First off, this one requires a MINIMUM one-year time horizon. If you don't have that kind of patience with a stock (and be honest with yourself guys), give this one a wide berth.
CPE is really two companies in one. One company is a very successful E&P company exploring for hydrocarbons in the shallow waters of the Gulf of Mexico. 95% of their current production is from this area. The other company is a development stage company that has yet to produce a single drop of oil or mcf of gas. This company has joined with the likes of Murphy Oil and Shell to make 4 discoveries in the deepwater Gulf. In each of these deals CPE owns from 11% to 40% of the project, and is not the operator. For more info on the Gulf deepwater, check out gomr.mms.gov.
The first (and largest) of their deepwater discoveries, Medusa, is scheduled to be put into production starting in April. One of the reasons the stock got hammered a few months ago was the double-whammy of: 1)news of delays in this project, plus 2) some debt that was due at the end of September. McDermott is making the production spar and underestimated the time & cost that would be required to make it. CPE has failed miserably in managing the expectations of its investors since it has continually made projections regarding the timing of the inception of production for these offshore projects, and each time they have been pushed out.
Long ago I learned that, when you don't have control over the timing of something, you either don't project a time it will be completed or, if pressed, you project but you give a wide range of potential completion dates, just to give yourself some leeway. Do you think these Louisiana hicks at CPE would have figured this out? No! Their web site even to very recently still had the old projection of initial production of Medusa starting in late '02.
It is this failure in managing investor expectations that has created a huge inefficiency in the valuation of the stock at this time, IMO. These deepwater discoveries were all made 2 - 3 years ago and all the folks that got involved with the stock are all pissed off now, since they have been in a dead-money stock for years, with constant delays to their payoff date.
But the payoff date is now within reach, I believe. Three of the 4 projects are scheduled to come on board within the next year. There could be delays of course, but the first one (Medusa) is very close to being completed and ready for shipment to the site. We could find this out as early as next week, when MDR has its earnings announcement for 3Q. Once it is on the site it would seem that the potential for signficant further delays in getting it operational is signficantly decreased.
The stock has up moved about a buck in the last four weeks, albeit on piddly volume, as a result of: 1) Solving its debt crisis by extending the maturities of some of its bonds, and 2) getting 2 new analyst reports, one by Jefferies and the other by Friedman Billings. These were the first reports (to my knowledge) that went out as far as '04 in their projections. '04 is the first full year that each of the 3 deepwater projects will have been put in production.
The '04 numbers are absolutely staggering. The Friedman guy was, IMO, unduly conservative, and figured CPE would produce 16 mboe/d and used benchmark natgas prices of $3, and came up with $5.26/share in cash flow. The Jefferies guy (Frank Bracken, a highly respected energy analyst who's been around awhile), is calling for just under 19 mboe/d of production for '04, and used a more reasonable natgas price of $4. His cash flow # for '04 was a whopping $7.50/share!!
Both analysts are projecting an average oil price in '04 of $24, which seems reasonable to me. This about the same price that oil has averaged for the past 3 years, and is in line with (albeit slightly higher than) the futures strip price for '04.
Small cap companies have rarely succeeded in offshore energy exploration, even after discovering immense amounts of hydrocarbons. XCL (Bohai Bay, China) ended up going bankrupt, EEX is selling out to Newfield Exploration for a pittance, a Canadian company whose name escapes me went bankrupt exploring offshore Nigeria, a company whose name escapes me found tons of oil in the Chinese waters and then ended up being bought out by Ultra Petroleum for cheap money.
In most of the above cases it was overindebtedness that did in the company. Here, CPE certainly has a ton of debt (about a quarter billion $, give or take). So, even with the extension of that debt out until 6/04, the market is (understandably, I admit) somewhat skittish about this company's ability to be in a position to refinance that debt by that point. Unless gas prices stay over $4 for quite awhile, this company will barely have enough cash flow to meet its capital commitments to its deepwater projects in '03, and will have little left over to use for its Shelf drilling. And this all assumes no further delays for Medusa (a brave assumption given what has transpired so far!). Without further Shelf drilling its gas production will decrease pretty signficantly over the next few years.
In spite of the above risks, this is my largest position by a decent margin, and I have not stopped buying it yet. I plan to buy more as the Medusa timing becomes more certain, and strong natgas prices for the winter become more locked in.
If you are looking for a good entry point, I personally would not chase it at the current quote ($5.40). It has moved up over $5 on extremely low volume. Remember, there will be a long time before any real news comes out on its deepwater projects and I would be stunned if the stock did not drift back under $5 sometime before that.
If you are interested in this company, the first thing I would do is call Terry Trovato, their IR guy, and ask him to send you the 2 recent analyst reports. If you speak to him, tell him I said hello (trying to get on his good side <g>).
Would be interested in any thoughts on this. |
