There's a pretty good trade going on over at the value investing sub and would like to share another user's DD. It stems on Oil and Gas company re opening an existing site. this is a good one for a few reasons but go ahead and take a look below. I know this area where the Santa Ynez project is and am familiar with operation. trust me bro. my position is 150 shares at $23.84 . credit goes to BJJblue34 :
"I've been working on this for a few days, and I wanted to share.
Background: Santa Ynez Unit was an asset owned and operated by Exxon since the late 1960s, and was Exxon's most productive US asset producing between 10-20 million barrels of oil per year at a low cost of production of about $16 a barrel. Exxon was forced to shut down production since June 2015 due to a pipeline leak of 2,400 barrels of oil into the Pacific Ocean (Exxon Valdez was 10 million gallons for comparison). Exxon was unable to resume production due to California regulations. Basically, California was requiring Exxon not only to have its Santa Ynez Unit compliant with California law, but every asset worldwide complaint. This was a non-starter with Exxon which forced them to exit California operations much like other large-scale oil companies like Chevron, Phillips 66, and Occidental Petroleum. This is where Sable comes in. Sable purchased ExxonMobil’s Santa Ynez Unit assets for $883 million for pennies on the dollar, with a net asset value of $10B. Sable has since made considerable regulatory progress and is expected to begin hydrotesting the Pipeline in January 2025 in advance of a potential restart of production in q1 2025. Sable must pass a Federal court ordered consent decree which which includes granting of waivers by the Office of the State Fire Marshal (OSFM) which has outlined 6 steps for Sable to complete before being able to start operations. Per OSFM, Sable is now on steps 5 and 6 which are deferred maintenance and a startup plan which OSFM has provided a detailed outline for anyone interested. Sable initially met obstacles from Santa Barbara County but settled with Sable to avoid a lawsuit due to loss of income which could bankrupt the county. California State Fire Marshal Daniel Berlant approved a key pipeline-corrosion-control plan submitted by the Sable Offshore oil company on December 17. The approval by the fire marshal starts begins a 60-day review by a federal hazardous materials agency. If the agency has no objections, the waiver will take effect in mid-February.
Further, the California State Lands Commission is currently processing applications to reassign four leases in state waters from ExxonMobil, the previous owner of the Santa Ynez Unit (SYU), to Sable. State Lands has no timeline in mind for this decision, said Sheri Pemberton, their spokesperson; however, the SYU may restart without these lease assignments.
Asset: Santa Ynez Unit is three offshore platforms located in Federal waters north of Santa Barbara, California with 112 wells (90 producers, 12 injectors, 10 idle); in shallow water of 900-1200ft. Sable has a substantial resource base with 646 million barrels equivalent of oil and a net asset value of $10B.
Thesis:
Ownership thinks it can bring production up to at least 10 million barrels in 2025 (28,000 barrels a day), and production up to 20 million barrels a year by 2028 while having minimal long term capital expenditures of about $150M per year. With improvements in drilling technology over the past decade production could possibly be up to 30 million barrels a year. With oil priced at $70/b, 10 million barrels of oil would imply annual free cash flow of $400 million and potentially up to $1.2B of cash flow based on increased production capacity on $70/b oil. This is a cash flow yield ranging between 20-63% given the current market cap is $2.0B and an enterprise value of $2.5B.
California oil production currently stands at 283,000 barrels per day, so Sable would be a moderate boost to California supply which currently still gets most of its oil from Middle East suppliers along with Canada and Alaska due to consumption of >4 million barrels per day. Given California's increasing reliance on foreign oil (will also lose a lot from Alaska in the next couple years) a supplier in state is becoming increasingly necessary. Furthermore, Sable is operating under 16 federal offshore leases. California has limited jurisdiction. With a pro-oil production administration coming into office, this should provide further assistance toward operational success.
Management plans to institute aggressive shareholder return program: ‒ Target fixed quarterly dividend of $1/share with a $2.50/share upside ‒ Opportunistically repurchase shares with excess cash ‒ Maintain conservative leverage profile by aggressively paying down debt
Buffett and Munger's thesis on Occidental Petroleum is investing in a business with known large oil reserves (in the case of Occidental their reserves in Permain Basin), having minimal capex, and returning maximum cash flows to shareholders. Most oil companies don't operate this way historically. However, Occidental and now Sable are focused on limiting capex and returning maximum value to shareholders.
Chairman/CEO: James C. Flores is the CEO and Chairman of Sable Offshore: -Leading Flores & Rucks, Inc. in 1994 -Chairman and CEO of Plains Resources Inc. in 2001 -Chairman, CEO, and President of PXP, which was acquired by Freeport-McMoRan Copper & Gold Inc. in 2013 -Vice Chairman of FCX and Chairman and CEO of Freeport-McMoRan Oil & Gas LLC until April 2016
Flores has extensive experience in the industry and his family spent their own money to own approximately 20% of the company, so they have a huge incentive for the success of this business.
Current balance sheet: 288M cash 344M in current assets
259M in warrant liabilities 814M Senior Secured Term Loan 1.3B in total liabilities
Valuation:
Bear case: If production is not resumed by January 1, 2026, the terms of the asset acquisition with ExxonMobil Corporation would potentially result in the assets being reverted to ExxonMobil Corporation without any compensation to Sable which would be a large loss of capital.
Base case: $400M in annual free cash flow ($70/b oil on a conservative 10 billion barrels annually and $15/b costs) for a $4 billion valuation, a doubling of current valuation.
Bull case $1.65 billion in annual free cash flow ($100/b oil on 30m barrels annually with 10/b costs) x 14PE for a $37.5B valuation, possible a nearly 20x if everything goes right.
Risks:
1. Regulatory hurdles. While significant progress has been made, Sable has still not officially cleared regulatory hurdles required to begin operation.
2. California political environment. There is a reason oil companies abandoned California. There is a known hostility toward the fossil fuel industry.
3. Sable is leveraged to the price of oil. A global drop in oil prices could severely hurt cash flows.
4. Ownership execution. While management is experienced in the G&E sector, they still have no track record with Santa Ynez.
Catalyst:
1. Clearing regulation is the single biggest hurdles. If Sable can begin operations, this company probably goes up >50% to >$30/share.
2. Proving operations. If management can deliver on their expectations of $1/quarter dividend then the stock should be >$40/share which is almost a double."