This oil producer just announced a merger deal with SandRidge Energy, Inc., which should result in one of the largest oil players in the Mississippian Lime shale formation.
Midstates Petroleum (MPO)
From The Turnaround Letter
Midstates Petroleum (MPO), based in Tulsa, Oklahoma, is a small-cap oil and gas exploration and production (E&P) company. Crude oil generates about 52% of its revenues, with the balance from natural gas (27%) and natural gas liquids (21%). After its initial public offering in 2012, Midstates thrived when oil prices hovered over $100 a barrel, but succumbed to the industry’s subsequent deep recession and filed for Chapter 11 in May 2016.
The company emerged from bankruptcy five months later, shedding about $2 billion of debt and replacing most of its board of directors. It currently produces just over 21,000 barrels of oil equivalent per day from three basins in Oklahoma.
Midstates’ shares, along with many other small-cap E&Ps, are being neglected by the market even as oil prices recover. For example, while the price of oil rose by 12.5% over the course of 2017, the energy sector of the S&P SmallCap 600 index lost 26.7% and Midstates’ stock dropped almost 19%. Not only do these companies get little coverage from Wall Street research, they also struggle for attention against rapidly rising and more fashionable technology and industrial stocks.
Midstates checks many of our turnaround candidate boxes. First, it recently emerged from bankruptcy, which usually brings a discounted price but also a fresh start. Additionally, the company is led by a new CEO, David Sambrooks, since November 2017. Sambrooks, an engineer by training, brings over 37 years of industry experience, including heading Sabine Oil and Gas along with many years at the much larger and highly regarded Devon Energy.
Importantly, Midstates has maintained its strong post-exit balance sheet with $76.5 million in cash and only $128 million in debt. The company’s immediate plan is to increase its strategic options by boosting its free cash flow and financial strength. Midstates will focus on improving its cost structure and productivity in the core Mississippian Lime region. Non-core assets, including its properties in the Anadarko Basin, will likely be sold. Longer term, we expect the company to use its financial strength to expand into other attractive basins outside its current core region.
Like all small-cap companies, Midstates shares carry significant risks, notably its link to commodity prices, the cost of drilling unproductive wells, its geographic concentration and the always-present chance of operational problems. Partly mitigating its oil price risk, Midstates has hedged about half of its oil production against price declines while preserving much of the upside should oil prices continue to rise.
MPO is trading at a low 3.6x EBITDA multiple, providing considerable discount for its risks. We expect mainstream investors to gradually come back to small-cap energy companies in general and post-reorganization energy stocks in particular. When that happens, it will significantly boost Midstates’ valuation metrics and stock price.
We recommend the PURCHASE of shares of Midstates Petroleum (MPO) up to 30.
George Putnam III, The Turnaround Letter, www.turnaroundletter.com, 617-573-9550, February 2018