hortages of natural gas have sent pricing in certain hubs skyrocketing. This fits into research Bison has been publishing over the past few months, highlighting supply/demand imbalances reversing and associated equity opportunities. Specifically, recent freeze-offs, deliverability issues, and massive localized demand drove Mid-con cash prices above $200:
In particular, we:
Identified the Permian gas price hub Waha as a newly under-supplied market in October 2020 - despite Bloomberg and Reuters articles at the time claiming it was over-supplied.
Identified the Mid-Con as another 'premium' market in November 2020 and updated our view in January 2021 of the market remaining undersupplied.
Shared our investment thesis on SandRidge (SD) in November 2020 as a way to get exposure to the Mid-Con market with a margin of safety. And we provided updates along the way.
Remarkably, we received negative feedback in the process. SandRidge is a hated company and stock, due to a long history of value destruction by prior management and boards. And Waha and Mid-con gas markets had been weak for years, making it difficult for investors, reporters, and observers to evaluate what had changed analytically and in an unbiased manner.
Perhaps the latest shock to these specific local gas markets and the difference in impact versus the broader natural gas market and the financial impact on affected companies will allow for more intellectually honest and rigorous evaluation and coverage.
As an unusually cold weather pattern hits Texas and much of the US, natural gas prices have risen and local prices have spiked beyond historical highs in some areas:
Let’s focus on a few specific markets. Henry Hub daily cash market is up from its February 1st level of $2.67 to $5.99. Leidy hub, which widely-touted Marcellus producers like CNX (CNX), Cabot (COG) and EQT (EQT) sell into, went from $2.35 to $3.80. And NGPL Mid-con, which SandRidge sells into, went from $2.56 to $205.07.
Yes. Natural gas more or less doubled, and Mid-con pricing went up 100x. What does this mean for SandRidge? It depends on the specifics of their hedging and midstream contracts. After speaking with the CEO of a privately held E&P company active in a similar market and a royalty owner active in the Mid-con and other areas, SandRidge is likely the beneficiary of this short-term move in prices, minus whatever its hedging losses are at Henry Hub.
So with conservatively 15,000 BOEPD of gas at Henry Hub, just in the 4 days with available futures at $205.07/mcf, SandRidge could earn tens of millions of dollars in excess profits. The math is 15,000 BOEPD x 6 MCF/BOE x 4 days x $205.07 x 0.75 Net Revenue Interest, minus nominal gathering & processing fees. This equals over $55 million. Versus a current market cap of $190 million and $40+ million net cash from the sale of the North Park asset.
With ~36 million shares outstanding, if SandRidge does net $55 million from this local price super spike, its share price could rise an additional $1.53 per share, or 29% higher from its closing price of $5.27 on February 12th. And that's if the market only values this as a fluke event and doesn't value the assets at a higher multiple on the possibility of ultra-high prices repeating at some point in the future.
These calculations assume no reduced production due to "freeze offs" and are based on the company's disclosures in their financials. There could be less benefit due to restricted production from the cold or from undisclosed terms on gathering agreements, but this represents a directional estimate of potential upside to SandRidge, based on the best available information at the time.
There are other beneficiaries of these local area super-spikes. SandRidge is a good example of how powerful getting a local area price differential change can be to the cash flow potential of assets and companies exposed to those areas. Even before the impact of this Mid-con super-spike, SandRidge had outperformed the E&P index (XOP) from the date the thesis was shared on here, and way outperformed ostensibly leading natural gas E&P equities COG, CNX and EQT.
It will be interesting to see what the above chart looks like with another week of price data. A fitting reward for a truly contrarian view on local realized pricing mattering. Like the Bison: "Instead of running away, the bison charges towards the storm. They recognize that by plowing through it, they get out of it faster, and minimize the amount of risk, time, and frustration other animals experience from trying to run away from the inevitable."
Important Disclaimer: Opinions expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment adviser capacity. This is not an investment research report. The author's opinions expressed herein address only select aspects of potential investment in securities of the companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies' SEC and CSA filings, and consult a qualified investment adviser. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author's best judgment as of the date of publication and are subject to change without notice. The author and funds the author advises may buy or sell shares without any further notice.