Supply Side Shock in the Making, page-31

Welcome to the WPL HC community
Prepare to be dismayed at the regular head scratching price action (oil up, US overnight up, WPL down). But near-term challenges overcome, the operating profile of WPLs base business looks strong throughout the rest of the 2020s.

@R21,

Yes, my gaze extends far beyond day-to-day twitches in the share price (heck, I'm not even interested in the month-to-month changes, so I'm spared of the sorts of dismay you reference.

Instead, I slot in very much in your "rest of the 2020s" investment time horizon, although I believe that, if it is correct, the investment thesis will play out within two years, or three at the latest.


"Are you looking at anything mid-cap O&G?"

Not anymore. But my initial position in this space was in HZN.

Here was my reasoning for HZN which made it preferable to WPL initially:

One of the things that I hate about this industry is the never-ending reinvesting of cash flows straight back into the business, with indeterminate financial return outcomes. WPL has (as is always the case) a long list of projects that require vast sums of capital to be spent on them ... either to explore them or to build them.

But what I want is for the cash flows being generated by business - which I can value - to be harvested and returned to shareholders. In other words, I want a predictable run-off situation which I can buy at cents in the dollar. HZN offers that, I think, and the appointment of a director representing 19.9% shareholder Samuel Terry Asset Management significantly increases my conviction that my capital management wishes are going to be met. I am very sure that Nigel Burgess brings little other than a mandate to Harvest Surplus Capital.

Finally, while HZN obviously deserves to be cheaper than WPL, what it is now is ridiculously cheap - at the current oil price it looks like it is being valued on a mere 2.0x to 2.5x Free Cash Flow, the bulk of those cash flows destined for the bank accounts of the owners of the business in coming years, I expect.

And I'm 100% certain the company will be producing oil from its existing assets for a lot longer than 2 or 2.5 years.


But subsequent to the forming of that view, and prompted by some questioning by @Clueso, I decided to delve a bit deeper into WPLto make sure my legacy opinion wasn't unnecessarily jaundiced.

My conclusions were that, sure, WPL has some elements I don't particularly like, most notably the significant capital investment outlay facing it, but under prevailing product prices and exchange rates, those capital commitments will be able to be funded with it being barely noticeable in terms of balance sheet impact.

Then there is the all-important valuation aspect: marking-to-market of oil prices and prevailing exchange rates would see the stock trading on a single-digit valuation multiple.

So while HZN and WPL are both businesses involved in oil and gas development and production, they are somewhat different investment "types", HZN is a fast-payback, but with higher-than-normal risks (which, obviously, informs portfolio sizing), WPL involves a "less risky" and longer duration growth thesis. Oh, and with WPL I get paid a ~6% fully franked dividend while I wait for the thesis to manifest.

I initially thought that there was only space for one oil and gas stock in my portfolio but I change my mind when it occurred to me that WPL was probably not as challenging an investment case as I had once thought.

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