holding increase by $10,000 in a single day. I put my profits into EKA and AUT and did well on them too, eventually getting to the point where 'ten thousand dollar days' were quite familiar. Actually, I was also holding EKA when it had its takeover (which was at a painfully low price, much as SEA would be if it was to be taken over now, but despite making much less than I hoped/should have, I did very well) and painfully I sold out of AUT the day before the takeover announcement, but I did make about $200k out of AUT along the way, which was amazing at the time, considering I'd had less than a grand to my name just months before buying into ADI, and never having had more than about $20k to my name before then.

I can't say the last 6-12 months have been so pleasant, and it has come at a terribly inconvenient time for me, but your reminder of the ADI takeover is quite apt, and almost exactly 10 years ago IIRC. Thanks for the pleasant and relevant memory. It does show how skewed the prices can be, and well demonstrates what I was saying in the post you quoted.

 

[ducati916]

1) Assuming average oil prices of anything other than a dramatic and sustained drop, the company will generate profits justifying a much higher share price. Net revenue is increasing and will soon be sufficient to reduce debt and eventually generate either a lovely cash position or potentially dividends to shareholders. Alternatively, just looking at the potential sale price of their assets, they could sell up, pay all debts, and have a cash position of multiples of the current market cap.

What don't you like?

2) If someone wanted to take over right now they'd easily snap us up for less than I paid,

If a takeover was successful, it would easily be possible for the buyer to then flip the assets for a significant profit above what they paid, assuming they paid anything under 50CPS. Compare the price of the recent sale SEA made to what their superior and much larger remaining assets are clearly worth.

Things I don't like on the Income Statement:

i. Still no net profit; and
ii. Rising COG; and
iii. Consistently high 'unusual expenses'.

On the Balance Sheet:

i. Very low cash position; and
ii. Increasing Receivables; and
iii. High Net Liabilities.

On the Cash-Flow

i. Low cash from ops (reflection of POO); and
ii. High depreciation (in a resources company, this can be an issue)
iii. Very high cash-flow from financing; and
iv. Very poor free cash flow.

Those are my issues. If they are accurate, then how do you see this as a takeover?

jog on
duc

 

[barney]

your reminder of the ADI takeover is quite apt. Thanks for the pleasant and relevant memory.

Yeah it was a memorable time in many ways

 

[Sdajii]

Things I don't like on the Income Statement:

i. Still no net profit; and
ii. Rising COG; and
iii. Consistently high 'unusual expenses'.

On the Balance Sheet:

i. Very low cash position; and
ii. Increasing Receivables; and
iii. High Net Liabilities.

On the Cash-Flow

i. Low cash from ops (reflection of POO); and
ii. High depreciation (in a resources company, this can be an issue)
iii. Very high cash-flow from financing; and
iv. Very poor free cash flow.

Those are my issues. If they are accurate, then how do you see this as a takeover?

jog on
duc

Some of this is irrelevant or I disagree with it (increasing cost of goods?), and in some cases you've just found ways to repeat the same thing trying to sound like you're saying something different, but yes, the two relevant issues are debt/cash position and price of oil.

If anything, cost of production should continue to decrease as shale technology improves. This has been an ongoing trend, including for SEA.

Definitely, the reduced oil price has hurt us. If oil was still sitting at $65+ SEA would probably still have a share price of over a dollar, and at $75+ we'd possibly be over $2. The reality is that oil has taken a dive and seems to be floundering around the mid 50s. This is the reason everything fundamental has slowed right down for SEA and the share price has collapsed, but even at this price SEA is set to begin reducing debt just by plodding along with their existing business model continuing along. As the profitable business continues and debt reduces, interest repayments become less of a drain and positive cashflow increases. Do you agree with that or do you think they're never going to become cashflow positive, and if so, how can you justify that position?

The debt/cash position is almost completely irrelevant to a takeover. If anyone has enough money to buy SEA out, they presumably have enough money to cover the debt. This means they can simply buy the assets, pay off the debt, and utilise the assets without being hindered by debt repayments, clearly turning a nice profit. SEA's assets are already generating a lot of income, the only problem, even at the current low oil price, is that SEA must put that income into debt repayment. SEA is not struggling to generate income from its assets, it's already doing that swimmingly, it just needs to increase that income so that it is enough to cover debt. Even in this challenging set of conditions, SEA's income is indeed increasing and any time now it will exceed all expenses including debt repayments. The only remotely likely problem (and this one possibility is more than remotely likely) is a significant long term drop in average oil price. If you think WTI is going to average $20-30 over the next 2+ years then yes, I agree, SEA is probably going to bite the dust. If it's around current prices or better, SEA's proven existing model will generate healthy profits. And again, if someone else is sufficiently funded to buy SEA and pay the debt, they can just enjoy the income without the debt issue. The most unfortunate issue here is that the interest on the debt is very high. Bad for SEA, not for a well-funded buyer.

