If one believes in the energy sector its a tempting bet isnt it.
one way to look at it is from a value perspective.
If average s&p 500 PE is around 14 but energy is around 6 and small cap o&g is between 4-5 then thats where the potential lies.
if energy market becomes a favourirte and even if just aligns with the average then one can see how small caps could triple. The key is however one has to be very selective in the small cap space and consider what their strategy is. For exmple its more then likey we going to c alot of consolidation with the mid caps ie 2-5bn market cap get gobbled up. On the small cap side the game is more going to be about companies which have an ok capital structure and the debt is not too high and decreasing. here you might c a few mergers of smaller fields but the question becomes which firm likely to win out
Debt due dates are also very important because you will find alot of the small shalers with debt not due fr a few years are just praying for higher oil otherwise may find difficult to rollover and will need to raise thru equity ie heavy dilution. Banks are tightening standards around small caps now but of course may change in 3 years. Bp over libor important so where are rates heading in medium term??
Also one has to remember that rbl is based on reserves so as fields decline so does ability to extend limit if topped out unless building base and how does one convince an investor to stump up cash for an ill disciplined management team when it comes to capex and cashflow.
In snde case if?? we have hit peak debt we have 30 months to reduce debt by around 50mm to look good IMO. Then if snde also did a small raise of say another 50mm ie reduce debt by 100mm in 3 years this would look ok. Of course a raise at 60$ is better then at 30$ from dilution pov.
So can snde triple from here lets say 68$ or to 1$ on the sea scale.
at 1$ sea market cap 670mm or EV around 1bn - end of 2020 with alot of assumptions lets say multiples have increased from 4 to 6 for small caps - for the good performers. We will need around 170-200mm ebitda - doable Yes. 17500boepd
I know my friend will disagree with me but buying sea and snde under 20c and 20$ was dirt cheap - if you have the same optimism as Peter Lynch or as I like to say fortune follows the brave, so do foodstamps; so lay your bet boys and girls.
SEA Price at posting:
16.5¢ Sentiment: Buy Disclosure: Held
