With WTI crude oil prices falling sharply to around $34/barrel currently from around $53 only a month ago, Amplify Energy (AMPY) faces a much more difficult future. We are removing the stock from the Most Timely list and moving to a HOLD.
While the shares have declined sharply in recent weeks, they hold considerable option value here.
First, their hedges carried an embedded $58 million profit at the end of February. These are likely worth much more today. Approximately 77% of their 2020 oil production is hedged at over $55/barrel, and about 34% of their 2021 oil production is hedged at $56/barrel.
Also, counter-intuitively, their natural gas production, about 20% of fourth quarter revenues, will likely see steady or potentially higher pricing. Much of the natural gas produced in the United States is a by-product of oil production. Across the industry, lower oil production (as drillers will likely curtail production) means lower natural gas production which should support higher prices. Today, natural gas is trading at around $1.92/MMbtu, up 14% from the dip at February month-end and in-line with pricing from earlier in the year.
The company will almost certainly suspend its dividend to preserve cash.
We also expect Amplify to halt its plans to be an acquirer, as financing for these transactions will likely dry up in at least the near term.
Amplify’s hedges and gas production help provide it time to sort through the next steps in the new environment. Any positive change in this environment, or other strategic actions, would likely lift the shares, potentially substantially.