While oil prices are where they are and SEA's share price doesn't seem like jumping up too much too soon, potential buyers are probably going to play it cautiously and just sit and watch. If we get a takeover bid I'd say it will be in 3+ months, likely 6-12 months.

 

[ducati916]

1. Some of this is irrelevant or I disagree with it (increasing cost of goods?), and in some cases you've just found ways to repeat the same thing trying to sound like you're saying something different, but yes, the two relevant issues are debt/cash position and price of oil.

2. If anything, cost of production should continue to decrease as shale technology improves. This has been an ongoing trend, including for SEA.

3. Definitely, the reduced oil price has hurt us. If oil was still sitting at $65+ SEA would probably still have a share price of over a dollar, and at $75+ we'd possibly be over $2. The reality is that oil has taken a dive and seems to be floundering around the mid 50s. This is the reason everything fundamental has slowed right down for SEA and the share price has collapsed, but even at this price SEA is set to begin reducing debt just by plodding along with their existing business model continuing along. As the profitable business continues and debt reduces, interest repayments become less of a drain and positive cashflow increases. Do you agree with that or do you think they're never going to become cashflow positive, and if so, how can you justify that position?

4. The debt/cash position is almost completely irrelevant to a takeover. If anyone has enough money to buy SEA out, they presumably have enough money to cover the debt. This means they can simply buy the assets, pay off the debt, and utilise the assets without being hindered by debt repayments, clearly turning a nice profit. SEA's assets are already generating a lot of income, the only problem, even at the current low oil price, is that SEA must put that income into debt repayment. SEA is not struggling to generate income from its assets, it's already doing that swimmingly, it just needs to increase that income so that it is enough to cover debt. Even in this challenging set of conditions, SEA's income is indeed increasing and any time now it will exceed all expenses including debt repayments. The only remotely likely problem (and this one possibility is more than remotely likely) is a significant long term drop in average oil price. If you think WTI is going to average $20-30 over the next 2+ years then yes, I agree, SEA is probably going to bite the dust. If it's around current prices or better, SEA's proven existing model will generate healthy profits. And again, if someone else is sufficiently funded to buy SEA and pay the debt, they can just enjoy the income without the debt issue. The most unfortunate issue here is that the interest on the debt is very high. Bad for SEA, not for a well-funded buyer.

5. While oil prices are where they are and SEA's share price doesn't seem like jumping up too much too soon, potential buyers are probably going to play it cautiously and just sit and watch. If we get a takeover bid I'd say it will be in 3+ months, likely 6-12 months.

1. Some of the issues are more pressing than others. I haven't prioritised them, simply highlighted them on their various statements. As such, some are interrelated, that is the function of statements, to provide a cross check.

2. That would seem to be a reasonable assumption.

3. Here is my issue with the 'bolded' part of your response. You posit POO needs to be $65+. While oil remains lower than that price, SEA are selling oil at a loss. This is where the depreciation charge becomes an issue, which is a using up of the oil in the ground, thereby reducing the value of the assets, although there will be debt reduction.

Therefore the important question is: which is progressing faster: (i) debt reduction or (ii) depletion of oil reserves? This would be an issue for anyone buying out the company, although they would have much better disclosure.

At current prices I would tend to agree that the depletion rate is probably in favour of a purchaser at the current depressed price. That however begs the question as to how high a premium to the current price remains, making it an attractive takeover target?

4. The cash position is critical. Currently, SEA is having to 'finance' current operations. That is an incredibly risky position to be in. The 2018 numbers demonstrated a massive increase, to the point where solvency must be a risk contemplated. There are some $34M in short-term investments as a cushion, but that is a pretty thin cushion.

5. So this becomes a highly leveraged play on POO. That is quite interesting to me.

jog on
duc

 

[barney]

You posit POO needs to be $65+. While oil remains lower than that price, SEA are selling oil at a loss.

Duc, I had a quick look at their recent preso …. I could be wrong (Sdajii can confirm) but their break even oil price is $30 per barrel and their 2019 price received was over $61 per barrel of oil (including hedging) and their Boe was just over $41 …..

The POO has ranged between $45-85 over the last 2 years so any mid term future hedging looks ok.

They should be making plenty of cash on those numbers?? If the POO gets a wriggle on over the next 12 months, and they knock the debt down, it should start to look fairly healthy.

 

[ducati916]

Duc, I had a quick look at their recent preso …. I could be wrong (Sdajii can confirm) but their break even oil price is $30 per barrel and their 2019 price received was over $61 per barrel of oil (including hedging) and their Boe was just over $41 …..

The POO has ranged between $45-85 over the last 2 years so any mid term future hedging looks ok.

They should be making plenty of cash on those numbers?? If the POO gets a wriggle on over the next 12 months, and they knock the debt down, it should start to look fairly healthy.

From what I have gleaned: they have assets that are older and a higher cost basis and newer assets that have a lower cost basis. I haven't tried to work out what figures are needed.

