Sable Offshore Corp. $FLME
Restarting offshore oilfield in California.
FLME 0.00%↑ is a SPAC which is trying to merge with Sable Offshore Corp (SOC) and restart offshore oilfield in California. Given attitude of some Californians towards oil it might sound a little bit crazy, but there is interesting call option characteristic, clear timeline and right people behind the deal.
What’s the deal?
Sable Offshore has agreed to acquire Santa Ynez Unit (SYU) from Exxon Mobil XOM 0.00%↑. SYU consists of 3 offshore platforms (Hondo, Harmony, Heritage) located on federal waters, an onshore processing facility in Las Flores Canyon and 123 miles of pipeline(worth noting: Exxon bought pipelines right before reaching agreement with SOC). Sable paid $643 million for these assets and financed it with 5 year 10% loan from Exxon. These were XOM’s last production assets in California.
Santa Ynez Unit
Field has been discovered in 1968 and has long history of production. In 2014 it produced ~34k boe/d before being shut in. In 2015 there was oil spill caused by ruptured pipeline Line 901 operated by Plains All American Pipeline (for more info check: Refugio oil spill). Beside SYU, Line was used by 4 other offshore platforms: one platform owned by Venoco and 3 platforms owned by Freeport-McMoRan. Sable’s plan is to repair pipelines and restart production.
Man behind the business
James Flores is chairman and CEO of Sable Offshore Corp. He’s considered to be the real deal. Expertise, connections and deep pockets to keep funding despite delays. Over the course of his 40-year career he was CEO of Plains Resources and Plains Exploration & Production which was acquired by Freeport-McMoRan in 2013 where he was Vice Chairman until Nov 2015. After that he became chairman and CEO of Freeport-McMoRan Oil & Gas.
He knows these assets.
SPAC details
Deal annoucement was 1,5 years ago, started with 28mm shares and 56mm warrants (2 warrants per share). Because of long permiting process there were 2 extensions and some investors decided to quit at trust value. After redemptions there are 7mm SPAC shares and 14mm SPAC warrants left.
They received permits and are ready to start implementing the plan. Deal deadline is set to Feb 29th, but PIPE is about to close and proxy is going effective anytime now. Once proxy is effective, there are 30 days to vote and then deal is done.
Cap Table:
Because warrants have $11,50 strike price and are in the money I will assume they are all exercised. The consequence is another 14mm shares and $161mm cash.
Production is 85% oil/15% gas, at $75 WTI generates $450mm EBITDA and trades at ~2,4 EV/EBITDA. Maintenance capex is negligible $30mm, so FCF is $420mm. But the more interesting part is that Exxon held it on the books at $2,5 billion valuation. So at $1,1b EV it’s trading at 45% of PV10 and there is some additional torque because of debt. And until de-SPAC there is floor at trust value ~$10,30.
Risk/payout profile:
Once the de-SPAC happens, there is no possibility to redeem at trust value so this become normal stock and there is no floor. It is possible to play it via warrants as well, in that case there is of course different risk/payout profile.
After de-SPAC company is entering new phase - production restart attempt. The main risk will be cost overruns. After all the field has been shut in for almost a decade now and cost overruns are kind of standard in this business. There is also non-zero risk of environmentalists trying to make life harder for SOC.
Summary
Sable Offshore is going to restart oilfield which is proven and they have experience operating. EV is about to be $1,1b while Exxon held assets at $2,5b at its books. There is ~1,4b value to be captured if oil prices don’t collapse. Of this $1,1b EV there is $0,6b in debt so equity has really nice leverage here. On top of that until de-SPAC there is a price floor creating really nice asymmetry.