CEO (ex stock broker apparently) very good at telling story, but here are the facts:
1) Yes Boone Pickens is involved. Boone is great at talking his book and a great bull market investor. Has lost money in every bear market for commodities. The CEO is undoubtedly well-connected, but the fact of the matter is he's talking a better story than the reality. At the end of the day, unless they are incredible engineers, they are buying assets that are worth no more and no less than what they paid for them.
2) Even post convert, this company will be massively leveraged. The MLP proposal is at least a year away to de-lever this company, and comes with very high risks. They will need to do an offering over over $1 billion, which would be over double the size of the largest MLP offering in history. This for properties they bought as recently as six months ago. The MLP will need to constantly acquire to be able to grow and sustain its dividend. A 1 year downturn in the commodities market could be enough to put this in jeopardy. Even with hedges, the maintenance capital will not change much in the long term, which means that margin compression could be devastating to this story.
3) Organic growth. Buying properties that APC had to sell means they have no growth. The real growth in this company is through acquisitions. Their view is that acquisitions are cheaper than organic growth, a highly debatable topic. This is not a bad thing, but it means they will constantly be tapping the capital markets for new capital, i.e. you. Right now, they're effectively telling you that these properties, which APC couldn't wait to get rid of, are worth you paying $20 a share for instead of the current $18 and change. Look no further than the chart of HAWK to understand what happens when you make a bunch of acquisitions over time.
4) the NAV of this stock, post offering is $14. Pro forma, this stock is not cheap on any metric ($EV/mcfe reserves, EV/EBITDAX, P/ATCF. PE, DCF). Remove the hype and "everybody wants in attitude" of management and realize that the only way to see more value is to a) believe that they are better than everyone in the market and can buy properties for bargain prices that neither billions of dollars of private equity money nor other strategic players with 30 year track records can see, or b) that they can magically do a massive Partnership offering that no other company has successfully pulled off with properties they haven't even had time to integrate. But they of course will be able to tap the pockets of the folks at Ares and Boone Pickens.
These hype machines work until they don't, but a debt-laden oil & gas company built on acquistion growth comes with every bull market...beware of what happens if the gas market weakens even modestly. Two years of hedges do not protect the present value of 30 year wells for investors.
There is no growth here except from buying stuff, so any company could grow 60% if they kept buying stuff...but you have to pay for that by issuing more stock and debt...so real question is when it's all done, did you create value above what you paid for it? Plus, if you're valuing oil & gas companies based on PE...good luck to you...that's hilarious.
Its not advice, its wisdom, tell us all why you bought another 1000 shares, and If I buy your reasoning, I'll buy another 2000 myself. It's not as if I don't own xco so don't get your panties in a bind. I am simply agreeing with tbird that on the surface, it doesn't look as good as WMB, ETE, WPZ all energy related, all moving forward with good apparent prospects for the future.
Whats your reasoning??? Not critizing you, just curious.
Well written, well thought out, however, aren't you talking about any independent oil and gas firm. Devon, Chesapeake, xto, are all chasing paper reserves. Last time I checked, they were all doing pretty well. As long as prices are up I look for things to at least hold their own. If prices go down, it won't matter what oil and gas holdings you have, they'll go south.
What I would really like to see is development activity for each of the aforementioned verses xco. Developing what you have purchased is the only way I know of to assure stock holders that you are for real. Rig count/company, success ratios on pipe setters cost cutting on acquired properties, are better indicators of future development and security. I agree whole heartedly that acquisitions alone won't make it, never has, never will, sellers just aren't that stupid.
It would also serve to see how well the acquisitions are being acclimated and whose reporting to whom.
Good questions. One, very true, every oil and gas company is on the treadmill, however XTO for example, replaces reserves for $1.50 per mcf. (along with generating substantial free cash flow after capital expenditures). XCO has to purchase these reserves, and so far has paid $2.50-$3.40 for these reserves...not exactly efficient returns on capital. I'm not going to defend Devon and Chesapeake, which aren't particularly low cost operators, but both of them have stable balance sheets right now (CHK has the weakest of the two).
Now, CHK has bought acreage and they are developing it, so costs can look high relative to reserves or production at first then later on look cheaper..DVN has prospects in the ultra deep water which will take a few years before we know what kind of reserves/production comes for the money they spent.
XCO is buying proved developed properties, which means the inventory to actually grow production is likely minimal (in the case of the Vernon field, it is flat out declining at 15% as we speak).
XCO has bought this stuff, which is not wrong per se. The problem is, they need to pay for it. They cannot sustain the debt they are carrying over the long term. Therefore, this 'MLP' is what they think can solve it. Two problems: one, they blabbed on a conference call and now got a quiet period for six months from the SEC as punishment. Second, they need to raise $1-2 billion to get to a reasonable debt level. This in a very unproven (upstream) business line for MLPs. Most industry experts believe this is very improbable. not only that, then there is the problem that the MLP will need to continuously make acquisitions to sustain the dividend. Morgan Stanley has estimated this would take 20% of the entire equity offering (IPOs and follow-ons) MLP-industry wide next year (yes, just this one offering). That means it would a) price poorly or b) bring down the entire sector as they oversaturate peoples' holdings in these securities.