Cimarex | Cabot

A merger arb, of sorts

Best take from the COG | XEC Deal Call:

Q: “What was the single biggest driver of the deal for XEC?”
A: “It makes us a better company”

@NextWaveEFT: ‘Nailed it(sarcasm)


CHANGE OF CONTROL.

Merger arbitrage usually refers to an investment strategy - whereby - an investor simultaneously purchases the stock of merging companies, *exploiting* market *inefficiencies* before a merger.

In the absence of a reasonable explanation for the Cimarex | Cabot merger, investors & analysts are voicing that the tables have been turned.

The merger appears to trigger change of control clauses.

And management appears to be using *the merger to exploit an executive compensation inefficiency*:

Ryan Lance at COP had notoriously massive change of control of like $120MM at one point. They changed it, but at a glance he would get 2-3x his comp of around $30MM. So (COG) Mr. Dinges $40MM is... modest?” - Paul Sankey

In support of this argument is a history of alleged misalignment of incentives at Cimarex:

Since 2014, there have been 160 insider transactions at Cimarex:

  • 152/160 were sales

  • Total sold: $85.2MM

  • Total bought: $570K - @EnergyCynic

The great thing about public transactions is that the market’s vote is transparent.

*Both* COG & XEC traded down ~7%, on a day when almost all other E&Ps were up -


DEMAND.

  • China’s oil demand has already reached pre-pandemic levels

  • US mobility recovered to 16% below pre-pandemic levels

  • Goldman sees oil hitting $80/bbl

Oil demand appears to be recovering faster than excess supply (Iran, etc.) is hitting the market.

We could go with more details, but - TBH - S&P put together an infographic that visualizes the story better than we can tell it.

Check out the infographic here -


OTHER NEWS.


That’s it for this week - we’re betting on Chelsea & ManU - catch y’all next Tuesday -

Chipping Away

“We are masters of the unsaid words, but slaves of those we let slip out” - Winston Churchill


***Editor’s note:  a woke mob at Apple attacked Antonio García Martínez, a writer who we admire (we’ve actually quoted him before); if you enjoy technology (& dislike woke mobs), we recommend giving his book, Chaos Monkeys, a read***


ECONOMIC SHOCKS.

The world appears to be dead-set on supply, demand, & supply-chain shocks:

…are leading to:

Right now, the semiconductor shortage is the supply problem in the world.

The shortage is is hitting everywhere…

…from server-farms to *farming* itself:

“The worldwide shortage of computer chips will impact all aspects of agriculture for the next two years and beyond.  Almost every piece of farm equipment, like most everything else in our lives, needs a computer chips to operate.”

“Due in part to the Covid 19 Pandemic, there is a massive worldwide shortage of chips; and the industry is unable to meet the skyrocketing demand. Industry sources say the current shortage will not be resolved until sometime in 2022” - Gary Truitt

Assuming that gets solved, we expect that - in the long term - oil & oil products will take the pole position.

If governments even attempt to follow the IEA’s latest report guidelines, then the outcome would be something on the scale of the 1973 oil price shock (~300% price increases).

The press has even called out the absurdity of the report:

“Finally, the IEA has a credibility problem. The agency was saying the opposite (we need more investment in oil) as recently as 2017. So either it was completely wrong then, or perhaps it's now. But the old messages from the IEA, and the new ones are difficult to square” - Javier Blas, Bloomberg

Unfortunately, the world has been trending towards the absurd

We’re reminded of the Hunter S. Thompson quote:

When the going gets weird, the weird turn pro

Today, there’s no shortage of policy “pros” doing weird things -


OTHER NEWS.

Michael Burry (of The Big Short fame) is massively short Tesla

…that trade has functionally stolen the name “widow-maker trade” from those lost souls who’ve bet against Japanese government bonds…

The event has our attention -


That’s it for this week - we’re rooting for the Spurs & Golden State on Thursday night - catch y’all next Tuesday -

Cyberattacks & Rocket-fire

OPEC+ Restraint Falters

“Our goal is to make money, and not creating problems for society,” DarkSide [group that attacked Colonial, from the FT]


Editor’s Note: Matt is working w/ the Marshall Society on their digital speaker series.

Tomorrow, the Marshall Society is hosting a panel on the virus / recovery efforts.

Panelists:

Y’all are welcome to join (panelists will be taking questions live) - the event kicks off at 6pm London time (1pm NYC / noon Texas) tomorrow.

Event link / details -


COLONIAL CYBERATTACK.

On Friday, the Colonial Pipeline suffered a ransomware attack. The hacker-group DarkSide is allegedly behind the attack.

Colonial is responsible for delivering 40%+ of the American Southeast’s gasoline supply. Obviously, an outage of this sort can affect gasoline prices.

This event further raises cybersecurity concerns about American infrastructure.

But - putting that aside - the public response from the hackers stole the story…

…it read like a passage from absurdist fiction:

“We are apolitical, we do not participate in geopolitics, do not need to tie us with a defined government and look for other our motives.

“Our goal is to make money, and not creating problems for society.

“From today we introduce moderation and check each company that our partners want to encrypt to avoid social consequences in the future” - DarkSide

Joe Weisenthal (Bloomberg) had a few good takes on the ordeal.

The FT noted:

“In a sign of how ransomware has become a professionalised industry, DarkSide operates its own “press office” and claims to have an ethical approach to choosing its targets” - FT

What’s clear - from this attack (and, well, all recent major hacks) - is that hacking risk is a tail risk that the market (industry) is not appropriately valuing -


OLD WORLD ATTACKS.

