Every company that I know of with Gulf of Mexico exposure suffered huge share price collapses following the BP oil spill and the resulting fear from potential government action.
I believe this sell-off was justified because we really had no idea what the resulting government legislation would be. Now however, we have a pretty good idea of what is coming from the government and it seems that Gulf of Mexico producers both small and large will not be materially impacted.
I wrote previously about the pending oil liability cap and certificate of financial responsibility legislation. With the House bill passed and the Senate bill drafted we basically know what we are getting:
http://www.gurufocus.com/news.php?id=102204
And it seems very likely that the drilling moratorium will be lifted early:
http://www.gurufocus.com/news.php?id=104109
So with that in mind I suggest that now is a good time to start having a very hard look at companies tied to the Gulf of Mexico who are likely to have share price recoveries.
Stone Energy is a company that barely made it through the 2008 credit market freeze up and oil price collapse. Immediately prior to the great panic Stone took on a bunch of debt in order to acquire Bois D’arc. It was an acquisition that could not have come at a worse time. However the company muddled through 2009 and has emerged in fine shape with debt reduced and reasonable EBITA to debt levels.
For much of late 2009 and early 2010 Stone’s share price was in the $16 to $20 range. But now following the BP spill the share price is back down to $11.70. And what does $11.70 mean in terms of value:
Market Capitalization - $556,000,000
Trailing 12 Month EBITA - $504,000,000
EBITA Yield of almost 100%
Enterprise Value - $1,056,000,000
Trailing 12 Month EBITA - $504,000,000
EBITA Yield of almost 50%
Clearly those are some pretty attractive numbers.
So what is the problem ? I think it is likely the market taking some time to realize that offshore production will continue and that smaller operators will be part of it. There is no production fall off coming for Stone, they have a sizable inventory of reserves and the cash and liquidity to develop them. There are no pressing debt maturities, the earliest is in 2014.
Stone even actually has a fairly diversified asset base. In addition to their Gulf of Mexico properties Stone has 40,000 net acres of Marcellus Shale and 80,000 net acres of Rocky Mountain oil opportunities with partner Newfield.
And for upside Stone has interests in several high potential exploration wells both on the Deep Shelf and in the Deepwater Gulf of Mexico.
With a 50% EBITA yield on enterprise value and a solid balance sheet I think Stone might be a very attractive opportunity.
Some useful reading:
Latest Stone Investor Presentation http://www.stoneenergy.com/pdf/events/2010/IPAANewYork2010.pdf
