Midstate is rated a strong buy - significantly undervalued to peers in the sector
The market has created an inefficiency and a fantastic buying opportunity. Even with the debt level somewhat elevated it is in no way onerous due to a low dilution share count. Debt is not a vacuous issue, one must always take into account what was "purchased" with the debt, and how many shares outstanding (diluted) are present when the debt is issued. Crum and Co. have purchased "upside acreage" next door to one another. As an investment team we see hidden value in the next door property of Basin/Lime. As opposed to being spread across Bakken, Permian, and where ever else drill rigs operate. When considering the "consolidated yet two distinct acreage" positions, we look at management, and what was the driving factor to the acreage purchase scheme? It appears fairly straightforward, steady state production with 60/40 upside. That means with every 10 wells, 6 out of 10 have a higher probability of hitting upside and thus pushing the "average" up the production curve. Final piece of debt analysis; does one believe that the CEO is using "debt risk" to build a more stable company. We believe the debt was utilized in a strategic manner that built upside acreage with 2 distinct positions, yet, within a consolidated play.
Moreover, MPO has a solid position in Upper Gulf. Our research has found competitors that are gaining solid result at Wilcox and other areas...
I share your optimism for MPO's prospects but the debt does matter. They have $600mm or so of equity supporting $1.4 billion of debt and they are spending $500+mm this year. That's a lot of leverage. If they can pull it off, get to 30k b/d by the end of the year, the stock price should be $10+. And they will need oil to stay in the current range. Debt can cut both ways.