However, from the financials it would look to be much higher than $30 oil.

jog on
duc

 

[Sdajii]

1. Some of the issues are more pressing than others. I haven't prioritised them, simply highlighted them on their various statements. As such, some are interrelated, that is the function of statements, to provide a cross check.

2. That would seem to be a reasonable assumption.

3. Here is my issue with the 'bolded' part of your response. You posit POO needs to be $65+. While oil remains lower than that price, SEA are selling oil at a loss. This is where the depreciation charge becomes an issue, which is a using up of the oil in the ground, thereby reducing the value of the assets, although there will be debt reduction.

Therefore the important question is: which is progressing faster: (i) debt reduction or (ii) depletion of oil reserves? This would be an issue for anyone buying out the company, although they would have much better disclosure.

At current prices I would tend to agree that the depletion rate is probably in favour of a purchaser at the current depressed price. That however begs the question as to how high a premium to the current price remains, making it an attractive takeover target?

4. The cash position is critical. Currently, SEA is having to 'finance' current operations. That is an incredibly risky position to be in. The 2018 numbers demonstrated a massive increase, to the point where solvency must be a risk contemplated. There are some $34M in short-term investments as a cushion, but that is a pretty thin cushion.

5. So this becomes a highly leveraged play on POO. That is quite interesting to me.

jog on
duc

These figures are wrong, and you've also misrepresented what I said.

I did not say that they needed $65 to be profitable. If we knew without doubt that oil was going to sit where it is in the mid $50s for the next several years, SEA would clearly be worth multiples of the current share price/market cap. I listed multiple scenarios, just one of which was $65WTI which would justify a an even higher price.

SEA is able to sell oil very profitably at well below the current price. A lot of what you've said indicates you completely misunderstand the economics of the situation. If we just look at the cost of production, it's well below $55 or even the $30 suggested by barney (an exact figure is difficult to calculate due to varying well performance a few unknowns). The problem SEA faces is that they have a large debt and thus need to not only produce and sell oil profitably, but they need to generate enough profit to meet debt repayments. They are currently approximately making enough to cover all costs plus debt repayments, and that situation is still improving; any time now SEA will become cashflow positive (that is, after all expenses including drilling of new wells and debt repayments, there will be surplus income), in fact, it might have already been passed.

Considering the above, if a buyer was to take SEA out now and repay all the debt, they would have no debt issue and simply a very nice profitable business. If they wanted to and had the funds they could profitably ramp up development. SEA is just not in a cash position to be able to do this, and working only on organic growth it will take some time, but if WTI stays exactly where it is, SEA will do very nicely in the long term. In fact, SEA's company guidance is based on $55 WTI.

Solvency is not a likely issue. It's not out of the question, but WTI would have to reduce significantly and stay low long term. Because of the heavy hedging, SEA could withstand very low WTI prices for a year or two before solvency would become a potential issue. Now, is it possible that WTI could hit $15-20 and stay there for a year or two? Possibly, and yes, that would be an absolute killer for SEA, but $60+ is surely more likely and would result in a very attractive position for SEA. The chances of WTI sitting at an average price of under $30 for the next year are approximately equal to WTI sitting at an average price of over $75 (my off the top of my head estimate only, feel free to disagree) and in the long term $75+WTI scenario SEA would easily be a 10 bagger IMO. My best guess is that oil won't stray too far from the $50s for a while and the market will leave SEA around the current share price for some time, probably ticking up a little when positive cashflow is announced, hopefully in the next quarterly.

Once cashflow positive status is confirmed, it should be obvious that if they are meeting all costs including debt repayments with money to spare, the cost of production excluding debt repayments is clearly well below the current sale price.

 

[ducati916]

These figures are wrong, and you've also misrepresented what I said.

I did not say that they needed $65 to be profitable. If we knew without doubt that oil was going to sit where it is in the mid $50s for the next several years, SEA would clearly be worth multiples of the current share price/market cap. I listed multiple scenarios, just one of which was $65WTI which would justify a an even higher price.

What you said is that SEA would be sitting circa $1/$2 share: this price implies that it is profitable, because currently it is not profitable and hasn't been for a number of years.

The last time SEA showed a profit was 2014. In 2014 POO was up in the $90/$100 range. Since then nothing but significant losses.

Since 2015 POO has ranged a bit, but call it a midpoint of $60. Still losses.

My inference was [based on your analysis] that to reach a share price of $1/$2, which is significantly higher than currently, would require that SEA be profitable and that POO would need to be $65+ to make it profitable.

But given that POO has been around that mark for a year or so and SEA is still bleeding, I'm not convinced that POO is the only issue: hence my laundry list of issues, none of which you considered important enough to respond to.

jog on
duc

 

[ducati916]

Solvency is not a likely issue. It's not out of the question, but WTI would have to reduce significantly and stay low long term. Because of the heavy hedging, SEA could withstand very low WTI prices for a year or two before solvency would become a potential issue.

It is very much an issue. Simply look at the current cash + short term investment position. Then look at the financing cash flow.

If financing dries up...there is an issue.

jog on
duc