Time to go long SSN?

Been watching this one for a while now. $1..10 is tempting... but is it good value? (Price is what you pay, Value is what you get)

So lets go to the actual source - the company's reported financials and you see the below 3 lines in the 10Qs (on a cumulative basis).

The 2nd set of numbers simply puts those same numbers in a Qtr over Qtr basis - makes it a little easier to see whats happening in the Qtr. And for sake of convenience I added below the yellow line the total oil production for the Qtr, what SSN reported as their realized oil price (before hedging) and for reference what the average was for WTI.



Hopefully we are now well versed in Cash Margin thinking - but its only a part of the equation as the "Net cash provided by operating activities" line highlights. Possibly this line is why SSN is referred to as cash flow positive (and over the last 5 Qtrs it has provided ~$1.5M of cash  from operations). On an operating basis SSN's Net Income will be a loss for some time into the future (because you do have to account for those pesky sunk costs that are the DD&A expense) and certainly not Free Cash Flow positive due to Capex spend.

I would expect to "A" being reported as >$2M at this stage.


"Net cash used in investing activities" - absent the acquisition or sale of oil/gas properties then this number would be a proxy for the capital being spent in the business - both growth and maintenance. The trick is how much is "growth" capital and how much is "maintenance". By maintenance I mean how much capital is needed to keep SSN at say the 1,100 bopd reported in May. You can see the heavy investment in the last 4 Qtrs (~$22M and approx 120% production growth).

So now it gets interesting. I'm sure everyone is looking forward to seeing possibly over 90,000 Bbls of oil produced for the Qtr and that would be great and a significant achievement. We also know (I think as there has been no annc on any property acquisition) that very little was spent in the way of new wells - so most of the $$$ here could be thought of as "maintenance" capital (happy to hear alternative accounts). Really have no idea what is the right number that needs to be here - that as a minimum keeps SSN pumping 1,000 bopd into the future (yes that means new wells due to decline but there is no "growth" in the business and the stock market values growth companies differently).

Anyone's guess as to what "B" will be reported as.


And then lastly we have "Cash provided by financing activities" - which has been SSN's main source for capital to invest in the business. This is effectively the drawdown of debt and sale of share equity. With the BB being fully drawn and no equity raising this number ought to be quite small (assuming the final drawdown made before the Qtr commenced). Ideally it would be good if the number changed to a negative - meaning debt is being repaid - but at this point that would not be an option.


The purpose of the yellow line is simply to highlight as a % how much of the cash required to maintain and grow the business (the cash used in investing activities) is being generated from operations. If you do the sums, then over the past 5 Qtrs, ~6% of the needed capital to grow the business from 29,000 Bbls oil produced in Q1'14 to 64,000 Bbls oil produced in Q1'15 was provided by operating activities. The other 94% was debt and share sale. Clearly commodity price is a big factor as can be easily seen in the table.


So while the flowing $EV/bopd multiple makes SSN look really cheap at $33,000/bopd using May'14 or the more realistic $55,000/bopd using a 12 mth forward view, looking at the company's actual financials the risk is very apparent.

Not the time to initiate a new long position (and for the record not short nor ever been short SSN).