Rocket-fire has followed a conflict at Jerusalem’s al-Aqsa mosque.

Israeli police & Muslim protesters clashed over planned home evictions & restrictions at the mosque.

Hundreds of Palestinians were wounded - Hamas responded by firing ~200 rockets.

Israel then responded to Hamas:

“The Israel Defense Force’s spokesman Jonathan Conricus said the military had a ‘green light’ to hit military targets until Hamas ‘gets the message and learns its lesson’” - the FT

Politics aside, history would tell us that Hamas has not quickly gotten “the message”.

We expect to see that Israel will continue to respond with (more) air-strikes.

And - as of today - we don’t expect these events to escalate into a larger conflict -


OTHER NEWS.

OPEC+ restraint appears to to be faltering


That’s it for this week - check out the panel tomorrow - catch y’all next Tuesday -

FANG Reports

M&A and a beat

"It's important not to overreact to this volatility in prices resulting from the unique circumstances of the pandemic" - John Williams [NY Fed President]


Editor’s note: A few weeks ago, we were alerted to the fact that the spot price of bee-tee-cee traded below the CME futures contracts. On the surface, that’s free money.

We’re guessing a few of you were also aware - here’s the best thread we’ve seen on the trade (and its risks).

OK - back to oil -


Q1.

Diamondback reported Q1 adjusted EPS & EBITDA of $2.30 & $836MM, beating consensus estimates of $1.83 & $740MM.

M&A was the story.

  • This is the 1st quarter post the QEP / Guidon acquisitions

  • Diamondback also announced two divestures

Oasis (emerged from Ch.11 in Nov) is buying Diamondback’s Williston Basin assets for ~$745MM, financed entirely by debt (via their RBL & a bridge).

Considering recent history, that’s aggressive.

Diamondback also sold a small chunk of non-core Permian assets for $87MM.

Hedging hurt a bit, and will continue to - throughout 2021 - at these oil price levels.

[re/ FANG: we liked the presentation of the tables (above) from BAML]

From the other side of the world, Aramco reported Q1 net income of $21.7BN (also beating consensus estimates).

When you produce numbers like *that*, you get to skip the analyst Q&A call.

And Aramco is doing just that.

Later today, Conoco, CDEV, PVAC, Pioneer, & Devon report, among others -


OTHER NEWS.

Mohamed El-Erian has recently made a few good points about the Fed, bank policy distortions, & global supply chain issues. We think the latter faces structural / policy concerns going forward, even if (or when) short-term issues are addressed.

And we don’t think that’s a good thing.


That’s it for this week - hope y’all enjoy Cinco de Mayo w/ a couple Mexican Martinis - catch y’all next week -

The Penn Virginia Doubletake

“Occasionally people will look at me and do a doubletake and they'll look at me like they're trying to think where they know me from” - Nick Hoult


Editor’s note:  Day late -


PVAC.

We did a doubletake on PVAC

Penn Virginia’s wells, and our December look at Magnolia - another oily Eagle Ford E&P - caught our eyes.

PVAC is an Eagle Ford E&P company headquartered in Houston:

  • The company focuses on Lavaca & Gonzales Counties

  • Juniper Capital now owns ~60% of PVAC

From PVAC’s most recent operational update:

  • 16,324 bbl/d

  • 20,534 boe/d

  • 80% oil cut

  • $364MM net debt (the equity is trading at a ~$500MM valuation)

PVAC’s latest reserve report lists 500 future locations:

  • They own ~91,000 net acres in the EFS

We built out type curve parameters (using ’19 & ’20 vintage wells) with ShaleProfile‘s state-level data.

A $52.5 WTI break-even is pretty good, in our minds.

On a multiples basis, PVAC looked good, too.

On top of that, their well efficiencies have been improving 15% per year over the last 3yrs (on both a total EUR basis & per 1000ft drilled), which is pretty rare.

So, the plan was to write up another (surprisingly boring) story about an E&P just drilling good wells…

…and then we looked at the capital structure…

And we found senior debt, junior debt, preferred shares, dividend restrictions, and a HoldCo / SubCo structure w/ one shareholder controlling 59%

OK, not so boring.

At this point, we decided to throw the quick-and-dirty analysis out the window and focus on the assets.

So we ran a production forecast & built out the model.

We sensitized what we found:

  • For this analysis, we ran a prod forecast using 3rd party data, covering 500 operated PDP wells owned by PVAC

  • The above results represent NAV sensitivities (PDPs + PUDs - $ in MM) of PVAC’s wells

  • Inventory is drilled over 8 years

  • Our 2021 Oil Production is 18,209k/bbl

Two major take-aways:

  • At the current strip, PVAC seems to be overvalued

  • PVAC is more sensitive to the price of oil than drilling inventory depth

A 25% increase in WTI - from $60 to $75 - translates to a ~100% increase in value:

  • A good way to value an E&P like PVAC is to apply probabilities to the above table, and take the sum (of the each scenario multiplied by the assigned probability)

  • Doing so would likely result in a higher valuation than a point-estimate using today’s strip which is in steep backwardation

We expected to see this sensitivity to the price of oil with PVAC.

We did not expect the valuation - at today’s strip - to be so low.

[to be fair, we think Juniper did very well w/ their November investment]

The whiplash from looking at this E&P felt all-too familiar.

US E&Ps are never as simple as they look from the surface (or the screen) -


OTHER NEWS.


That’s it for this week - the Ohtani dream has come to life - catch y’all next week -

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